Your Primer to Healthcare Mergers and Acquisitions

5 Tragic Outcomes Of Competitive Bidding (Or How The Cure Became Worse Than The Problem)

Jan 2, 2018

by Eric Hymes

By Eric Hymes, Managing Director

Volume 5 Issue 1, January 2, 2018 

The Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) Competitive Bidding Program (CBP) was mandated by Congress through the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). This legislation was largely a response to multiple cases of profiteering by unsavory DME companies in various areas of the US. As you can imagine, there was considerable anxiety for DME business owners across the country. A competitive bid process for guardrails on the highway is one thing, but to thrust healthcare services into a competitive bid program would seal the fate of most smaller providers. Not to mention the outcomes for the end users, the patients.

To date, the CBP has essentially ruined every high-volume product line such as CPAP, diabetic testing supplies, enteral nutrition equipment and supplies, oxygen equipment and supplies, power and standard wheelchairs, among others. Along with the traditional annual rate adjustments that are provided by the Medicare fee schedule, we now have rates reduced to “how low can you go” points, creating titanic pressures on the entire system of healthcare supplies and services delivery.

Here are five of the disturbing outcomes of the CBP thus far:

Costs Have Been Shifted, Not Saved

CBP has caused many DME businesses to change the way they deliver their products and services, often with negative impact on the quality and immediacy of the response. Clearly, Medicare competitive bidding program architects did not fully understand these potential ramifications. Essentially, the cost has been shifted downstream to another segment of care or has created unnecessary corrective care, often in more institutional environments. While savings can be claimed on the DMEPOS fee schedules, that cost has been pushed further into the total delivery model and there has been no system-wide assessment of any true cost savings.

Commercial Healthcare Insurance Programs Always Follow Medicare’s Lead

Commercial and managed care insurance providers have changed dramatically over the past two decades with much more of the cost responsibility shifting to the beneficiary. This shift to increasing the patient financial burden, combined with the fact that the commercial and managed care fee schedules closely mirror (and at a discount) that of Medicare, is a disaster for many patients. This factor, in concert with the increased paperwork burden for DME billing departments has created an additional margin drain. And, yes, this is all related to Medicare’s CBP. The end result is a “perfect storm” scenario of low margin for the DMEPOS providers.

Forced Formulary

Another unfortunate outcome is the fact is that DME operators have been forced to consider generic and/or foreign made products to retain their razor thin margins. At the end of the day, the end user is at significant risk of either developing complications or not having the advantage of technology available in higher quality products. The same is also true for limiting the availability of technology only found in higher cost products

The National Healthcare Outlook is… well…More Unpredictable

Given our current national outlook on healthcare, the emphasis on savings is greater than ever. With the Obama administration, we witnessed many changes in the way that insurance programs are administered in the United States. All those program changes driven by an effort to create more transparency in federal healthcare programs, as well as, drive tangible cost savings. With the Trump administration's recent passage of tax reform, we know little except that Medicare is targeted for further reductions in expenses and/or benefits, placing further pressure on patients to consider going without a needed DME product.

Industry Consolidation

Competitive bidding has accelerated the consolidation of DME providers. These small business owners were expertly geared to provide excellent service and earn a decent living for their families. These industry pioneers were sadly unable to stay in business or they had to liquidate given the concept of Medicare CBP. Massive consolidation of the industry has and will continue, with volume the key strategy for being able to remain profitable on razor thin margins.

With or without competitive bid, the stage has now been set for foreign made products and low-quality generic products to make their way deeper into the supply chain. We should all expect further consolidation of the industry, companies seeking to diversify their offerings, companies accepting historically low fee schedules, and all DME providers considering their next steps to remain profitable and purposeful. What comes next is a guess and a systemic analysis of the cost effectiveness would help all of us to understand if tragedy is worth the alleged cost savings.

Eric Hymes

Eric Hymes

Former Managing Director

Eric has worked for nearly 20 years in the healthcare services industry, with a focus on high customer satisfaction and quality service as an executive in the Durable Medical Equipment (DME) sector.  During the past decade, he has helped manage a successful $100 million national multi-product DME, and has assisted in building a top tier platform Urology DME, including the completion of multiple strategic acquisitions across the country.  As a Managing Director at VERTESS, Eric advised healthcare business owners in diversifying their holdings by means of strategic acquisitions, recapitalizing their businesses, and providing qualified buyers to transition their business to the next stage. He also consulted with healthcare business owners on their next step based on their goals, including building value in their companies prior to a transaction.  While his primary focus was the DME marketplace, he also assisted specialty physician practices and other related healthcare businesses in evaluating their objectives and maximizing their potential.

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