B&F’s Bachenheimer unpacks proposed bidding methodology

Friday, July 20, 2018

WASHINGTON – CMS’s recently issued proposed rule proposes two key improvements for the competitive bidding program: lead item pricing and clearing price to establish the single payment amounts (SPAs).

Lead item pricing

CMS is proposing to implement lead item pricing for all product categories, a concept CMS introduced in its 2016 final rule and that has been supported by auction economists and the industry. Under lead item pricing, suppliers bid on one item in a product category. This one item, the “lead item,” is determined based on the item with the greatest national allowed charges in the product category, for the year preceding each competition. The lead item will, therefore, be the item with the highest expenditures in the category. The bid submitted by the supplier on the lead item would be known as the “composite bid,” and the supplier’s bid could not be greater than the 2015 fee schedule. CMS announced the increase of the bid ceiling in its 2016 regulation, increasing the bid ceiling for future competitions from the previous bid ceiling to the higher 2015 fee schedules.

The SPA for the non-lead items will be based on the relative difference in the 2015 fee schedule amounts for the non-lead item and the lead item in2015. Therefore, the payment level of the lead item will determine the prices of the remaining items in the product category. However, because the current product categories include a wide range of items that are not similar to one another, the product categories will be split into multiple and more discreet product categories. CMS is collecting in comments on the product groups to conduct lead item pricing.

Clearing price/maximum winning bid

CMS is proposing to replace its methodology of using the median bid to set the SPA with the clearing price, or as CMS describes it, “maximum winning bid.” This means that the SPA will be determined by the “last man in” for the lead item. This is a significant improvement from previous payment policy, and one that the industry and auction economists have been urging the agency to do for years. It means that no contract supplier will get paid less for the lead item than its bid.

Over the last several years, AAHomecare has provided CMS with a series of detailed recommendations on how to improve the bid program, including specific regulatory and sub regulatory changes the agency needed to make. These two policy changes were among those, with the clearing price being the most important. The combination of these two improvements with the higher bid ceiling and the additional protection of bid surety bonds (designed to prevent speculative inexperienced bidders) should result in a significantly improved bidding program.

Remember, this is a proposal (there may be changes and additional improvements)—public comments are easy to submit. Watch for the final rule details in the fall.

Cara C. Bachenheimer is the chair of the government affairs practice at Brown & Fortunato.