From: Home Care Magazine

Round 2 of competitive bidding has dealt providers of diabetes supplies a roundhouse blow; how to recover?

by Greg Thompson

Tim Binkley got out while the getting was good, opting to sell the Medicare portion of Valentine’s Diabetic Supply last year. As president and CEO of the Roswell, Ga.-based supplier, he had seen enough. “We saw what happened with the first round of competitive bidding and its 56 percent cut,” he says. “It was unbelievable to think we could stay in business, and now they have cut it even more, 72 percent, with Round 2.”

In addition to heading up Valentine’s, Binkley has seen fundamental market changes in his capacity as a mergers and acquisitions representative. As many expected, large providers who did not win a contract are acquiring winners. In the past, acquisition values for these transactions hovered around $1,500 per patient, but Binkley has completed recent sales that put the figure at $50 per patient.

According to Binkley, even nationwide giants such as Arriva Medical did not win a bid. “And that is pretty amazing,” he says. “Consider that they are probably the largest diabetic supply company at around a million and a half patients. They are the company that should be able to buy the cheapest box of strips, but they could not even win a bid. They would not go that low, $10.41 per box, for Round 2.”

These days Binkley only deals with private insurance and Medicaid, and he is hopeful these entities will not fall in line behind Medicare. “Everybody says they will follow suit with Medicare, but we are dealing with the poorest of the poor, and we are dealing with people for whom transportation is a problem,” he says. “The mail order model still makes sense, in that it is local. It makes it easier also to deal with my local Congressman.”

Another provision of Round 2 mandated that retail diabetic supplies be sold at mail-order rates. While the move has not been popular with retail establishments, some believe it was the right thing to do. “I thought it was only fair,” says Binkley. “I told a rep from one of the major drugstores that it was not fair that he was getting a much higher retail price. Well, he did not like that, and he did not think it was going to happen. Now they are going to get paid the same low, ridiculous amount that the mail-order guy is receiving. I’m not in that anymore, but I feel sorry for the people who are.”

Blood Bath for Independents

A few years ago when Round 1 rates were announced, diabetes products and supplies took the biggest hit with a whopping 56 percent reduction over previous allowables. For Round 2, CMS once again honed in on diabetes supplies, but this time manufacturers and providers alike are even more perplexed.

Advocates say the likely result of the latest carnage is that big nationals will take over the Medicare diabetes market. “It is going to be a blood bath in this industry, and so many people are going to be out of work,” says Binkley in reference to diabetes rates, and the across the board cuts. “I have been around a long time, and it is sad to see. We belong to several state associations, and all the members just can’t believe a 45-percent average drop in price.”

Manufacturers who have already cut prices to the bone are left to contemplate the new reality, and they are not immune to the frustration that so many providers feel. “How could CMS conclude that $10.48 would be enough?,” asks Bret Morey, director of marketing and sales at Fora Care in Thousand Oaks, Calif. “Prices are much lower in the market, just not as low as CMS reimbursements.”

Morey agrees with Binkley’s harsh assessment that jobs will be lost if the rates are allowed to stand. “It is going to displace a lot of strips manufacturers, put many DMEs out of business and lead to thousands of jobs lost,” he says. “It’s a sad day. Manufacturers who do not have DMEs who won the bid will have a tough time gaining new ground with those who won. The new rules will make it difficult to compete fairly, because those with deep pockets will be able to market their brand and potentially grow. Those who do not will be forced to find other channels. If I made any educated guess on what will happen next, strip pricing as a whole will be reduced.”

The grapevine has buzzed since contracts for diabetes supplies were offered nationwide, and some of the stories are real head scratchers. “I heard that a winner down in Florida with two patients won a competitive bid for mail order,” says Morey. “Another company with 5,000 patients asked this company to partner with them. How did CMS come up with the conclusion that a company that small could reasonably afford to compete?”

And providers who wish to compete, says Morey, must know that low price will essentially be the only market driver worth considering when it comes to deciding which brands to carry. “Medicare patients will no longer have providers who can afford to give them more,” he laments. “They will be allowed to keep the brands they have for a while, and sooner or later it will be the lowest cost products—and those may not be the best. Only time will tell.

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