Understanding capacity and demand: Tips for bidding in Round 2021

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08/28/2019
Kathy Lester
Executive director of the Council for Quality Respiratory Care

As we head into the final stretch of bidding for Round 2021 of competitive bidding, suppliers across the country are realizing just how different the program is now compared to the past.

One question I hear a lot is: How does capacity and demand influence the payment rate that CMS sets? Since this is one of the most technical—but important!—pieces of the competitive bidding program, I’m here to break it down and help you feel more confident when you go to submit your bid.

In short, the capacity you submit in your bid can have major impacts to the competitive and noncompetitive rates for Round 2021, so it is critical to get it right. To understand how this all works, let’s explore the impact of capacity and demand in how CMS sets rates.

Why do capacity and demand matter?

Capacity is a critical component of each bidder’s bid because CMS uses it to determine the “maximum winning bid,” which is essentially the clearing price for the lead item. At the same time, CMS also uses beneficiary demand to determine the winning bid. These two numbers influence the final rate just as much as the bid you submit.  CMS then uses the maximum winning bid to set the single payment amount (SPA). Then the SPA essentially becomes the basis for the rate in non-CBAs and the SPA plus 10 % is essentially the rate for the non-CBAs defined as rural.

For bidders, thinking about cost is not enough. You must also think about your capacity. The greater your capacity, the greater role your bid amount will have in the process of setting the final SPA. When bidding, overestimating your capacity has the potential to influence payment amounts based on inaccurate information. It is the bidder’s responsibility to get the capacity number right.

In addition, beneficiary demand plays a critical role in setting SPA rates. For each lead item, CMS determines beneficiary demand based on the historic beneficiary utilization of each lead item and will increase that historical utilization by estimating the projected increase in the number of beneficiaries in the CBA and the projected increase in the utilization of the lead item in the CBA.

How does CMS define capacity?

There are two components of capacity. The first is historical capacity, using the most recent 12 months of claims data to show what your capacity was during the last year. The second part is estimated future capacity, which is the “number of lead item units that (a supplier) believe(s it) can furnish in the competitive bidding area (CBA) in one calendar year.” Unlike previous years, CMS no longer requires expansion plans from bidders.

Note that CMS will undertake a ramp up revenue review to determine if a bidder has sufficient funds to furnish the number of lead-item units it estimated for future capacity. To do so, CMS will multiply the bidders’ projected growth by the preliminary SPA then divide that number by the bidder’s actual revenue to create a percentage. If CMS finds that the bidder overestimated capacity, then CMS will reduce the capacity and additional bidders are needed.

Because capacity is used to set the SPA, CMS will then use bidders’ capacities to determine where the bidders’ capacities equal demand, starting with the lowest bid amount working up. The greater a bidder’s capacity, the fewer suppliers will be needed to establish the maximum winning bid, which will lead to a lower SPA.

How does CMS adjust bidders’ capacity?

After bids are submitted, CMS will review each bidder’s capacity amounts and may alter them. The process works like this: First, each bidder defines its estimated capacity in the bid it submits. If the bidder meets the financial threshold set by CMS, then CMS will use the greater of the bidder’s estimated capacity or historical capacity. To ensure competition between at least five bidders in each CBA for each product category, CMS will cap the bidders’ capacity at 20% of demand.

In some instances, CMS may adjust a bidder’s estimated capacity down. If a bidder has no experience in the product category or CBA, CMS will adjust the capacity down to zero. If a bidder demonstrates experience in the product category and the CBA, CMS will use the highest capacity amount (historic or estimated future capacity). And if the bidder has experience providing the product category but not in the CBA, CMS will use a formula to adjust and discount the estimated capacity.

If a bidder’s capacity is lowered and CMS determines demand for the CBA/product category has not been met, then additional bidders will be added until the capacity is meant, which will increase the SPA.

Conclusion

As you can see, capacity and demand are critical to setting rates in competitive and noncompetitive bid areas. Ultimately, it is up to bidders to ensure that all information about their capacity is accurate.

To learn more about this important process, visit the CBIC website or the industry’s education website, which also offers useful explanations, tutorials, bid calculators and more.

Kathy Lester is executive director of the Council for Quality Respiratory Care.