Contingency Planning for

Medicare Competitive Bidding

Mike Tootell

Harvard Medical Device Congress

March 29, 2007

Necessary Disclaimer

Speaking as individual

Not representative of Abbott Laboratories

Medicare’s Program Advisory and Oversight Committee

AdvaMed

Concept of Competitive Bidding

Philosophical reversal for MedicareTraditional:

• “Any Willing Provider” who accepts Medicare rules and rates may participate

New concept: • Competition between providers will reduce rates

• Competition will eliminate fraudulent billers

• Competition will provide efficient market pricing to Medicare market.

DME experiment

The law has been passed and will go into force unless repealed.Medicare Modernization Act requires small initial steps

10 of 272 Metropolitan areas in 2007, Perhaps 10 of 55 DMEPOS product groups

Implications of this concept should not be underestimated.

Political History

HCFA tried in 1990’s to set up competitive bidding among managed care organizations

Each initiative defeated by Congressional intervention

Baltimore (1996); Denver (1997); Phoenix and Kansas City (1999)

National competitive bidding program for Part B infusion drugs (2005).

undersubscribed

3 Medicare DMEPOS demonstrations

1998 – 2002 Polk County Florida – 2 bid cycles;San Antonio Texas – 1 bid.

Oxygen equipment and suppliesHospital beds and accessoriesEnteral nutritionUrological suppliesSurgical dressingsWheelchairsGeneral Orthotics

Saved 20%

Medicare Modernization Act (2003)

Authorized Competitive Bidding in 10 Metropolitan Statistical Areas in 2007

80 MSAs in 2009

Nationwide in 2010

Proposed Rule issued May 1, 2006

Inadequate detail on core issues

Establishes process for selection of product groups and designated Metropolitan Statistical Areas

Indicates likely selections without locking down final decisions

No exclusion by site-of-serviceAnticipate SNFs will need to bid for own patients

Mail order companies can bid as providers

Bidding ProcessSuppliers qualify to bid

Clean Medicare/Medicaid recordMeet Quality Standards, confirmed by accreditationMeet soft financial standardsComplete detailed applicationProvide bids by HCPCS code

No distinction between types of suppliersMarket basket calculated, bidders rankedCapacity calculated, cut off bid determinedPayment rate becomes the median (midpoint) of winning bids.

10 of these 19 MSAs will be included in Phase One (2007)

Largest in each DMAC Miami, Cincinnati, Pittsburgh, Riverside California

Next likely qualifiersDallas, Houston, Charlotte, San Juan Puerto Rico, Atlanta

Other potential candidatesTampa, Kansas City, San Francisco, Cleveland, Detroit, Seattle, Baltimore, Philadelphia, Phoenix, Boston

AdvaMed pointed out statistical problems in calculation, which (if corrected) may change site selection.

Huge geographic variation within some MSAs

Riverside California MSA is larger than West Virginia

Cincinnati MSA covers counties in three states

Atlanta MSA includes 20 counties

Riverside, CA - MSA

Cincinnati - MSA

Atlanta, GA - MSA

Possible product groups (2003 data)

Oxygen supplies and equipment $2.4 BWheelchairs $1.9 BDiabetic Supplies $1.1 BEnteral nutrition $ 676 MHospital Beds $ 373 M CPAP $ 205 MSupport Surfaces $194 MRespiratory Assist Devices $134 MLower Limb Orthoses $123 MWalkers $ 97 M

Medicare expects to save

$1.7 billion 2008 – 2012

In 2009, competitive bid results can be used to reduce national rates.

2008 Medicare budget contains many larger, controversial items

March 23, 2007 status

Awaiting publication of the Final Rule

Web sitemap launched

Political support uncertainReplacement of key Republican members of Congress (advocates of competitive solutions) by unknown Democrats.

Democratic Congressional health agenda is uncertain.

Failure to implement competitive bidding will require Congressional action.

Accreditation requirement wobbly

May, 2006 --Proposed rule. Bidders could be granted a grace period if not accredited at time bid is due. Would be excluded if the supplier failed to gain accreditation.January Transmittal – Required all suppliers to be accredited by April 1, 2007.February Reversal – withdrew Transmittal.Current status: Suppliers must be accredited or in process of becoming accredited to submit a bid. Watch Final Rule for details.

Lobbying initiatives are intense

Coalition to Ensure Beneficiary AccessManufacturer coalition to seek repeal

American Association for Home CareReintroduce Hobson-Tanner bill

Protect small suppliers.

Multiple requests for exceptions and exclusion by various industry groups

Critical unresolved issues

Which product groups, which initial cities?

Will reimbursement be based on median value of winning bids, or the maximum “cutoff” bid?

Will capacity be determined aggressively or inclusively?

Will differences in sites of service be recognized?

How quickly will competitive prices be imposed on the remainder of the US marketplace?

CMS aware of limitations in Proposed Rule

MSAs are not homogenousCould over look underserved neighborhoods

HCPCS codes are not designed for biddingOne code covers $1 billion in products

Many modifications to proposed rule support request for another round of public comment.

Nevertheless

Business Decisions

Must be Made

Now

Assumptions for Planning

Assume Final Rule resembles Proposed Rule

Assume Congress does not interruptAssume no distinctions between sites of service

Common bid per city by all players:Mail order, local HME companies, national HME companies, buying groups, skilled nursing facilities, local pharmacies, new provider networks

Assumptions

Assume initial accreditation does not create meaningful hurdles

Final Quality Standards impose very modest requirements.Accreditation to these standards will not limit participation.Innovative and newly formed companies can easily qualify with appropriate attention to the process.

Market dynamics will vary by product group

Oxygen and respiratory productsNational and regional companies vs. local hospital-based companies vs. niche suppliers.Demonstration project oxygen savings = 16% -19%

WheelchairsBidding complicated by product diversityMultiple manufacturers with incompatible partsBidding will force product interchangeabilityMixture of international, national and local providers

Market Dynamics –Enteral nutrition

60% of Medicare Part B enteral nutrition is provided in Skilled Nursing Facilities

enterals are included in Part A per diem for up to 100 days,

can be separately billed after Part A benefit

SNFs may bid for own patients after Part A benefit is completed.

Enteral market is complex

HME dealers, including many GPO members

Nursing homes caring for own patients

Nursing home suppliers caring for SNF residents

Competitive bidding can disrupt fabric of contracts and patient care plans.

Tootell “Best Guess” timeline

Accreditation process on fast track, enrollment slow.

Final rule will be released “any day now.”

Intense provider education, RFP, bids through spring and summer.

Selections announced fall, 2007, effective December, 2007.

Fast track for phase 2, effective Jan 1, 2009.

Able suppliers preparing now

Remove accreditation hurdle now! despite CMS uncertainty.

Identify MSA boundaries.

Identify likely competitors.

Review results of commercial insurance and HMO competitive bids, particularly in HME markets.

ExpectationsDemonstration projects resulted in winning bids 20% below national fee scheduleSurvey of 450 suppliers. Respondents expect 15%- 20% bid necessary to survive competitive process.Demonstration projects eliminated 35% - 48% of bidders

Polk I – 14/30 did not qualify in any categoryPolk II – 10/26 did not qualifySan Antonio – 28/75 did not qualify

Identify Competitors

Widen definition of competitorsCompanies not in current direct competition in a market niche may submit bids.

Mail order, HME, retail pharmacies

Companies geographically separated, but within the same MSA, will submit competing bids.

Identify likely “Irrational” bidders

Companies dependent on Medicare business

Companies that use Medicare products as loss leaders, to attract other business

New companies created to participate in competitive bidding

Evaluate each business

How important is Medicare revenue?Medicare Revenue/Total Revenue

Medicare Contribution Margin/Total Margin

How important are Medicare referrals?How would loss of Medicare referrals impact other referrals?

Classic financial pro forma “What if” analysis.Business model if successful bid

Business model if not successful

Watch for

the

Final Competitive Bidding

Regulation

Medicaid programs watching.

Minnesota Medicaid has competitively bid oxygen for several years.

Pennsylvania 2006 proposal would have replaced 1100 suppliers with 15 mega-suppliers.

Proposal stopped by legislative action.

New Jersey has proposal ready.

Michigan law passed Senate, died in House. Reintroduced 2007.

Thank you

Mike Tootell

Director, Health Policy

Ross Products Division, Abbott Laboratories

Michael.Tootell@Abbott.com

614-624-7654