Why suppliers need real cost data before they bid – or sign

Editor's note: Questions about competitive bidding continue to surface throughout the HME industry. As discussions intensify and the program's start nears, AAHomecare's Cadie McGonagill discusses why accurate cost modeling is critical when evaluating bids and payer contracts.

DMEPOS suppliers face a common problem, whether they’re preparing for CMS's competitive bidding program (CBP) or negotiating with a managed care payer: many don’t know their true cost to deliver an item of equipment or supplies once every expense is accounted for.

Suppliers often price against product acquisition cost alone without factoring in delivery and setup labor, freight, warehouse and facility overhead, administrative, billing costs and bad debt expense. The result is a bid or contracted rate that looks fine on paper but erodes margin once the full cost of doing business is applied.

The stakes in competitive bidding

Under CBP, CMS uses supplier submitted bids to set payment rates for the product category in the competitive bidding area. Bid below your true cost and you are not just leaving money on the table; you may be locking yourself into an unsustainable rate for the length of the contract period. Conversely, a supplier that overstates its costs risks losing the bid to competitors with a more competitive number.

CMS ranks eligible bidders' composite bids from lowest to highest and selects suppliers, in ascending order, until it reaches the number of contracts calculated for that competition. Together, these selected suppliers make up the “winning array.” Every supplier in that winning array is then paid the same rate, the single payment amount (SPA), which is set at the 75th percentile of the winning array's bid amounts, not any individual supplier's own bid. Your payment rate is, ultimately, set by the market of winning bids, not by how aggressively you personally bid. A supplier that underbids its true cost to win a contract still must operate at the SPA for the length of the contract period, whatever that percentile turns out to be. Generally, the SPA also becomes the new benchmark for non-CB areas, Medicaid and managed care contracts.

Accurate bidding requires understanding your fully loaded cost per item: acquisition cost, transportation and setup labor, facility and administrative overhead allocation, and realistic bad debt assumptions based on the payer mix in that specific market. Bidding based on intuition or acquisition cost alone is bidding without adequate data. CMS's CPI-U adjustment accounts for general inflation but not provider-specific pressures like wages, tariffs and increased fuel costs

One HCPCS code, many products – plan for the worst case

A detail that often gets lost: A single HCPCS code can cover many products with materially different acquisition costs, and a winning supplier is generally expected to furnish products in all HCPCS codes that fall within the awarded category, not only the lowest-cost item. Don’t build your cost model around the cheapest product alone. Weigh it toward the full range of products you realistically may need to supply under that code and those you furnish most often. Then stress-test the number against the highest-cost item you could be required to provide. A bid priced only to the low end of the product range can become unsustainable the moment beneficiary need shifts toward higher-cost products within the same HCPCS code.

Non-discrimination and specific-brand rules raise the stakes further

Medicare regulations and CBIC guidance reinforce this. Under 42 CFR § 414.422(c), a contract supplier can’t offer Medicare beneficiaries anything less than what it makes available to other customers and must furnish all competitive bid items to any beneficiary in the CBA who requests them. That obligation extends to specific brands. As specified in 42 CFR § 414.420(b), if a physician or other treating practitioner orders a specific brand or mode of delivery to avoid an adverse medical outcome, the contract supplier must furnish that specific brand, consult with the physician or treating practitioner on a documented alternative, or help the beneficiary find another contract supplier that furnishes it.

In practice, this means you can’t price and stock around the cheapest item in a code and decline everything else. A cost model that ignores this obligation is understating your real cost to serve.

The same math applies to payer contracts

This same discipline matters outside of CBP. When a managed care payer offers a rate, providers need to know whether that rate covers their fully-loaded cost to serve – not just whether it beats acquisition cost. A rate that looks attractive against wholesale pricing can still lose money once overhead, administrative burden and that payer's historical bad debt and denial patterns are factored in. Payer mix matters here, too: Bad debt and collection risk vary meaningfully across Medicare fee-for-service, Medicare Advantage, Medicaid fee-for-service, Medicaid MCOs and commercial plans, and a single blended assumption can mask which contracts are profitable.

Building the discipline in

For suppliers without a formal costing process, building a fully loaded cost-per-item model – one that captures direct cost, overhead and administrative allocation, and payer-specific bad debt – is a practical and necessary first step before the next bidding cycle or contract renewal.

Cadie McGonagill is senior director, payer relations, for AAHomecare.