Business Solutions

Canary in the Coal Mine

Competitive Bidding: The first 90 days as seen from the eyes of bed and support surface providers.

Canary in the Coal MineYears ago, miners would carry caged canaries deep into the pits with them as an early warning against poisonous gas. The second the delicate canary dropped over in its tiny cage, the miners knew they had to scramble for the surface. Could beds and support surfaces — a cornerstone DME segment for the home medical equipment industry — be the canary in the competitive bidding coal mine?

On Jan. 1, Medicare’s competitive bidding program launched in nine regions across the United States. These competitive bidding areas (CBAs) were Charlotte; Cincinnati; Cleveland; Dallas-Fort Worth; Kansas City; Miami; Orlando; Pittsburgh; and Riverside, Calif.

Congress mandated the bidding program through the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The statute requires Medicare to use a competitive bid process to determine current fee schedule payment methodology.

Long before the rollout, this controversial program had been the target of vociferous critics, with predications ranging from providers not being able to deliver an acceptable standard of patient care to not being able to survive financially from the drastic cuts in Medicare reimbursement imposed by the predicted draconian cuts.

Three Months In

Perhaps it’s too early to tell the fate of the program, providers or patients, but with almost 90 days between the program’s inception and the writing of this article, there are trends, problems and complaints catching the attention of many in the industry.

“It’s just weeks into this program and we have received complaints from hundreds of patients, providers, clinicians, and hospital administrators who have expressed grave concerns about this approach to healthcare,” said Tyler Wilson, president and CEO of the American Association for Homecare (AAHomecare). “We agree with the many patient advocacy groups, economists, and members of Congress who have called for an end to this misguided pricing mechanism. Homecare is already the most cost-effective setting for post-acute care, and this bid system is merely a badly designed solution in search of a problem.”

As a watchdog group for home healthcare services, AAHomecare also reported to the CMS earlier this year that regarding competitive bidding, there are:

  • Companies being awarded Medicare contracts that are bankrupt.
  • Companies being awarded Medicare contracts that are not licensed to provide items or services.
  • Companies being awarded Medicare contracts that have credit problems.
  • Incorrect information distributed by Medicare about the contract winners and which beneficiaries need to change their home medical equipment providers.

A rocky start to say the least. And with 91 other metropolitan areas set to start the competitive bidding process later this year, a lack of improvement to the program might simply be asking for 10 times the number of problems and complaints being shared today.

Round One of competitive bidding involves many product categories, including beds (in all nine CBAs) and support surfaces (only in the Miami CBA). For many providers this category is the cornerstone of their business — and a good one to put under the microscope to see how providers and patients are coping right out of the starting gate.

Into the Fire

Georgie Blackburn is the vice president of governmental relations and legislative affairs for Blackburn’s, a Pittsburgh-based provider of home medical equipment and services. Blackburn’s has been awarded two categories under the competitive bidding program: Enteral Nutrition and Equipment, and Standard Power Wheelchairs, Scooters and Accessories.

They did not win in the bed category. The company has chosen to grandfather all existing patients for product categories under rental status affected by the competitive bidding program. This means that grandfathered product lines, which include Oxygen Supplies and Equipment, Hospital Beds and Accessories, CPAP and Respiratory Assist Devices, will remain in place until it converts to purchase or until it is returned because the patient no longer requires it.

“We were awarded only two contracts, so the fact that we no longer can service new Medicare referrals with a hospital bed, oxygen, CPAP, walker — the type of product lines that are most associated with discharges from hospitals — is a serious concern, ” said Blackburn.

Although the support surface category does not apply to her CBA, Blackburn said that while the average bid discount across all CBAs was 32 percent, in Pittsburgh, bed bidding lowered the allowable by a full 38 percent, making the collective Pittsburgh bid outcomes the second lowest across all CBAs.

“Any CBA provider who was not awarded a contract definitely is experiencing lost revenue,” said Blackburn. “We chose to ‘grandfather’ our existing rental clients to protect their continuity of care; however, the amount paid is now at the competitive bid single price. Once those patients’ products convert to purchase we may not continue to service the patient.

“For instance, a CPAP patient cannot continue to receive their masks and supplies required to use their breathing machine from us,” she explains. “They must find another supplier who was awarded a contract. We may not supply a replacement mattress for an owned hospital bed. I believe the grandfather rule has a very poor design and one that benefited CMS because more providers than not felt compelled to continue to provide service. For many providers, grandfathering was an ethical issue and one that placed providers in a precarious position.”

Griffin Home Health Care, a provider of medical equipment and supplies in CBA Charlotte, was another provider of beds that was not awarded a contract for that category. They were, however, awarded an oxygen contract, but overall, William H. (Bill) Griffin, CEO and President, says the company has lost revenue so far regarding competitive bidding. Like many companies looking for a way to survive in this new reimbursement era, Griffin is looking for other revenue streams. And even if they got the bed contract, Griffin said that the bed contract price is not sufficient for sustainable services.

Unlike Blackburn’s and Griffin Home Health Care, Medical Service Company, which services the Cleveland, Cincinnati and Pittsburgh areas, was awarded a bed contract. Although the company has been able to provide beds to patients, Joel D. Marx, chairman of Medical Services Company, says they have had issues with non-grandfathered providers where Medical Supply Company needs to switch their products for the old providers.

Marx also pointed out that “referral sources prefer to use as few providers as possible because they are more comfortable with a provider that can provide all bid products rather than just the bed or just the oxygen.” For Marx, he sees Round One of competitive bidding as financially challenging, something he says will ultimately result in industry consolidation and patient access issues as the program expands.

“The elimination of competition, an unorthodox bidding program, lack of transparency and unsustainable pricing will ultimately result in higher costs to the system in hospital readmissions, delayed discharge, patient satisfaction and sector unemployment,” said Marx.

Jim Acker, vice president of sales and marketing for Blue Chip Medical Products, a manufacturer of therapeutic mattresses, overlays, seating and positioning cushions and patient safety products, says it’s too early to see exactly how competitive bidding will ultimately affect the provisioning of beds and support surfaces. However, one aspect of the business that should never change is the necessity to meet patients’ needs. And as providers scramble to recover lost revenue due to cuts, Acker’s fear is that the patient could suffer.

“There should always be a high standard set for the quality of care for a patient,” said Acker. “Unfortunately, there is a trend out there that a provider focuses on the cheapest product from an importer or distributor. In this case the patient will suffer. The patient is at the mercy of the provider in this case, not necessarily the referral source. The referrals and the providers must be educated on why quality products matter. Education and service is the key to providing quality care that will result in positive clinical outcomes.”

According to Acker, bed and support surface bid winners need to work with a manufacturer that understands their needs and manufactures a quality but competitive product.

“Many distributors of support surfaces ship thousands of other products daily and do not understand the needs of the provider or the other opportunities out there for the provider,” said Acker. “Our goal is to manufacture a quality product that helps result in positive clinical outcomes for the patient. The main issue with this is when the provider feels they need to buy the cheapest product out there in order to be competitive. In reality they need to focus on clinical outcomes, quality, durability, and education and they come out ahead every time. When providers buy the cheapest product on the market, they jeopardize their credibility to their referral sources and their future revenue flow.”

Searching for supplemental revenue

Past caps, reimbursement cuts and now competitive bidding have caused providers to don their entrepreneurial hats and create sales strategies and partnerships that allow them to bring in supplemental revenue to slow or stop the financial bleeding. With beds and sleep support systems being the cornerstone of many providers’ businesses, it’s hard not to have a sense of dread as the competitive bidding program creeps toward a much larger rollout. For Acker, Blue Chip Medical creates partnerships with its providers. If anything, competitive bidding has brought about urgency to think outside the box. And by partnering with manufacturers to help build your business, two heads seem way better than one.

“We have worked with our customers for many years, showing them other areas in revenue outside of Medicare Part B, helping them minimize any loss of revenue,” said Acker. “We work side by side with our customers on how to effectively enter into the sub-acute, hospice, Medicaid, managed care, private insurance, worker’s comp markets and even working with the federal government. We provide training webinars, CEU [continuing education units] programs, around the clock in-servicing to facilities and referral sources, and we stand behind our product.

“It is easy for an importer or distributor of support surfaces to say they have a program in place to help the provider,” he explains. “It is a whole other thing to actually put that program in motion and make it work for the provider. Blue Chip is a manufacturer of specialty support surfaces. That is what we do. The provider needs to choose their manufacturing partner carefully. This is the only way they will succeed in today’s environment.”

For provider Griffin Home Health Care, they have dealt with the early challenges of competitive bidding through diversification.

“We have been blessed to have a well-rounded business to include VA, commercial insurance, retail, hospice, and managed care,” said Griffin. “We miss the Medicare bed, walkers, enteral, and CPAP [business] but we are working our strategy in other directions than Medicare, which ultimately is a real problem for the Medicare recipients and families of the Medicare beneficiaries. The competitive bidding program is not sustainable. Service will ultimately suffer. Prices will rise. We as tax payers will pay a huge price for this debacle.”

Gary Owens founded a company three years called TenderCare Beds. His company manufactures headboards and footboards that easily transform existing hospital beds into attractive pieces of furniture.

He knew he was creating a non-reimbursable retail item and many providers told him that they did not carry these types of cash items. Well, a lot has changed in three years, and at only 90 days old, competitive bidding is a driving force in that change.

“Today all we hear is, ‘We are looking for cash items for our new retail showroom,’ ” says Owen. “We didn’t plan this or even understand enough about the industry to know that a paradigm shift was taking place. We just happened to be in the right place at the right time.”

Lucky or not, there is a lot too be learned from this business model. Owen says he sees uncertainty and fear in the industry today.

“Fear often paralyzes people but I think that most DMEs understand that business can’t continue as is,” he says. “Your either moving forward or falling behind. To count on revenue from a source that is constantly drying up is crazy. Their cheese has been moved. I was visiting a major manufacturer of medical-grade mattresses recently. I was told that because of cutbacks, a cheaper throwaway-type mattress was coming. This is all that the government wants to pay for.

“I believe this same philosophy will carry over to more products,” he continues. “This will make end users seek out higher quality items that they will pay for themselves. In the long run this is not necessarily a negative. It will give DME providers with an entrepreneurial spirit an opportunity to rebuild their business into something that is self-sufficient and doesn’t depend on government monies. The end users will have better products, greater selections, and competition and demand will control prices.”

Getting Creative

And this is where providers of beds and support surfaces in Round One — and soon Round Two — will have to get creative and start adopting more flexible business models, so that they can tap into various cash fl ows. Jack Evans is a consultant for Global Media Marketing, a company that is helping providers find success in retailing home healthcare items such as beds and support surfaces.

“Many retail HMEs are displaying and selling a wide selection of hi-lo, all-electric beds rather than hospital beds, with memory foam or Tempur-Pedic mattresses,” Evans says. “These are all cash sales. They also focus on helping end users become more independent at home, as well as improving their daily quality of life, so they offer sheets that fit hospital beds, memory foam mattress pads that are better at preventing bedsores than egg crate or low, air-loss systems, and standing-assist products to get out of bed on their own.

“Basically, with every bed rental, they will average $200 to $400 in add-on cash sales,” he adds. “But to be successful in selling these accessories and related products, they must display beds in a bedroom setting with all of the related products out-of-the-box and on display so customers can see how the products are beneficial to the end user.”

Owens agrees with the importance of aesthetics and creating an environment that doesn’t remind patients that they are sick. It’s an emotional need that Owens believes people will meet by paying out of pocket.

“Consumer shopping experiences will be enhanced by large beautiful retail showrooms, replacing what sometimes felt like almost dealing out of the back of someone’s truck,” said Owens. “Many HME/DMEs are expanding into value-added products and services to address revenue to their bottom line, such as accessibility and design services.

Owens wears many hats: inventor, product developer, businessperson, and manufacturer, but his most important role is one of caregiver to his wife, Gina.

“Over the last 14 years , I have bought a lot of durable medical equipment for our personal use,” Owens says. “Nothing I ever bought made us feel good or got us excited about our challenges. They were items that were needed to help Gina function. As important as that was, real satisfaction came when we started addressing our emotional needs.” And perhaps there can be additional opportunities for enterprising providers.

“Function always comes first,” he says. “I believe function and style can go hand and hand. Just because someone is sick doesn’t mean he or she won’t enjoy the niceties of life they enjoyed before. No one wants to see a loved one in a sterile clinical environment at home or even in a long-term care facility. Decorating services will be a great value-added service that is already being embraced by the industry.”

In the end, however beneficial cash sales and providing additional related services are, these are most likely temporary solutions to put a gas mask on the proverbial canary in the coalmine. Devising cash sales strategies and rethinking or creating new business models to help providers of beds and support surfaces contend with competitive bidding will help them survive longer, but not indefinitely.

The central strategy will be for providers to leverage this additional time to continue to fight to repeal the competitive bidding program or, at the least, change it to something that could work. If they can secure that, they will find themselves in an advantageous position to soar in a more reasonable funding environment — thanks to the prior work they did to protect themselves and make their businesses more resilient.

This article originally appeared in the April 2011 issue of HME Business.

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