Business Solutions

Competitive Bidding Crossroads

Providers face some difficult choices when it comes to the fight against competitive bidding. What’s the right path to take?

Competitive Bidding CrossroadsThe political ground under providers’ feet has shifted greatly since the mid-term elections. Up until that point, providers were very much on a clear political course: they must fight to repeal competitive bidding. But now providers might have to choose a new path.

What that path should be is still coming into focus. Members of the HME Business Editorial Advisory Board, a panel of various industry experts, recently explored what the industry’s options might be, and what factors could influence how providers fight to protect their industry. Perhaps the best start in trying to get a clear picture of what the industry’s strategy would be is to look backward for a moment.

The strategy once seemed so clear. The industry needed a repeal of Round Two hopefully before it reached the point where Round Two bids have been finalized. That way the industry’s efforts wouldn’t be undermined in the same way its repeal efforts for Round One were scuttled.

In that case, H.R. 3790, the bill introduced by Rep. Kendrick Meek (D.-Fla.) that called for the repeal of competitive bidding, ultimately became irrelevant when the Round One bid amounts were finalized, and the Congressional Budget Office re-scored the bill, thus throwing off the bill’s pay-for. Also, Meek lost his House seat. Both developments sent the industry’s hard work to secure a repeal — the bill boasted more than 240 co-sponsors toward its end — down the drain.

For Round Two, HME providers have secured another bill, H.R. 1041, a House bill introduced by Reps. Glenn Thompson (R-Pa.) and Jason Altmire (D-Pa.) that also calls for the repeal of the bid program. At press time, the bill has 150 co-sponsors. It’s tough to tell whether that is good progress or not. What is known for certain is that the industry does not have companion legislation in the Senate; the bidding schedule for Round Two, which covers more than 90 additional CBAs, starts this fall; and bidding begins in winter of 2012.

“Unfortunately, it’s been an uphill battle from day one,” says Tom Ryan, president and CEO of Homecare Concepts. “Our co-sponsors and Representatives Thompson and Altmire have been terrific, and they’re committed to the bill. But the biggest shortfall is that we have a short window of opportunity to get this done. You have the debt ceiling debate that became a driving issue in Congress, and, it’s a $20 billion pay-for.”

That large a pay-for is not sitting well with the current Congress. One need only turn on the evening news to be bombarded by Congress members and potential presidential candidates railing against government spending and calling for stiff cuts to Federal programs. As it stands, the government needs to find $1.2 trillion over 10 years (see “Sizing up the Super Committee”).

“Whether it’s timing or otherwise, I don’t believe we’re going to be successful getting the government to have an appetite for passing legislation that will cost the government money,” says Carl Will, senior vice president of Global Commercial Operations for Invacare Corp. “When you’re looking for $1.2 trillion in cuts, you’re not going to give back $20 billion.”

The task is made doubly hard by the fact that CMS is doing everything it can to publicize Round One of competitive bidding as a success to Congress and the Administration, says John Shirvinsky, executive director of the Pennsylvania Association of Medical Suppliers. Regardless of whether there’s any substance to CMS’s claims, it’s a message that resonates in today’s Congress.

“The Administration is 100 percent behind [competitive bidding] and [CMS] has incredibly strong backing in the Senate,” he says. “So CMS is really feeling its oats, while there is this pressure to find ways to cut expenditures. And when you have the director of CMS calling competitive bidding the most wildly successful cost-savings program in the history of CMS, that’s saying something.”

The Crossroads

So the question is, does the industry need to change course and adopt a new strategy for fighting competitive bidding, and if so, what would be that opportunity to pivot? Some argue that it is to adopt another market-based solution for setting pricing that would achieve the objectives of cutting Medicare costs while still preserving the industry and patients’ access to today’s levels of choice and quality of care.

This has certainly been the position of auction model expert and University of Maryland Economic Prof. Peter Cramton, who helped assemble the legion of economists (including two Nobel Laureates) who sent a letter to CMS and other key Washington decision-makers itemizing why the current competitive bidding program is so flawed. In the letter, the economists highlighted four key problems with CMS’s program:

  • It’s not binding. The auction rules violate a basic principle of auction design: bids must be binding commitments. In the Medicare auction, bidders are not bound by their bids. Any auction winner can decline to sign a supply contract following the auction. This undermines the credibility of bids, and encourages low-ball bids in which the supplier acquires at no cost the option to sign a supply contract.
  • A flawed pricing rule. As is standard in multi-unit procurement auctions, bids are sorted from lowest to highest, and winners are selected, lowest bid first, until the cumulative supply quantity equals the estimated demand. However, rather than paying winners the last-accepted bid, the auction pays winners the unweighted median among the winning bids. The result is that 50 percent of the winning bidders are offered a contract price less than their bids. This median pricing rule further encourages low-ball bids.
  • The use of composite bids. Composite bids are an average of a bidder’s bids across many products weighted by government estimated demand. This provides strong incentives to distort bids away from costs—the problem of bid skewing. Bidders bid low on products where the government overestimated demand and high on products where the government underestimated demand. As a result, prices for individual products are not closely related to costs. Bid skewing is especially problematic in this setting, since the divergence between costs and prices likely will result in selective fulfillment of customer orders. Orders for low-priced products are apt to go unfilled.
  • Lack of transparency. It is unclear how quantities associated with each bidder are determined. These quantities are set in a non-transparent way in advance of the auction. Bids from the last auction event were taken in November 2009, and more than 10 months later, the contract winners remain unknown, while both quality standards and performance obligations are unclear. This lack of transparency is sharp contrast to other government auctions, such as the Federal Communications Commission spectrum auctions for wireless telecommunications.

That critique of competitive bidding has served as a key piece of evidence the industry has cited when meeting with lawmakers to convince them to get behind H.R. 1041. But for Cramton, that critique is because he thinks an auction model for DME/HME can work — provided it is done right.

To that end, back in April, Cramton organized a Medicare Auction Conference at the University of Medicare beneficiaries, government agencies, Congressional staff, and auction experts to not only debate the basic issues surrounding CMS’s program, but also learn about the auction methods that could simplify and conduct a “mock auction” that tested a bidding system Cramton argued could work for HME providers, without the aforementioned flaws in CMS’s current program.

In the mock auction approximately 90 bidding teams competed to be DME providers for six product categories in nine regions. Each team was given a specific business plan including the company’s cost of providing service for the product categories and regions the company was targeting. The goal of this mock auction is to get the participants to consider how the auction works, think about bidding strategy, and then actually bid in the mock auction, just as the would in a real auction.

Now, a half a year later, some members are asking themselves if something like what Cramton suggests might be the better route to go given the state of the political reality on the Hill?

“It’s not likely that the government, during this particular period of time, is going to have any appetite for eliminating things that save money,” Will says. “When you look at our policy decision on Capitol Hill as it pertains to competitive bidding, is more likely going to be to pursue a repeal and replace of the bid program with specific improvements.”

“Potentially we can get support for this,” Ryan says. “... In general, the providers in the industry understand the [competitive bidding] timeline; they understand that CMS is pushing Round Two; they understand that they’re going to be starting registration this Fall; and that our window of opportunity for a strict repeal might be closing.

“If we cannot get a Senate companion bill, it’s time to rethink the strategy, and if we can come in with a market-based program that would maintain competition within the benefit then maybe we can get more support,” he adds.

Whether or not the industry will adopt the Cramton plan remains to be seen. Perhaps what the industry will outline in a repeal and replace scenario would be something that involves the best elements of the Cramton plan, says Georgie Blackburn, vice president of Government Relations and Legislative Affairs at BLACKBURN’S.

“What Prof. Cramton did was come out with some core competencies that have to be in any good audit program, and gave us a lot of food for thought on how does this mesh with the industry, and how do owners within the industry think they could make this work,” she says. “I think that has been our challenge, and I believe we are up to that challenge.”

One of the ways Cramton’s model could be altered would be to make the competitive bidding areas much smaller, Shirvinsky says. Basing the CBAs on MSAs is misguided because MSAs are usually much larger than a typical provider’s local market place. Even for larger providers they cause problems, especially when a CBA/MSA crosses state lines.

“If you really want do competitive bidding in a way that yields more marketbased pricing, you want to shrink it,” he says. “Make it smaller. If we can move to a smaller model, it might work. But right now it really is a winner-take-all kind of structure.”

Regardless of how the repeal and replace takes shape, providing an alternative to the current program is essential, Blackburn emphasizes. “‘Just say no’ isn’t enough,” Blackburn adds. “Not in this climate. Not with what is happening in D.C. ... And I’ve be a proponent of repealing competitive bidding since 2007.”

Building Consensus

Changing course isn’t exactly easy. There are still many in the industry that still call for a complete repeal of the program, because, simply put, competitive bidding is not appropriate for healthcare. It just plain does not make sense, and is bad for pages; legitimate points.

“We should be trying to repeal competitive bidding,” says Peggy Walker, RN, billing & reimbursement advisor for the US Rehab Division of VGM Group. “There shouldn’t be any discussion of fixing the competitive bid program. I don’t think we should give up” And, if the industry is not able to secure a repeal of the program by the time Round Two bids are secured, it should keep fighting for repeal after the bids come in, she adds.

A third option is to pursue a multi-pronged approach. Instead of pursuing any one track, perhaps the industry should try multiple avenues when it comes to stopping competitive bidding (in its current form), says Wayne Stanfield, president and CEO of the National Association of Independent Medical Equipment Suppliers.

“Plan A is to repeal using HR 1041, and we must continue to do that,” he says. “Plan B is to attempt to delay Round 2 from going forward through whatever means possible. So far nothing has come to the surface, but we continue to advocate for a delay. Plan C is to repeal and replace the current program with a workable process using a Cramton-type proposal modified to address some key supplier issues. We must keep all of these options on the table and fight for all of them.”


So if there is a Plan C, a repeal and replace option, that is being tossed around by the industry, when might providers see it?

“I believe over the next month, we’ll see some ideas coming out that might be palatable to both Mr. Altmire and Mr. Thompson, as well as others on the Senate side,” Blackburn says. “That’s my hope. I believe it’s in our best interest to drive it there.”

Of course, deciding to change course and adopt a new strategy doesn’t change the time element. Round Two is around the bend regardless of what the strategy is.

“When you’re down to a couple of months left to go until Round Two, and 90 more MSAs, and you’re not getting any Senate support whatsoever, it’s time to reconsider,” Ryan says. “Our timing is such that if there’s going to be a late Medicare bill, then we don’t have a lot of time. So we have to make a determination, and pivot pretty quickly when and if we do it.”

Of course judging the political sentiment on Capitol Hill is one thing. Judging the political sentiment within the industry is another. Whether or not providers will be able to reach a consensus is another issue.

“One of the ways that, as an industry, we do ourselves a disservice, is that our overall amount of the Medicare budget is very small in the grand scheme of things, and our size in terms of lobbying, relative to other players in Washington, is very small, as well, but we have a splintered voice,” Will says. “On this one, we’re going to need organizations and leaders to make sure we’re on the same page.”

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

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