Competitive Bidding – Where are we Today? THE STATE OF THE INDUSTRY John Gallagher The VGM Group

1. Competitive Bidding – Where are we Today? THE STATE OF THE INDUSTRY John Gallagher The VGM Group 3 May 2005

2. First of all, much of today’s presentation and related information may be found on DC Link...To get there, first go to http://www.vgm.com

3. And you are there!

4. THE GOAL: “EFFECTIVE LOBBYING” GRASS – ROOTS LOBBYING • THE MOST EFFECTIVE FORM OF LOBBYING • WHY – BECAUSE YOU & YOURS VOTE! YOU HAVE 15 MINUTES WITH YOUR CONGRESSMAN OR SENATOR --- Before you sit down with your Senator or Congressman, Remember the SIX PPPPPP’s

5. Develop Triple Track approach to combating National Competitive Bidding: Legislative – Develop a champion for the industry Grass-Roots – Coordinate Grass-Roots activity at Provider Level Legal – Develop Legal effort to delay and or defeat NCB

6. The MMA of 2003 (*) – HME Provisions • FEHBP Pricing • Inhalation & Infusion Drugs • CPI Freeze • Competitive Bidding (*) On December 8, 2003, President George W. Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act (MMA) of 2003.

7. THE 2003 MEDICARE BILL & THE HME INDUSTRY: FEHBP • Industry analysts originally estimated that CMS would likely reduce reimbursement for stationary oxygen by about 11% on average and by 7% on average for portable oxygen. • On Wednesday (30 March) the DHHS Office of Inspector General released its revised report on Medicare fee schedule amounts for home oxygen for 2005. • The report indicates that the stationary oxygen equipment "Percentage Difference Between Medicare and FEHB Weighted Mean" is 12.4% • The report indicates that the portable home oxygen equipment "Percentage Difference Between Medicare and FEHB Weighted Mean" is 10.8% • CMS has notified providers that “These fee schedule amounts will be implemented by the Medicare Contractors as soon as possible and by no later than April 8, 2005”.

8. THE 2003 MEDICARE BILL & THE HME INDUSTRY: FEHBP & Oxygen… • Note: The Morrison study, (AAHomecare) which used data from about 107 FEHBP plans, found virtually no difference between pricing for FEHBP fee-for-service plans and Medicare rates for home oxygen. E0431). And, the OIG study “did not address the significant pricing, contracting, patient service and administrative differences between the Medicare program compared to FEHBP or Medicare + Choice plans”.

9. THE 2003 MEDICARE BILL & THE HME INDUSTRY:ACTUAL 2005 REIMBURSEMENT CUTS Cuts vary widely by state; generally “less than many industry observers had feared”. • diabetic test strips (A4253): 0 to 4 percent • diabetic lancets (A4259): 0 to 5 percent • semi-electric bed (E0260): 1.6 to 16 percent • power pressure-reducing mattress (E0277): 0 to 7 percent • nebulizers with compressor (E0570): 4 to 18.3 percent • manual wheelchair (K0001): 0 to 2.5 percent • power wheelchair (K0011): 0 to 3.3 percent

10. THE 2003 MEDICARE BILL & THE HME INDUSTRY:Example = FEHBP Cuts - State of VIRGINIA Actual Data

11. THE 2003 MEDICARE BILL & THE HME INDUSTRY:Example = FEHBP Cuts - State of WEST VIRGINIA Actual Data

12. Surviving and Thriving with the newest Oxygen Reimbursement Cuts • Use ABN’s for newest technology and equipment upgrades • Use financing to match reimbursement with payment • Best Price at the best rate will allow you to maximize cash flow • Every time you set up a new oxygen patient you know how much positive cash flow you have created • Take advantage of quantity purchases and promotions to get the best possible purchase price

13. Surviving and Thriving with the newest Oxygen Reimbursement Cuts • Maximize efficiencies for certain patient populations that are better handled with an outside source • Utilize a patient follow-up program to increase quality of life and quality of life for oxygen patients • Utilize compliance programs to ensure patients are compliant with their oxygen • Select the best modality and the best products for individual patients • One size equipment doesn’t work for everyone • Maximize positive cash flow by patient not by equipment

14. In 2004 (108th Congress)… • Reps. David Hobson (R-Ohio) introduced a bill, H.R. 4491, to repeal cuts in Medicare reimbursementfor these items. • Co-sponsors: 117 – VA = 4 0f 11 or 36% Rep. Goode, Boucher, Goodlatte, Davis & WV = 2 0f 3 or 66% Rep. Mollohan, Rahall. • When congress adjourned “sine die”, all legislation that was not brought to a vote dies in that Congress – hence H.R. 4491 is dead… • AAHomecare, VGM, state/regional associations lobbied hard for this repeal: Comparisons between Medicare and FEHBP are inappropriate • “FEHBP plans serve younger, healthier populations and impose fewer administrative burdens on providers.”

15. H.R. 4491 was still a success… • Our industry’s grassroots effort that pushed the bill forward developed a relationship with 117 members of Congress. • In reality, the actual chances of HR 4491 coming to a vote were slim during an election year as well a lack of a companion bill in the Senate. • Should a new bill be introduced in 2005, it is a good bet that a large majority of the original 117 co-sponsors will sign on again. A new bill will give us a chance to meet with our elected officials once again to address the FEHBP cuts as well as NCB. This can only help our cause moving forward!

16. Rep. Hobson: “I am committed to making sure that seniors who depend on durable medical equipment will continue to have access to the equipment and services they rely upon so they can maintain the highest quality of life while staying in their homes.”

17. 109th Congress: New legislators include those from the healthcare ranks • HME's own Representative Mike Ross (D-AR) has been appointed to the House Energy and Commerce Committee. Contact Rep. Ross at mike.ross@mail.house.gov,or at his Washington D.C. office (202.225.3772) and extend congratulations to him for landing this plum position. The HME industry finally has a friend on this very powerful House committee!  • Ross and his spouse own and operate an independent pharmacy/HME business

18. Other 2005 Issues: Part B Drugs • Infusion drugs frozen at 95% of AWP (in effect since October 1,2003) and then subject to competitive bidding starting in 2007. • Inhalation drugs based on the ASP plus 6% for the drug. This amount would be updated quarterly. A $57monthly dispensing fee for inhalation therapies applies for 2005. CMS also set a 90-day fee of $80 in the fee schedule (*). (*) It is assumed that you will no longer be able to bill the $5.00 (E0590) dispensing fee per drug dispensed.

19. Nebulizer Medications Transition On January 1, 2005, CMS transitioned to the ASP pricing model for nebulizer medications. This change in reimbursement methodology has caused much confusion within the small to medium size pharmacy providers of nebulizer medications. The appropriate drug mix for this type of patient must now change to provide results that are best for both the patient as well as for the provider. As a result of this transition to more brand drug usage, the smaller providers have found themselves in a difficult position as it relates to the usage of the Brand Drug Duoneb. Dey has a pricing structure for this product that is not beneficial to the small and medium size provider. We have made many attempts to work with Dey to solve this problem and have received Zero cooperation in doing so. Dey’s current price structure for Duoneb allows for a large discount to providers purchasing 100,000 vials per month. This would be 833 patient shipments every month. Dey offers as much as a 50% discount from what small providers pay for providers purchasing 500,000 or more vials per month. Previously, when utilizing their albuterol and Ipratropium generic products, small to medium size providers were within 5 cents of the same pricing offered to the largest providers. For Duoneb the difference is in excess of .40 cents per dose allowing the large providers to pocket an extra $50.00 per patient shipment. To solve this problem and better even the playing field, we are suggesting that instead of switching patients to Duoneb, your pharmacy should consider using one vial of Xopenex and one vial of ipratropium (where necessary). This will offer you patients the benefits of Xopenex with equal benefit of albuterol but with only half the active ingredients of albuterol. This benefit also reduces the side effects of normal albuterol by as much as half. This is a true benefit to the physicians and patients. Sepracor has over 1,500 detail representatives ready to work with you and inform physicians of your choice to offer their product. It is like adding sales reps to your company for free. When you compare the profitability, you will also find that you will make a substantially higher profit that when using Duoneb. We offer this solution to our VGM Members.

20. Other HME Provisions of MMA (none positive…) • CPI Freeze5 year freeze in the CPI update for DME and off-the-shelf orthotics in those areas where competitive bidding is not being phased in, in 2007 and 2008.

21. COMPETITIVE BIDDING • COMPETITIVE ACQUISITION AUTHORITY: • Section 302 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173) authorizes the Secretary to utilize our competitive acquisition authority, as outlined in the U.S. Code Section 1847(a). Section 302(b)(1) of the Medicare Modernization Act, requires Medicare to replace the current durable medical equipment (DME) payment methodology for certain items with a competitive acquisition process to improve the effectiveness of its methodology for setting DME payment amounts. This new bidding process will establish payment amounts for certain durable medical equipment, enteral nutrition, and off?the?shelf orthotics. Competitive bidding provides a way to harness marketplace dynamics to create incentives for suppliers to provide quality items and services in an efficient manner and at reasonable cost. The Medicare DME Competitive Bidding Program has five objectives: • To operationalize competitive bidding for DME and to use this to determine appropriate prices for categories of DME covered by Medicare Part B; • To protect beneficiary access to quality DME throughout the program; • To reduce the amount Medicare pays for DMEPOS and bring the reimbursement amount more in line with that of a competitive market; • To limit the burden on beneficiaries by reducing their out-of-pocket expenses; and • To mitigate proliferation of use of certain items of DMEPOS by contracting with suppliers who engage in a business model that is beneficial for the program and for Medicare beneficiaries. • In the coming months CMS will be publishing more information and resources related to this provision.

22. Competitive BiddingCommences in the 10 “of the largest” MSAs in 2007; followed by the next 80 largest MSAs in 2009. After 2009, (the DHHS) Secretary has authority to apply Competitive Bidding prices nationally. Note: CMS is interpreting Sec. 302 of the MMA to read “ten of THE largest MSA with population of 1million or more.

23. Competitive Bidding – The Largest MSAs 1. Los Angeles—Long Beach, CA2. New York, NY3. Chicago, IL PMSA4. Philadelphia, PA—NJ5. Washington, DC/MDVA/WV6. Detroit, MI7. Houston, TX8. Atlanta, GA9. Dallas, TX10. Boston, MA—NH

24. COMPETIVE BIDDING FACTS • Total amounts paid under the contract (including costs associated with administration of the contract) be lower than the total amounts that would otherwise be paid • Requires re-bid of contracts ** NOT TO EXCEED** every 3 years • Allows limitation of number of contractors in a “competitive acquisition area” to the number necessary to meet product demand • Requires the award of contracts to “multiple entities” in each area for an item or service. • Requires that entity to meet quality and financial standards.

25. Requires studies to determine whether suppliers under competitive bidding influence physician prescribing practices based on profitability of products. • Requires report to Congress annually on the competitive acquisition program. Each report shall include information on cost savings, reductions in beneficiary cost sharing, access to and quality of items, and beneficiary satisfaction. Requires GAO to submit report to Congress on the impact of Competitive Bidding on manufacturers and suppliers by January 1,2009.

26. “PROTECTION OF SMALL SUPPLIERS” • “In developing procedures relating to bids and the awarding of contracts under this section, the Secretary shall take appropriate steps to ensure that small suppliers of items and services have an opportunity to be considered for participation in the program under this section.”

27. Other MMA Regulatory Issues • Requires establishment and implementation of quality standards and accreditation requirements. • One year after the quality standards are developed, DHHS is required to designate and approve one or more independent accreditation organizations. • Quality standards as applied by accrediting organizations must be met in order to receive or retain a supplier number.

28. Mandatory Accreditation • Many providers we surveyed comment that accreditation had a positive impact on their business, and others said they would investigate accreditation as a way to improve their companies. However, the majority of providers remain unaccredited (estimated at about 60%). • About one fourth of unaccredited providers are considering accreditation in 2004.

29. Allowed Charges UnderDemonstration (Modified) AllowedCharges in Absenceof Demonstration (Modified) Differential % Differential Polk County, Florida $21,315,740 $26,184,833 $4,869,093 18.6% San Antonio, Texas $14,786,802 $18,731,722 $3,944,920 21.1% Grand Total $36,102,542 $44,916,555 $8,814,013 19.6% Actual Administrative Expenses -$4,800,000 -54.5% Actual Savings to Medicare $4,014,013 8.9% AllowedCharges Under Demonstration Pro-forma AllowedCharges in Absenceof Demonstration - After FEHBP Differential % Differential Polk County, Florida $21,315,740 $23,564,225 $2,248,485 9.5% San Antonio, Texas $14,786,802 $16,807,336 $2,020,534 12.0% Grand Total $36,102,542 $40,371,561 $4,269,019 10.6% Actual Administrative Expenses -$4,800,000 -112.4% Actual Cost to Medicare -$530,981 -1.3% REPORT ON IMPACT OF FEHBP CUTS ON COMPETITIVE BIDDING SAVINGS Summarized from report written by economist Dr. Kenneth Brown, Ph.D.

30. Program Advisory and Oversight Committee (PAOC) Overview • In order to allow the industry to have input on the DME provisions of the MMA (e.g., FEHBP cuts, competitive bidding, mandatory accreditation), CMS formed the PAOC. • Equipment manufacturers (e.g., Sunrise, Invacare and Pride Mobility), three state Medicaid programs, two national provider associations, national and independent HME dealers, independent pharmacies, accrediting bodies, manufacturers that sell directly to patients and advocacy groups make up PAOC. The committee is charged with assisting CMS in the development of a national competitive bidding program.

31. PAOC MEETING SUMMARIES INITIAL MEETING – OCTOBER 6, 2004 • Review of the competitive bidding demonstration projects • Quality Standards • Scored savings from NCB • Items of concern following the meeting • Savings in light of the FEHBP cuts  • What standards do winning bidders have to meet • Dealers allowed to form networks to bid • Cost shifting

32. SECOND MEETING – DECEMBER 6 & 7, 2004 Review of existing DME competitive bidding programs VA Utah O2 Minnesota Wheelchair Possible program design Bidding Cycles MSA selection Possible Phase-in process MSA’s Equipment/ HCPCS codes

33. THIRD MEETING – FEBRUARY 28, MARCH 1 & 2, 2005 Timetable for NCB process Summer 2005 – Publish regulations for NCB Fall 2005 – Review comments Spring 2006 – Finalize proposed regulations and move them thru Congress Fall 2006 – Begin Implementation process January 2007 – Implement in 10 large MSA’s All decisions are preliminary until the final regulations are published. PAOC will have an open door forum after the preliminary regulations are made public.

34. Progress on issues raised in previous PAOC meetings CMS has been given more money to study the impact on small businesses CMS allocated more time and money to development of quality standards Coding changes and improvements

35. CMS was told that the Congressional Budget Office factored in the FEHBP cuts and CPI freeze when they scored the NCB savings?

36. Bid solicitation process Step 1 – Evaluate the Basic eligibility requirements Valid NSC number No current CMS sanctions Valid state or local licenses ( if applicable) Step 2 – Calculate the composite bid Individual items? Product categories?

37. Bid solicitation (continued) Step 3 – Array the bids lowest to highest Step 4 – Evaluate Quality Step 5 – Evaluate financial capabilities of bidders

38. Bid solicitation (continued) Step 6 – Calculate market and supplier capacities Step 7 – Select Pivotal Bid - Everyone at or below the pivotal bid is selected as a winner if they meet all other requirements

39. Options being considered for selecting number of winners Pick enough winners so all estimated demand is met Base bid on the median rate Pre-select the number of winning bidders and take the lowest rates Base the bid on a target “composite” bid i.e. Give the bid to anyone who bids 20% off

40. Determining Payment amounts Bid individual HCPCS codes and set rates on each Bid a group of codes and award the lowest total rate

41. Principles of Bidding Principle 1 – Bidders at or below the pivotal bid are selected as winners Principle 2 – All winning supplies will be paid the same price for each item Principle 3 - Winning suppliers will have to receive at least as much for an item as they bid

42. Rural Area and Low Population Density Exemption Authority Area Phase-in; 10 MSA’s in 2007 80 MSA’s by 2009 2010 - ?

43. Proposed Approach to Accreditation • During Summer 2005, RTI will conduct focus groups in 3 – 4 sites across the US yielding responses from 40 – 1000 small suppliers. • First Focus group was at MedTrade West • Potential market areas: Atlanta, Cleveland, Denver, Chicago, Minneapolis, Raleigh / Durham, NC

44. CMS Announces More Focus Groups for Small HME Providers on "Competitive Bidding" and Seeks Email Feedback • The Centers for Medicare and Medicaid Services (CMS) has announced focus groups in Dallas and Chicago for small home medical equipment (HME) providers to help CMS evaluate the effect of quality standards, accreditation, and the selection process under "competitive bidding." • By small, CMS means providers that have gross annual revenues of $3 million or less and/or 10 or fewer full-time equivalents. Both accredited and non-accredited providers are welcome. • In a statement, CMS says it is particularly interested in providers with $1.5 million or less in revenues to "assist CMS in considering alternatives for the protection" of small HME providers.

45. CMS plans two focus groups in Dallas, TX on Wednesday, May 4 and two in Chicago, IL on Thursday, May 5. To register for one of the focus groups, please contact ssfocusgroups@rti.org by Wednesday, April 27th. CMS asks that you rank your location and time preferences and provide the following information: ·        Name of Business ·        Mailing Address ·        Phone Number ·        Estimated gross revenue (2004) ·        Is your business accredited? (Y/N) If yes, by whom? ·        Number of FTE's (full time equivalents) ·        Primary product categories offered by your business (e.g. oxygen, mobility aids, etc.) CMS says, "Space is limited to 16 participants per session and registration is on a first-come basis. However, RTI may modify participants to allow participation from the various regions. Input from the various areas is very important. Among those selected to participate, only one participant per company will be allowed." The statement notes that, "If you do not receive a confirmatory email by the end of the day on Friday, April 29th, you have not been selected to participate in this round of focus groups." However, CMS says those not attending the focus groups can provide feedback on these issues via email by sending comments to ssfocusgroups@rti.org To get full details, see the CMS announcement at: http://www.cms.hhs.gov/suppliers/dmepos/dme_focusgroups_annou.pdf

46. Size of Competitive Acquisition Areas May expand the size of areas for 2007 & 2009 to include areas adjoining the MSA if it is determined they are “highly” competitive or are “high utilization” areas. May carve out areas within an MSA if they are not considered competitive Nationwide Areas may be considered – Items that can be provided via mail order.

47. Quality Standards • MMA Section 302 • “…. The Secretary shall establish and implement quality standards for suppliers of items and services described ….. To be applied by recognized independent accreditation organizations….. • This applies to; • Furnish any such item or service… • And • 2. Receive or retain a provider or supplier number

48. Quality Standards Domains Organization Structure Financial Management Human Resources Patient/Client Management Assessment and Evaluation of Quality Facility and Patient Environment and Safety Management Ethics/Rights Information Management (Patient Records,etc.)

49. Accreditation Accrediting bodies Rational for Accreditation MMA Section 302 “ The Secretary shall designate and approve one or more independent accreditation organizations……”

50. Small Business Companies are considered “small” by: SBA & NAICS if they do less than $6 million in annual sales CMS if they employ 10 or > people Based on these criteria 60% of DMEPOS suppliers qualify as small businesses