It’s a slower day around the office as doctors are closing down for the holidays so I figure it’s a good time to do a little blogging…  The subject today is competitive bidding.  Without a doubt this program is and will continue to impact our business more than anything else.  The Charlotte area was one of the test markets for Round 1.  Puerto Rico was also part of Round 1, although they got a get out of jail free card when they colluded and refused to participate.   In 2013 it’s rolling out to 90 more cities where let’s just say stuff will really hit the fan.  President Bush signed into law the Medicare Modernization Act in 2003.  Part of this included the phasing in of the Competitive Bidding Program for durable medical equipment (DME) in 2007.  Sounds like a logical idea, for example at the time Medicare was paying close to $200 a month indefinitely for an oxygen concentrator you could buy online for about $500 shipped.  The media loves to compare us to the internet.  Our average Medicare patient stays on oxygen therapy for about 10 months.  I’m an internet savvy coupon clipping bean counter for a DME business, I’ll say there’s a problem that needed to be addressed.

Was Medicare overpaying for some services?  If I didn’t know better I’d say absolutely but I’ll use oxygen as an example and explain what is included.   An oxygen concentrator is a stationary unit that must be plugged in to a wall outlet, where you then attach tubing and a cannula to breathe.  If you’re like me, you probably don’t want to be tethered to a 10, 20 or 30’ tube for the rest of your life nor do you want to wheel around a giant oxygen tank on wheels when you have to leave the house.  I’m not sure Medicare has considered the quality of life for the people who need these machines. 

Innovation in the medical device industry has been booming year after year.  New home filling devices and portable oxygen units are developed every year, some weighing less than two pounds that can fit in a woman’s purse.  You can buy them online for about $3,000.  Patients can fill their own small tanks having an unlimited supply of oxygen, or use the cigarette adaptor in the car to charge a portable unit.  The useful life is about 3 years and they generally carry a 3 year warranty excluding batteries, chargers and accessories.  That warranty applies to the parts only.  The last battery charger I purchased was $313.  The last replacement battery was $275 dealer cost.  Backup batteries for longer trips are $495 at cost.  Obviously we’re purchasing these to replace the ones that disappear when we pick-up equipment.  Medicare nor patients do not know these cost exist.  These portable units and home filling devices are provided at the Medicare allowable of $43 per month.  After three years of Medicare payments we can chuck these in the dumpster and have a gross loss in the hundreds on the base unit alone.  We provide these products not because we have to, but rather as a value added service to our customers.

Maybe CMS wants to drive down innovation and service, and have more patients in the hospital where we can really spend some money.   DME represented 1.6% of the Medicare budget in 2009 and is part of the solution, not the problem.  We keep patients in the home where they want to be and where patient outcomes are at their best.  We provide 24 Hour technicians and Respiratory Therapists that drive to patient homes in the middle of the night for emergencies, power outages, broken machines etc.  We follow up on a regular basis and our techs physically go to patient homes to calibrate the concentrators to ensure patients are recieving adequate oxygen.  I’m not sure how the internet can pull that off.  Rent, phones, liability insurance, auto insurance, vehicles, fuel and workers comp alone ran about $175K this year.  We’ve had 130 audits in the past 6 months, yet interestingly enough every denial except for one that we’ve appealed all the way to the administrative law judge has eventually paid.  It takes a highly skilled staff and a lot of time and effort to work these audits.  I just checked a patient’s file that’s been on oxygen for a few years and stopped counting at 200 pages as there’s a good 100 left.  Just a little documentation so we can get paid as a doctor’s prescription doesn’t mean a whole lot these days. We have power wheelchairs we put out in 2008 we haven’t been paid for yet.  This is not a drop ship cash only business.

Notice anything wrong with this picture??  Why is it so difficult to do business with Medicare?  Whatever happened to free markets?  Innovation is what drives our country and the future of healthcare.  This bidding program does not set prices anywhere near the “clearing price” of what any reputable provider bids.  Pricing is based on the median price that satisfies the stated capacity, and the low ballers interestingly enough are not required to accept the contracts.  Say for example the expected capacity for the Charlotte area was 100 units, and each bidder is able to supply 33^1/3 units each.  Bob bids $50, Tom $75, Mary $100, Alex $150 and Beth $200 per unit.  The new contracted price would be set at $75 per unit as the expected capacity was filled with Mary’s bid.  Bob denies the contract as he lives in Miami and was bidding in Charlotte just for the hell of it hoping the other providers would drive up the price.  Tom accepts the contract but later goes out of business.  Mary gets disqualified because she transposed a number on the application so that brings Alex back into the game.  Unfortunately the capacity is still full so the median bid remains at $75.   Alex is unhappy but does not know what else to do so he accepts the contract.   Since Bob dropped out, Medicare calls Beth to see if she is interested.  Beth decides she’d rather have terminal cancer than a bullet to the head and accepts the contract (this is where Carolina’s Home Medical Equipment ended up).  Although Bob declines the contract, his bid is still used to determine the contract price, not Beth’s bid.

I don’t want to go into any more detail regarding the flaws of the bidding program, but let me tell you it is unlike any other government contracting process. 

-Andrew Trammell, Controller