Having been in the Home Medical Equipment business for the best part of 40 years

[The complete text of the following letter with proper formating of the table is posted in the attachment “IPD Letter.doc”   The next two posts contain the two attachments to the letter that were provided by the letter’s author, “Flaws in Bid Implementation July 2008 2-page summary 070808.doc” and “Lincare sole survivor-From HME Business.doc” — CRE]

Having been in the Home Medical Equipment business for the best part of 40 years, I have seen many changes in the industry, some good, and some bad. None of which would have the negative effect on the quality of care that the National Competitive Bidding (NCB) program promises. This industry has, over the years, reduced Medicare spending by billions of dollars by markedly reducing hospital lengths of stay and readmissions.

This is especially true for the home oxygen patients, an at risk group of patients predominantly of Medicare recipient age. The Agency for Healthcare Quality and Research (AHRQ), the Department of Health and Human Service’s own in-house experts on patient quality, access and evidence-based medicine, released a comprehensive study in 2004 of the effect of Long-Term Oxygen Therapy (LTOT) on patients’ health and related health care utilizations. “In a retrospective cohort study of 246 patients that focused on the effect of LTOT on hospitalization, Ringbaek et al. (2002) reported that the average number of hospital admissions per patient per year decreased from 2.1 to 1.6 and the average number of days hospitalized decreased from 23.7 to 13.4 after LTOT.” Since the current cost of one day hospital stay is $4,603/day while the annual cost to Medicare for providing home oxygen is $2,457, a policy that restricts access to LTOT may result in Medicare spending far exceeding the calculated savings resulting from the NCB while further jeopardizing the health of an already at risk population. The results of the first eight days of implementation of round one bidding which was implemented on July 1, 2008 and was then rescinded on July 15 2008 (see attached report) accurately demonstrates this potential negative effect in that some of the companies awarded bids, either were not licensed to provide oxygen in the areas they were awarded bids, or they would take 2 to 3 days to provide the oxygen. Under the current arrangements home care providers are able to, within about two hours, provide the patient at the hospital with portable oxygen for transport to their home while providing a stationary oxygen system in their home. These NCB resulting delays can result in an additional 2 to 3 day stay in the hospital for the patient while adding much additional cost to the healthcare program and disadvantaging the at risk patient.

There are currently an estimated 25,000 to 30,000 HME companies employing approximately 300,000 individuals. These companies have survived because they know that this business is a service business. They succeed by obtaining referrals from doctors and hospital discharge planners because they are able to provide quality care on a timely basis. CMS does not understand this concept. They continue to attempt to establish reimbursement rates as if these service companies were your standard retail companies using cost of goods as the only condition for determining rates. In fact, studies show that the cost of goods for your typical HME company is only 28% of their total costs. These companies must provide 24 hour availability. They provide pick-up and delivery. They provide all necessary repairs and maintenance. They monitor the patient’s condition and alert the physicians of any changes in their condition which often results in early intervention and eliminates a costly hospitalization. They are required to adhere to very strict record keeping requirements and must wait for their Medicare payments which may take well over 90 days. These quality providers and the competition that now exists are responsible for the reductions in hospital stays and the reductions in readmissions and yet, CMS acknowledged in one of their teleconferences that they have no way of determining whether the bidders are qualified to provide the services required of the winning bidders.

The NCB program began when Congress, as a part of the Balanced Budget Act of 1997 directed CMS to evaluate what effect a change in the then current methodology for DME payments would have if it were changed to a National Competitive Bidding process. CMS then conducted demonstration studies in 1999 through 2001. The results were summarized by Tommy G. Thompson, the then Secretary of HHS as follows:
“Fee schedules resulting from the three bidding competitions held in the two sites suggest that substantial savings can be realized from competitive bidding. Our final estimates suggest savings of 16-17 percent annually in Polk County’s Round 1, 20 percent in Polk County’s Round 2, and 20 percent in San Antonio’s single round. Overall, the demonstration in both sites saved 19 percent over what would have been paid under the existing statutory fees. The demonstration reduced Medicare payments by $7.5 million and beneficiary payments by $1.9 million.”
Relying on the results of these studies, Congress, in 2003, enacted the Medicare Reform Bill. In this bill Congress directed CMS to implement the NCB with the intent of reducing reimbursement by approximately 19%.
What has been overlooked is the fact that, concurrent with CMS developing the roll out of NCB, they implemented other rate reductions and rate freezes that resulted in saving exceeding the 19% savings intended by Congress. To demonstrate this, we performed the Following comparisons. Since the CMS demonstrations were conducted between 1999 and 2001 we determined the average national rates for the year 2000 for those items contained in the bid process. Certain of those items could not be analyzed due to changes in coding and product descriptions so we analyzed the remaining 16 items. We then adjusted the unit prices of these items to what their 2009 allowable rates would have been using the then existing methodology used by CMS to adjust rates annually. At that time the rates were increased annually based on the market basket CPI-U index increase. Finally we compared these results to the actual 2009 average allowable charges. We then performed the same analysis just on all biddable Respiratory Items and also on just the Oxygen items. These amounts were then adjusted to a consistent historic volume so as to accurately reflect their impact on overall Medicare spending. Using the year 2000 as the base year the results are as follows:

Comparisons to 2000 Rates 2009 Calculated % Rate changes based on 2000 Methodology 2009 Actual Rate % Medicare Savings Already Realized
All Items Analyzed 31.7% -9.0% 30.9%
Respiratory Item 31.7% -15.1% 35.5%
Oxygen Items 31.7% -16.6% 36.7%
*Note: None of the calculated Medicare Savings include savings realized from the 36 month Oxygen Cap
As a result of the above referenced rate cuts many of the existing HME companies are now struggling to keep their doors open. In a recent report from wall street analysts, Suntrust Robinson Humphrey said that, in a survey of more than 50 oxygen suppliers on the impact of 2009 Medicare cuts (already in place), only 40 percent of providers expected to be profitable in 2009, and 60 percent said they would close up shop if further cuts were implemented. (78 percent said they were small providers with annual revenues of less than $6.5 million). The complete report (see attached) included analyses for Deutsche Bank, Soleil and Pomeroy and concluded that, if the cuts Congress is currently considering are implemented, only Lincare, Inc. will be in a financial position to survive. This result would obviously be devastating to the industry, result in the closing of approximately 30,000 companies and the elimination of over 250,000 jobs, not to mention the effect on hospital costs and the homecare patients.

I applaud your efforts in attempting to take action to protect the small businesses. My concern is their ability to compete with the anticipated rate reductions. They would have to slash services at the expense of hospitals and the patient. I am also concerned that there is no protection for an important part of the industry, the independent regional companies. These companies started as small business but, due to their successes, no longer qualify under SBA’s definition. The large, publicly traded companies may survive and your recommended exceptions for small business afford them the opportunity to compete but the intermediate sized private companies would be punished for their successes.

I especially applaud your recommendation that the awarded competitive bidding contract not be transferrable for a period of at least one year. It is very apparent from the attached report of the first 8 days of round one implementation that many of the winning bidders in round one had no intention of providing the equipment and services awarded under the bid. I am sure many companies submitted “low-ball” bids with the intent of being awarded the bid and then selling their companies. Requiring them to provide these equipment/services for an extended period of time will eliminate these bidders from the process.

I would hope that, since Congress’s initial intent to reduce HME reimbursement has more than been met, and, since implementation of NCB in its present form would have such a negative effect on hospitals, total Medicare reimbursement, independent businesses, their employees and especially to the patient, you would recommend to Congress that they pass legislation eliminating NCB for the HME industry and instructing CMS to develop a reasonable method of establishing Medicare rates for this industry.

IPD Letter.doc (37 KB)

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