Competitive Bidding: Can Small Suppliers Survive?

John Latsko If all goes as proposed, the largest, most accessible, and cheapest suppliers of certain durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) may gain Medicare business. Smaller, less accessible, and more expensive suppliers stand to lose Medicare business. The Center for Medicare & Medicaid Services' (CMS) recent proposal for a competitive bidding program for some DMEPOS items and supplies to Medicare patients raises some questions while it answers others. On May 1 of this year, CMS published a proposed rule for the long-awaited competitive bidding program for certain Medicare DMEPOS items. CMS intends to divide DMEPOS items into product categories, such as "Hospital Beds and Accessories," "Power Wheelchairs," and possibly "General Orthotics," and then will request bids on each item within a category from all Medicare suppliers within a "competitive bidding area." A competitive bidding area is expected to be roughly the same as a Metropolitan Statistical Area (MSA). Suppliers in the competitive bidding area wishing to respond to a request for bid (RFB) must submit pricing bids for every item in the product category. Each supplier also must meet the new Medicare accreditation and quality standards as well as all of the Medicare supplier standards. The accreditation and quality standards were published on August 14, 2006. CMS then will select from the lowest bidders the minimum number of qualified suppliers necessary to meet the needs of the entire competitive bidding area. It expects that the successful bidders will generally be less than half of all the suppliers located in the MSA. Any supplier who does not submit a complete bid, or any supplier whose bid is not chosen, may not bill Medicare for any item subject to that bid except for some limited "grandfathering" rules. The competitive bidding program when coupled with the new quality and accreditation standards raises the question of whether the program will cause a significant reduction in the number of DMEPOS suppliers. As to orthotics and prosthetics, only a few over-the-counter orthotic devices will be included initially. Longer term, as more and more orthotic devices are added to the competitive bidding program, consolidation may be inevitable. Except for medically necessary custom-fabricated devices, most other orthotic devices could be added to future RFBs. In fact, it might be anticipated that proposals will be made to put many orthotic items and even some prosthetic devices under a competitive bidding program in the future if the current program proves to be successful in CMS' opinion as to cost, quality, and access. That is why everyone involved in the business of orthotics and prosthetics needs to carefully follow what is happening. The rule says that small suppliers will be considered on equal terms with larger ones, but the rule's requirements that any bidder must bid on an entire category and that all bidders must agree to serve the entire competitive bidding area can present a problem for the small suppliers. More significantly, however, is that it will be difficult for small suppliers to be as price-competitive as large suppliers. Moreover, because CMS will only accept the minimum number of bids necessary to supply the bidding area, it will require low bids from only a small number of large suppliers having many locations to meet the needs of a particular area. Any large DMEPOS supplier with multiple locations that offers high volume and low prices would leave room for very few competitors within a category such as "General Orthotics." Supplier Networks Level Playing Field CMS suggested that one way for small suppliers and others to be more competitive would be to form supplier networks. CMS says that it will allow supplier networks comprising up to 20 percent of the available market of any given competitive bidding area to bid together as one, so long as the network meets certain requirements. Among those requirements are that the network would have to bid through a single legal entity, such as a joint venture formed for that purpose or possibly using a lead supplier acting on behalf of the entire network. Also, all legal contracts among the network participants must be in place and executed before the bid is submitted, so suppliers cannot wait to see if a network wins the bid before joining it. All members of the network must be eligible to bid individually by having met the accreditation and quality standards as well as having a Medicare supplier number. Interestingly, CMS seems to be saying that competitors can discuss pricing without risk of antitrust reprisals. The MSAs being considered include: Miami, Florida; Houston, Texas; Dallas, Texas; Detroit, Michigan; San Juan, California; Philadelphia, Pennsylvania; Atlanta, Georgia; Tampa, Florida; Boston, Massachusetts; Washington DC; Pittsburgh, Pennsylvania; Baltimore, Maryland; St. Louis, Missouri; Cleveland, Ohio; Orlando, Florida; San Francisco, California; San Antonio, Texas; Cincinnati, Ohio; Kansas City, Missouri; Charlotte, North Carolina; Norfolk, Virginia; and Riverside, California. Since CMS already has ruled out New York City, New York; Chicago, Illinois; and Los Angeles, California, from the first round; the ten will be chosen from this list. By 2009, all of those MSAs will be included as well as more than 50 additional MSAs. Another question raised by the proposed rule is the effect it will have on physicians or suppliers who cannot or will not meet the accreditation or quality standards. Many physicians supply orthotics to their patients. However, if these physicians wish to continue getting Medicare reimbursement for these orthotics, they would not only have to submit a bid, which in itself would be administratively burdensome for a small office, but they also would have to bid on all items in the product category such as "General Orthotics." Furthermore, medical groups will need to comply with the accreditation and quality standards. In many instances, medical groups will not find it financially feasible to remain a Medicare supplier and may decide to refer the Medicare orthotic business. This also applies to non-accredited suppliers. The new quality and accreditation standards may substantially reduce the number of DMEPOS suppliers. The National Supplier Clearinghouse (NSC) reports that physicians and other professionals account for 14 percent of all Medicare supplier numbers while orthotics and prosthetics suppliers comprise 11 percent. Drugstores and grocery stores have 53 percent of the supplier members. There are more than 18,000 Medicare supplier companies holding supplier numbers in more than 65,000 locations, according to the NSC. CMS estimated that 2,500 DMEPOS suppliers and 7,500 locations are currently accredited by some organization. No estimate is made as to the number of orthotic and prosthetic suppliers accredited by a recognized accreditation agency. Beware of 'Rebate' Bidders must be careful on pricing a category of items because of the "rebate" provision included in the regulations, which is another controversial provision. CMS suggests that the cut-off bid (the lowest bid that allows enough suppliers to supply the region) would be paid for all accepted bidders, but any supplier that bids lower than the cut-off bid would pay the difference to the beneficiary. Thus, if a supplier bids to supply a brace for $200, and CMS accepts all bids of $300 or lower, then for every brace sold, the supplier would be reimbursed $300. The supplier bidding $200 would then pay the beneficiary $100. The idea, allowing beneficiaries to share in the savings, is something new under current Medicare regulations and raises some legal questions. It certainly does require careful evaluation of pricing on the part of bidders so as not to underbid on price. MSA Numbers to Increase The first RFBs are scheduled to be sent in 2007 with ten product categories in ten of the largest MSAs. More product categories will be added later, and by 2009, the program will be expanded to 70 additional MSAs, which would include most of the major metropolitan areas in the country. According to CMS, they hope to publish the final rule by late fall of this year on the specific MSAs included in 2007. Large suppliers with multiple locations and access to significant volume-related discounts will have an advantage in bidding successfully for contracts. Some smaller suppliers, especially in the orthotic and prosthetic industry, are currently members of supplier networks. These network suppliers, if all members are accredited and possess Medicare supplier numbers, will be in a position to competitively bid on contracts when desired and aggressively participate in group purchasing discount programs. Unfortunately, many suppliers who may want to respond to an RFB are not part of a network. For now, being a part of a network will only be important to facilities in the ten MSAs selected to participate in 2007. But in two years, the number rises to 80 MSAs. That will include virtually every major metropolitan area in the US. After 2009, virtually the entire country will be included in the competitive bidding project so long as there are a sufficient number of bidders in the market. Therefore, all small orthotics facilities in any of the bidding areas subject to competitive bidding which currently provide a significant volume of the items included in the RFB will need to seriously consider their options. While a facility does not need to participate in a supplier network that might bid on a contract for orthotics, it might be to its advantage to do so. As the number of MSAs included in the competitive bidding program grows, and as the number of items in the orthotics category increases, the risk increases if RFB Medicare business is important to the supplier. Time Is Urgent Many MSAs have orthotic and prosthetic networks in existence already. Others may not, and new networks might need to be developed in order to competitively bid in that manner. The regulations require the network to be in place and its members under contract to the network before the network may bid on a Medicare contract. Therefore, time is of the essence. The large orthotics and drugstore companies already are positioned to effectively bid on the Medicare business. Competitive bidding will change the manner, the amount, and who Medicare pays for DMEPOS. Since commercial payers have in many respects been using competitive bidding procedures already, many suppliers are well prepared for the change. Others will need to adapt as this just adds another element to the evolution of financing healthcare delivery in America. John Latsko is a partner in the health law practice of Schottenstein, Zox & Dunn, Columbus, Ohio. He can be contacted at 614.462.2329; jlatsko@szd.com Healthcare Decision Makers Weigh in on Electronic Health Records Medical Record Institute Inc. (MRI), Boston, Massachusetts, released the results of its "Eighth Annual Survey of Electronic Health Records (EHR) Trends and Usage" online at www.medrecinst.com . MRI said the survey reached key EHR decision makers in the healthcare industry with 65 percent of respondents reported to be final decision makers or having a strong influence. The web results of the EHR Survey include results and trends based on 18 questions with responses collected from April through June 2006 via online access and printed surveys made available at the 2006 Annual Towards the Electronic Patient Records (TEPR) Conference. While there were a total of 1,383 respondents, the total database survey size was pared down to 729 in total, eliminating vendors and consultants in order to increase relevancy and reduce bias. The "MRI Survey of EHR Trends and Usage" reveals insights into the: Priorities for strategic decisions in IT; EHR applications and functions being implemented or planned; EHR configurations for different environments; Data capture methods being employed; Major barriers to implementing EHR systems; Mobile/wireless technologies used, concerns related to implementation, and impact on healthcare delivery; and Perceived effectiveness of IT on patient safety. Some of the major findings from the 2006 EHR Survey include: The top three priorities for strategic decisions in IT are: 1) the need to improve clinical processes or workflow efficiencies; 2) the need to improve quality of care; and 3) the need to share data. EHR Systems within most healthcare institutions support both inpatient and outpatient capabilities. Most respondents have not been able to measure the return on investment of IT for patient safety. "Remote access to lab results" is most cited as the most important EHR feature. The three most planned EHR implementations are alerts, warnings, or reminders generated by decision support; post-visit education; and pre-visit health screening, evaluations, or assessments. E-prescribing to commercial/retail pharmacies is most used for "drug-allergy checking," followed closely by "access to drug reference information." MRI's mission is to be a global forum for healthcare consumers, providers, and technology vendors on the journey to improve quality of care through advanced information technology solutions. To review or download the survey results, go to: www.medrecinst.com

Competitive Bidding: Can Small Suppliers Survive?

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