Competitive bidding analysis: Providers were dealt an impossible hand

Thursday, July 8, 2010

On July 2, after months (or even years) of anticipation, HME providers, industry stakeholders and analysts finally learned what the results of a second bidding process would look like.

Unfortunately, it looked exactly as some prognosticators, including myself, had predicted. To steal a line from Van Miller, CMS essentially recreated a famous scene straight out of Butch Cassidy and the Sundance Kid. Bidders were put in the precarious position of standing on the side of a cliff with the "bad guy" chasing them down. They were forced to decide whether to stand there and let the bad guy kill them (bid "high" and lose their ability to bill Medicare) or jump of the cliff into a river hundreds of feet below with a minimal chance of survival (bid low, win a contract, and take the slim chance that it can be done).

I've been asked more times than I can count in the days following July 2, "How could the industry have bid itself to the point of a 32% reduction?" The answer: CMS created the perfect storm for suicide bidding. Consider these factors:

*    The stakes are immeasurably high, and "Game Theory" principles prevailed.

*    Many knew the 26% cut announced in 2008 was skewed low by the fact that 49% of bidders were removed before their bids were considered for reasons other than price.

*    Non-winners from 2008 went to extremes to ensure "winning."

*    The median pricing format led bidders to believe their bids could be pulled up by other higher bidders.

Ultimately, all factors considered, some bidders elected to take that chance, jump over the cliff and submit suicide bids. That's certainly not to say that those who were "awarded" contracts used unscrupulous tactics, but that, from an analyst's standpoint, they were dealt an impossible hand.

Knowing that even the most efficient providers frequently operate only with net margins between 5% and 7%, the question is not "How can the winners survive?" but "What can we do now to get rid of this program?" Sure, contract providers will, undoubtedly, reduce service and quality to cut costs, but that can only go so far and last so long. Medicare patients will suffer, and providers will still find it impossible to reduce costs by 32%.

At these rates, regardless of the current viability of the "winners," CMS did not select enough providers to meet a soon-to-be rapidly growing Medicare population. CMS offered 17% more contracts this time around, but the numbers still appear to be insufficient to handle increasing demand. Furthermore, I've already spoken with a handful of providers who have contract offers on the table who have said that they have no intention of serving Medicare patients at those rates, and several others who have inquired about an "out clause" in their contracts. Legally, there is none.

As an industry, we now know exactly where we stand. Our next step can only be to continue to make our legislators, bureaucrats and Medicare patients understand the true value of the services we bring to the healthcare table, and help this program fall flat on its face. Get involved with your senators, congressperson and, maybe most importantly, local patient advocacy groups.

Alan Morris is a regulatory analyst for VGM & Associates. Reach him at 800-642-6065 or