Contingency Planning for Medicare Competitive Bidding

1. Contingency Planning forMedicare Competitive Bidding Mike Tootell Harvard Medical Device Congress March 29, 2007

2. Necessary Disclaimer • Speaking as individual • Not representative of • Abbott Laboratories • Medicare’s Program Advisory and Oversight Committee • AdvaMed

3. Concept of Competitive Bidding • Philosophical reversal for Medicare • Traditional: • “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.

4. DME experiment • The law has been passed and will go into force unless repealed.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.

5. 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

6. 3 Medicare DMEPOS demonstrations • 1998 – 2002 Polk County Florida – 2 bid cycles;San Antonio Texas – 1 bid. • Oxygen equipment and supplies • Hospital beds and accessories • Enteral nutrition • Urological supplies • Surgical dressings • Wheelchairs • General Orthotics • Saved 20%

7. Medicare Modernization Act (2003) • Authorized Competitive Bidding in 10 Metropolitan Statistical Areas in 2007 • 80 MSAs in 2009 • Nationwide in 2010

8. 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-service • Anticipate SNFs will need to bid for own patients • Mail order companies can bid as providers

9. Bidding Process • Suppliers qualify to bid • Clean Medicare/Medicaid record • Meet Quality Standards, confirmed by accreditation • Meet soft financial standards • Complete detailed application • Provide bids by HCPCS code • No distinction between types of suppliers • Market basket calculated, bidders ranked • Capacity calculated, cut off bid determined • Payment rate becomes the median (midpoint) of winning bids.

10. 10 of these 19 MSAs will be included in Phase One (2007) • Largest in each DMAC • Miami, Cincinnati, Pittsburgh, Riverside California • Next likely qualifiers • Dallas, Houston, Charlotte, San Juan Puerto Rico, Atlanta • Other potential candidates • Tampa, 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.

11. 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

12. Riverside, CA - MSA

13. Cincinnati - MSA

14. Atlanta, GA - MSA

15. Possible product groups (2003 data) • Oxygen supplies and equipment $2.4 B • Wheelchairs $1.9 B • Diabetic Supplies $1.1 B • Enteral nutrition $ 676 M • Hospital Beds $ 373 M • CPAP $ 205 M • Support Surfaces $194 M • Respiratory Assist Devices $134 M • Lower Limb Orthoses $123 M • Walkers $ 97 M

16. 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

17. March 23, 2007 status • Awaiting publication of the Final Rule • Web sitemap launched • Political support uncertain • Replacement 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.

18. 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.

19. Lobbying initiatives are intense • Coalition to Ensure Beneficiary Access • Manufacturer coalition to seek repeal • American Association for Home Care • Reintroduce Hobson-Tanner bill • Protect small suppliers. • Multiple requests for exceptions and exclusion by various industry groups

20. 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?

21. CMS aware of limitations in Proposed Rule • MSAs are not homogenous • Could over look underserved neighborhoods • HCPCS codes are not designed for bidding • One code covers $1 billion in products • Many modifications to proposed rule support request for another round of public comment.

22. Nevertheless Business Decisions Must be Made Now

23. Assumptions for Planning • Assume Final Rule resembles Proposed Rule • Assume Congress does not interrupt • Assume 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

24. 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.

25. Market dynamics will vary by product group • Oxygen and respiratory products • National and regional companies vs. local hospital-based companies vs. niche suppliers. • Demonstration project oxygen savings = 16% -19% • Wheelchairs • Bidding complicated by product diversity • Multiple manufacturers with incompatible parts • Bidding will force product interchangeability • Mixture of international, national and local providers

26. 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.

27. 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.

28. 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.

29. 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.

30. Expectations • Demonstration projects resulted in winning bids 20% below national fee schedule • Survey 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 category • Polk II – 10/26 did not qualify • San Antonio – 28/75 did not qualify

31. Identify Competitors • Widen definition of competitors • Companies 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.

32. 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

33. 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

34. Watch for the Final Competitive Bidding Regulation

35. 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.

36. Thank you • Mike Tootell • Director, Health Policy • Ross Products Division, Abbott Laboratories • Michael.Tootell@Abbott.com • 614-624-7654