"I find myself in a position where it seems so ridiculous."

Monday, September 30, 2002

Study calls NCB a 'near certainty'

MELBOURNE, Fla. - A national competitive bidding program would eliminate half the nation's Medicare suppliers and reduce operating margins by 80%, according to a stark new analysis by the Weeks Group.

Characterizing competitive bidding as a "near certainty" for HMEs, the evidence for this grim assessment of business under nationwide competitive bidding (NCB) comes from analysis of more than 40 documents that contains hundreds of pages of testimony, opinions, statistics, legislation and policy statements.

The paper - "Strategies and Tactics to Competitive Bidding & Inherent Reasonableness" - by Wallace Weeks states that "the facts" gleaned from his survey of the literature will "leave only the most optimistic to believe that the incumbents of the DME industry will dodge knee-buckling punches from a national competitive bidding program and reinstatement of inherent reasonableness (IR) authority for CMS."

Perhaps the report's most startling revelation is Week's projection that NCB will eliminate half the nation's 106,000 DMEPOS suppliers from the Medicare program within two to three years. Indeed, he notes that NCB has been designed to eliminate suppliers.

As an example, Weeks looks at Polk County where 321 pre-demonstration suppliers dwindled to 15 after the implementation of competitive bidding. Of that 321, 291 elected not to submit bids; 15 of 30 who bid for the business succeeded. In the San Antonio demonstration, 51 of 790 bidders were successful.

"Cutting us out of Medicare would be devastating.," said an HME supplier who has read the report, Patrick Hanna, president of B & K Home medical Services in Tiffin, Ohio. "I find myself in a position where it seems so ridiculous that I can't believe it's actually happening."

Before all those DMEPOS suppliers vanish, Gordon Smith, a divisional vice president at American HomePatient, believes a couple of things would happen first: one, manufacturers would try to lower costs to keep customers and two, providers would shift their business models.

Weeks principal survival strategy - diversification - takes on just this issue: 1) seek more business from low volume payers; 2) if you can't, expand geographically, and move if you have to; 3) develop niche markets; and 4) acquire companies that have diametrical business models.

But survival under nationwide competitive bidding is a mixed blessing, according to Weeks' analysis. Successful bidders may stay afloat but may also lose 80% of their operating margin since demonstration margins are discounted 21%-22%.

The report's last message does not sound an encouraging note for the complacent. Weeks predicts that efforts to contain costs at Medicare are only going to escalate unless there is a radical change in demographics or the structure of the present healthcare delivery system. HME

Week's findings
- National Competitive Bidding (NCB) is a near certainty for suppliers of durable medical equipment (DME).

- NCB will eliminate more than half of the DME suppliers from the Medicare program.

- Unsuccessful bidders with more than 15% of their sales to Medicare beneficiaries are at risk of becoming unprofitable and loosing all shareholder value.

- Successful bidders are likely to remain profitable but may loose as much as 80% of their operating margin.

- Inherent Reasonableness (IR) Authority can quickly and easily be restored to CMS, and it will likely occur during 2002. IR will not be as easy to exercise as it was after the authority was expanded in the Balanced Budget Act of 1997, but more easily exercised than it was prior to BBA 97.

- The suppliers most adversely affected by IR will be those with strong concentrations of sales in a given line of products.

- Efforts to constrain prices for goods and services by Medicare will escalate. The efforts can only end if some event of huge proportions changes the: demographics of the U.S.; healthcare delivery system; health of our citizens; or, a combination of the above.

Source: The Weeks Group, "Strategies and Tactics to Survive Competitive Bidding & Inherent Reasonableness"