Inflation throws a monkey wrench into bidding

Sunday, March 23, 2008

YARMOUTH, Maine - There's a real concern among industry watchers that providers who decide to participate in the first round of national competitive bidding could, as one insider said, "lose their shirts" if not careful.

The culprit here is inflation. Over the past few months, key inflation measures have jumped significantly and appear poised to continue their rise. For that, you can thank the slumping dollar, rising commodity prices (chrome and aluminum, for example) and other economic factors now at play in the world.

As a result, first round bids submitted Sept. 25, 2007, may be outdated if providers didn't account for spiking inflation when crafting their bids. By most accounts, many didn't.

"I think provider costs were a whole lot less in September," said industry consultant Mary Ellen Conway, president of the Capital Healthcare Group. "For goodness sakes, they think that by summer gas will be $4 a gallon. We didn't see that happening."

CMS on Thursday announced that the bid prices for round one came in, on average, at 26% below the current fee schedule. The prices will stand unchanged for three years.

When providers crafted their bids last fall, the annual rate of core wholesale inflation stood, as it has for many years, at between 2% and 3%. In February, core inflation hit 0.5% (analysts expected 0.2%), which if extended over an entire year would equal 6%. Core inflation strips out volatile food and energy prices. The 0.5% increase in February was the fastest pace in more than a year.

"It is incumbent upon bidders to consider inflation in the bid," said industry consultant Wallace Weeks. "I think it would be dangerous to assume that the cost of goods and labor will be static for the course of three years."

Indeed, since providers in the first 10 competitive bidding areas submitted their bids, many HME manufacturers have increased their product prices by 3% to 6%, mainly due to the increased cost of doing business in China. Several manufacturers said there's a growing likelihood that there will be more increases later this year.

"There are so many factors out there and they are all going in the same direction--up," said Ken Spett, senior vice president of Graham-Field's Medical Surgical Division. "It's just not affecting the DME industry. As people drive their cars, they know what is happening. As people travel anywhere in the world, they see that is happening to the dollar. You'd have to have blinders on not to see what is happening."

The VGM Group's Mark Higley has conducted seminars on competitive bidding for hundred's of providers around the country. Most of the providers he's talked to failed to adequately analyze inflation, minimal acceptable margins, product costs and other factors that figure into a bid, said Higley, vice president of development.

That may not be as bad as it seems, he added.

"Most providers are aware now of the inflationary reports and pricing from vendors," he said. "We are hearing from many providers in the first 10 competitive bidding areas who bid that they are going to wait until the pricing schedule is released and then decide if they will accept."