Preparation for and Submission of a Competitive Bid Packet

1. Preparation for and Submission of a Competitive Bid Packet Presented by: Mark J. Higley, VP, Regulatory Affairs VGM Group, Inc. Laura Williard, VP, Payer Relations AAHomecare

2. Introduction • In past rounds, the bids of too many DME suppliers were disqualified for (i) financial ratios that did not meet CMS’s unpublished standards, (ii) lack of state licensure, (iii) narrow limits of accreditation, and (iv) other purely technical reasons. • Additionally, a number of bids were rejected because they were “too high.” This program will discuss how DME suppliers can prepare to submit bids for the next round.

3. Introduction • For example, the program will discuss the steps that suppliers can take to (i) show healthy financials, (ii) confirm that the supplier has all of the required state licenses, and (iii) confirm that the supplier’s accreditation and 855S cover the products that are the subject of the supplier’s bid. • Equally as important, this program will take the class through a hypothetical bid preparation and submission that (i) shows “what to do right” and (ii) points out the pitfalls to avoid.

4. The “financial ratios” • We recognize the CMS is woefully “non-transparent” in its use of analyzing bidding entities financial ratios and other metrics. We will (likely) never know “what’s an acceptable number?” • However, we do have access to the various ratios and metrics used. CMS offers this statement….

5. Financial Measures: The competitive bidding law and regulations specify that the Centers for Medicare & Medicaid Services (CMS) may not award a competitive bidding program contract to a supplier unless that supplier meets applicable financial standards. • Applying financial standards to suppliers is needed to assess the expected quality of suppliers, estimate the total potential capacity of selected suppliers, and ensure that selected suppliers are able to continue to serve market demand for the duration of their contracts.

6. The Request for Bids (RFB) Instructions specifies the financial information used to evaluate suppliers’ financial health • CMS uses the required tax and financial documents to calculate standard accounting ratios for each bidder.

7. The actual ratios & metrics… • Return on Sales = Net Income (Loss)/Annual Net Sales • Current Ratio = Current Assets/Current Liabilities • Sales to Inventory = Annual Net Sales/Inventory • Collection Period = (Accounts Receivable/Annual Net Sales) x 360 • Working Capital = Current Assets – Current Liabilities • Accounts Payable to Sales = Accounts Payable/Annual Net Sales • Debt to Equity = Total Liabilities/Net Worth • Current Liabilities to Net Worth = Current Liabilities/Net Worth • Quality of Earnings = Cash Flow from Operations/(Net Income + Depreciation + Amortization) • Operating Cash Flow to Sales = Cash Flow from Operations/(Revenue – Adjustment to Revenue)

8. A financial ratio is, somewhat simply, a relationship – often a percentage - between two of the items selected from the documents noted above. • Again, ratio analysis is one method in which CMS will evaluate weak and strong points in an HME’s financial (and perhaps managerial) performance.

9. The “Current Ratio” • The current ratio (current assets divided by current debts) is a measure of the cash or near cash position (liquidity) of the company. It indicates if your company has enough cash to pay current creditors. The higher the ratio, the more liquid the firm's position is and, hence, the higher the credibility of the firm. • Cash, receivables, marketable securities, and inventory are current assets. HMEs should be realistic in valuing receivables and inventory for a true picture of their liquidity, since some debts may be uncollectible and some of the equipment inventory obsolete. Current liabilities are those which must be paid in one year. • In HME, a current ratio of 1.5 to 2.5 or more generally indicates sufficient liquidity.

10. Average Collection Period • You find this ratio by dividing accounts receivable by daily sales other than cash. (Daily billed/credit sales = annual billed/credit sales divided by 360.) This ratio tells you the length of time it takes your HME to get its cash after billing or making a sale on credit. • The shorter this period the quicker the cash inflow is. A longer than normal period may mean over due and uncollectible bills. If it is greatly outside a common range (see next), you need to alter your collection policies

11. HMEs should develop an aging schedule to gauge the trend of collections and identify the slow payers. Slow collections hinder cash flow and also hurt your profit (e.g., you could be doing something with the money, such as taking advantage of discounts on your own payables). • In recent years a survey of the average collection period for independently owned HMEs was as follows: DME 66 days, Respiratory 48 days, and Rehab 88 days.

12. DSO… • **Last year we reported a 40% drop in reported DSOs under 45 days, while DSOs over 60 days increased by 43%. Now we see 60+ steady or decreasing. • **Collections continue to average approximately 85% of allowable revenues. • **Fewer respondents report Medicare audits increasing DSO.

13. Accounts Payable to Sales • This ratio is obtained by dividing the accounts payable of the company by its annual net sales. This ratio gives you an indication as to how much of the HME’s supplier’s (e.g., equipment vendors) money the company is using in order to fund its sales. • A low percentage would indicate a healthy ratio. A high percentage indicates the firm may be using suppliers to help finance operations. The formula: Accounts Payables to Sales Ratio = [Accounts Payables / Net Sales] x 100. • Common ratios in HME are from 20 to 30%.

14. The quick ratio;;; • …Or acid-test ratio) is found by dividing “quick assets” (cash and accounts receivable) by current liabilities. The purpose is to test the company's ability to meet its current obligations. This test doesn't include inventory to make it a stiffer test of the company's liquidity. It tells you if the HME could meet its current obligations with quickly convertible assets should sales revenues suddenly cease. • In HME, a quick ratio of 1.0 or more generally indicates sufficient liquidity

15. Current Liabilities to Net Worth • …is a measure of the extent to which the HME is using creditor funds versus their own investment to finance the business (Current Liabilities / Liabilities + Equity). • A ratio of .5 or higher may indicate inadequate owner investment or an extended accounts payable period. (Note: Care should be taken not to offend your equipment vendors to the extent it affects your ability to conduct day to day business.)

16. Return on Sales is a percentage measure of profits after taxes on the year’s sales (profits earned per dollar of sales). • Calculations of ROS commonly use operating profit before deducting interest and tax (EBIT); using income after-tax is less common. • Return on sales (operating margin)= EBIT / Revenue • The higher this ratio, the better prepared the HME business is to handle downtrends brought on by adverse conditions. • 15% -20% is common in HME…

17. Sales to Inventory • …or “Inventory Turnover Ratio” is obtained by dividing annual net sales of the company by its total inventory. The ratio is regarded as a test of efficiency and indicates the rapidity with which the HME is able to move its equipment, and how fast inventory is moving the cash flow into the business. • When this ratio is high, it may indicate a situation where sales are being lost because equipment is under stocked and/or customers are buying elsewhere. If the ratio is too low, this may show that equipment inventories are obsolete or stagnant. • Example: Assume that ABC Company's total inventory for the year is $1,200,000 and that its total net sales for the same period are $960,000. Dividing $1,200,000 by 12 will result to an average inventory of $100,000. Dividing $960,000 net sales for the year by the average inventory of $100,000 will result to a net-sales-to-inventory ratio of 9.6.

18. Working capital represents the amount of day-by-day operating liquidity available to a business. Also known as operating capital, it is calculated as current assets minus current liabilities. • An HME can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash. • A positive change in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors. • A good working capital ratio is considered anything between 1.2 and 2.0.

19. “Quality of earnings” • …is a confusing financial metric to many. It is calculated by dividing cash flow from operations into the company’s net annual income plus depreciation. The official definition is “the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory.” • An example may help: An HME can show positive earnings on its income statement while also bearing a negative cash flow. This is not a good situation to be in for a long time, because it means that the HME has to borrow money to keep operating. And at some point, the bank will stop lending and want to be repaid. A negative cash flow also indicates that there is a fundamental operating problem: either the equipment inventory is not selling or billing/receivables are not being collected.

20. Operating cash flow to sales is a percent measuring capability of a HME company’s ability to convert sales into cash. • It is an important indicator of an HME’s creditworthiness and productivity. If the ratio is low, then growth may not be financially possible because the company will not have enough cash flow to increase operations to meet higher demands and sales targets. • If the ratio is high, then the company will be able to grow and expand because it has enough cash flow to finance additional production. The formula is Cash Provided by Operating Activities / Net Sales. • Ideally, this ratio value should be greater than 1.0.This indicates that the business has at least reached its break-even point, and generated enough cash flow from its sales.

21. IMPORTANT NOTES… • All ratios measuring profitability can be computed either before or after taxes, depending on the purpose of the computations. Acknowledging the CMS/CBIC requirement, HMEs should recognize that the ratios have limitations. • Since the information used to derive ratios is itself based on accounting rules and personal judgments, as well as facts, the ratios cannot be considered absolute indicators of your HME’s financial position. Ratios are only one means of assessing the performance of the company and must be considered in perspective with many other measures.

22. “Improving” Bad Financials

23. Improving Bad Financials • Financials must be tied to the most recently filed tax return. Let’s assume the (anticipated) 2021 program begins sometime in spring or summer of 2019. • Let’s also assume that the bidder’s most recently filed tax return is for 2017. This means that the financials must be for 2017. • Let’s say that in 2017 the bidder was hit with some out-of-the-ordinary events that caused its financials to look bad. 2018, while not yet filed, might not be any better. • So…

24. Improving Bad Financials • Because of the electronic bid format, as a general rule, the bidder cannot submit 2017 financials and projected final 2018 financials that will help the bidder “cure” the 2018 financials. • Having said this, there is a way to “back door” the 2017 and 2018 financials into the bid packet. • We anticipate that the next program will continue to require something similar to the last R2 Recompete bid program: Form B, Section 2 is entitled “Expansion Plan.” It says, in part: “Can you increase your current capacity for this product category in the CBA? If yes, you must complete an expansion plan.”

25. Improving Bad Financials • This section allows the bidder to include supplemental information for increased staffing, financing/funding levels, facilities (e.g., square footage), inventory (including method of tracking inventory), distribution methods (e.g., vehicles, mail order) and “additional information” regarding expanding capacity. • The bidder can enter as much information as it would like to support its ability to increase capacity.

26. Improving Bad Financials • If there is not enough space for the bidder to enter its information in this section on DBids, then the bidder is permitted to submit hard copies of the information to the CBIC, but the bidder must remember to title the documentation appropriately (“Supplemental Financial Plan Information”) and to put the bidder number on every page. • Excerpt from RFB Instructions: Submit ONLY the required documents. Do NOT include other documents such as bank references, personal statements of corporate stockholders, advertising materials, or bank statements. Only required documents will be evaluated; supplemental documents will be disregarded.

27. Improving Bad Financials • The instructions state that the only exception to prohibition against submitting supplemental documents is “additional information that explains the organization’s business structure or provides additional details about information reflected in your required financial documents.” • This section enforces the point that any supplemental information submitted must be titled appropriately to avoid being discarded by the reviewers.

28. Lack of State Licensure…

30. Accreditation and more… • “IF I NEED TO VERIFY THE INFORMATION I HAVE ON FILE WITH THE NSC SUCH AS MY AO'S INFORMATION, LICENSURE, ACCREDITATION, ETC., CAN I CONTACT THE NSC AND VERIFY THIS INFORMATION OVER THE TELEPHONE?”

31. Suppliers should verify all enrollment information, such as authorized officials, product categories, location specific information, copies of licensure, business structure, etc., in the Provider Enrollment, Chain, and Ownership System (PECOS) application. • To register to view your organization’s information in PECOS, please review the information on the External User Services’ (EUS) website at www.eushelpdesk.com or contact EUS at 866-484-8049. Suppliers are strongly encouraged to register to view their enrollment information in PECOS.

32. However, if you do not wish to register to view your information in PECOS, you may verify your authorized official's information and organization’s mailing address through the National Supplier Clearinghouse (NSC) customer service line. • You should send all other requests for verification of other enrollment information on file, such as product categories, location specific information, copies of licensure, business structure, etc., to the NSC in writing. • Suppliers should follow the NSC’s current guidelines for requesting this information in writing. • To verify accreditation dates, you should verify this information with the applicable CMS approved accreditation organization.

33. 2021 bid preparation steps… • Know the new “rules” • We anticipate a Final Rule very shortly • Industry stakeholders are now coordinating a nationwide education campaign for all eligible bidding companies • We also anticipate these new major changes to the bidding program…

34. “Lead Item Pricing” • CMS proposes that some product categories need to be split into multiple product categories, including (i) general hospital equipment, (ii) respiratory equipment, and (iii) standard mobility equipment.  • DME stakeholders agree. It is important to develop product categories that ensure commonality of products in a single “pricing group.” This is necessary to avoid skewed pricing. • Grouping common products ensures that patients can receive items they need from a single supplier. Accessing products from multiple suppliers is a problem for beneficiaries.

35. Lead Item Pricing • A product category will include the base equipment, accessories, and complimentary supporting products.  • Because of varying margins, differing delivery times, and different service cost structures, some product categories should be subdivided with a unique lead item for each subcategory.  • The SPA for the lead item will be used to establish SPA rates for other items in the subcategory.  • The composite bid for the entire product category would be determined by summing the weighted value of each subcategory. It is important to note that not all product categories will have subcategories. 

36. “Maximum Winning Bid” • DME stakeholders support CMS’s proposal to change the methodology for calculating the SPA. Under the change, the SPA for the lead item in each product category or subcategory would be based on the maximum or highest amount bid for the item by suppliers in the winning range.  • Stakeholders recommend that nebulizers be removed from the competitive bidding program. 

37. Maximum Winning Bid • CMS proposes that bids from small suppliers that are “only awarded [a] contract in order to help meet the small supplier target would not be used to determine the maximum winning bid because these contracts are awarded after the SPAs are established.” • DME stakeholders disagree. The CMS proposal results in the same problem as the median pricing method. In establishing SPAs, all bids (including those from small suppliers) should be considered. Additionally, CMS should recalculate the SPAs after additional suppliers are awarded competitive bid contracts. This is consistent with the premise that no supplier be paid less than its bid.

38. Maximum Winning Bid • Less information will be provided under the lead pricing methodology. Therefore, stakeholders recommend that measures be implemented to ensure that bidders submit bona fide bids. • Bidders need to be educated that the price for the lead items must translate into sustainable prices for non-lead items in the product category.  • CMS should assess all non-lead items to ensure that prices for non-lead items result in bona fide prices. 

39. Capacity Determination and Calculating Expected Beneficiary Demand • Instead of evaluating bids submitted for items within a product category and calculating expected beneficiary demand for items in a product category, CMS proposes to calculate expected beneficiary demand and supplier capacity based on the lead items in the product category when evaluating bids. • Stakeholders recommend that the actual historical capacity of a supplier be used in evaluating supplier capacity. The historical capacity should not be adjusted by CMS.

40. Capacity Determination and Calculating Expected Beneficiary Demand • Stakeholders recommend that CMS should not include capacity associated with inexperienced bidders, both in terms of product category and geography. • It is recommended that CMS use historical utilization of items making up at least 120% of total expenditures for lead items. This will provide better assurance of beneficiary access.

41. Watch out to ensure a “bona fide” bid… Possible factors that may result in a determination that a supplier submitted a non-bona fide bid include the following: • Submitting a rental bid when the RFB instructions require a purchase amount bid, or vice versa, for one or more of the items in a product category. • Entering an incorrect bid inadvertently. • Submitting a “loss leader” bid (an infeasible bid). • Submitting a bid without consideration of the cost to buy the item, profit, and overhead. • Please check your bids carefully before you certify in the online bidding system (DBidS). Suppliers may change their bids while the bid window is open, but bids cannot be changed after the bid window closes.

42. New Regulatory Changes • Back in 2016, CMS published three regulatory changes that remain a positive for the DME industry. • Bid Bond - A bidding supplier must obtain a $50,000 bid surety bond for each CBA in which the supplier is submitting a bid. The bidder must submit proof of the bond by the deadline for the bid submission.

43. 2016 Regulatory Changes • If (i) the bidding supplier is offered a contract for any product category in a CBA, (ii) the bidding entity’s composite bid is at or below the median composite bid rate for all bidding entities included in the calculation of the SPA, and (iii) the bidding supplier does not accept the contract offered, the supplier’s bid bond for the applicable CBA will be forfeited and CMS will collect on the bid bond. • If the forfeiture conditions are not met, the bond liability will be returned to the bidding entity. • Bidding suppliers that provide a falsified bid bond will be prohibited from participation in the competitive bid program for the current and next round of bidding. Bidding suppliers that provide a falsified bid surety bond will also be referred to the Office of Inspector General and Department of Justice.

44. 2016 Regulatory Changes • Positive regulatory changes.... • Expansion of Appeal Rights - The appeals process is expanded for suppliers that have been sent a notice of a breach of contract stating that CMS intends to take one or more actions as a result of the supplier’s alleged breach of the competitive bid contract.  • Establishing Bid Limits - Prior regulations required that suppliers submit bids that are lower than the amount that would otherwise apply...in other words, bids that are lower than the fee schedule amount.  • Beginning in 2016, the fee schedule amounts were adjusted based on information from, and prices set through, the competitive bidding program. CMS indicated in a previous rule that the adjusted fee schedule amounts would become the bid limits for future competition.

45. 2016 Regulatory Changes • Positive regularity changes... • Establishing Bid Limits.... • In response to concerns that suppliers would not be able to bid below the adjusted fee schedule amounts as those amounts continue to decline, CMS revised its prior rule to set the bid limit for future competitions at the fee schedule amounts that would apply if the competitive bidding program had not been implemented and that existed before making adjustments to the fee schedule amounts using information from the competitive bidding program.

46. Laura’s final thoughts…

47. THE END Mark J. Higley, VP, Regulatory Affairs VGM Group, Inc. mark.higley@vgm.com 888-224-1631 319.504.9515 Laura Williard, VP, Payer Relations AAHomecare lauraw@aahomecare.org 336-451-1934