You Are Not Offered a Competitive Bid Contract: Now What Do You Do?

1. You Are Not Offered a Competitive Bid Contract: Now What Do You Do? Jeffrey S. Baird, Esq. & Denise M. Leard, Esq.

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3. Introduction

4. Introduction • Competitive bidding (“CB”) is currently on hiatus. However, it will be with us again beginning 1/1/21. The bid window for Round 2021 is closed. Now, all we can do is (i) wait to see who the winners are; (ii) wait to see what the reimbursement will be; (iii) determine what we are going to do if we are awarded a contract; and (iv) determine what we are going to do if we are not awarded a contract. • This program discusses the options available to a DME supplier that is not awarded a contract.

5. Three Good Changes to the Competitive Bidding Program

6. Introduction • On November 4, 2016, CMS published a Final Rule implementing requirements imposed by statute, that should be viewed positively by the supplier community.

7. Requirements For Bid Surety Bonds • Under the Final Rule, a bidding entity must obtain a $50,000 bid surety bond for each CBA in which the supplier is submitting a bid and submit proof of it by the deadline for bid submission. 

8. Requirements For Bid Surety Bonds • Then, if (i) the bidding entity 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 entity does not accept the contract offered, the entity’s bid surety bond for the applicable CBA will be forfeited and CMS will collect on the bid surety bond.

9. Requirements For Bid Surety Bonds • If the forfeiture conditions are not met, the bond liability will be returned to the bidding entity. Bidding entities that provide a falsified bid surety bond will be prohibited from participation in the Competitive Bidding Program for the current and next round of bidding. • Bidding entities that provide a falsified bid surety bond will also be referred to the Office of Inspector General and Department of Justice for further investigation.

10. Requirements For Bid Surety Bonds • Suppliers are accustomed to the surety bond concept due to CMS's supplier standard requiring all suppliers to have a $50,000 surety bond in order to enroll in the Medicare Program.  • The surety bonds required for enrollment purposes serve to protect CMS's interest in the event of unfulfilled repayment obligations. 

11. Requirements For Bid Surety Bonds • The bid surety bonds, on the other hand serve to protect the interests of bidding suppliers that are interested in maintaining sustainable reimbursement rates and that take seriously the obligation not to submit loss leader bids.  • Now, a supplier looking to carelessly throw around low-ball bids, especially in CBAs the supplier does not traditionally serve, will be discouraged from doing so in a meaningful way.

12. Requirements For Bid Surety Bonds • Binding bids are one hallmark of a healthy, reliable auction system, and while not creating truly binding bids, the bidding bond requirement makes it unlikely a bidding supplier will decline a contract offer. 

13. Expansion of Supplier Appeal Rights in the Event of a Breach of Contract Action • The Final Rule revises 42 C.F.R. § 414.423 to expand the appeals process for suppliers that have been sent a notice of a breach of contract stating that CMS intends to take one or more of the actions described in § 414.422(g)(2) as a result of the breach. • The current appeals process is available only for contract termination, so the revised rule expands this to provide suppliers appeal rights whenever CMS takes any one of the actions specified in § 414.422(g)(2) following an alleged breach of contract.

14. Expansion of Supplier Appeal Rights in the Event of a Breach of Contract Action • If a supplier’s notice of breach of contract includes more than one breach of contract action CMS would take, and the supplier chooses to appeal more than one action, CMS would make separate decisions for each breach of contract action after reviewing the hearing officer’s recommendation.

15. Changing the Methodology for Establishing Bid Limits • Previous 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. • CMS imposed this requirement to ensure that the total payments it expects to make to contract suppliers are less than the total amounts that would otherwise be paid.

16. Changing the Methodology for Establishing Bid Limits • Beginning in 2016, the fee schedule amounts were adjusted based on information from, and prices set through, the Competitive Bidding Program. • CMS indicated in another Final Rule published in the Federal Register on November 6, 2014 (79 FR 66232) that the adjusted fee schedule amounts would become the bid limits for future competitions.

17. Changing the Methodology for 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 42 C.F.R. § 414.412(b) 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 Program.

18. Changing the Methodology for Establishing Bid Limits • This allows suppliers to take into account both decreases and increases in costs in determining their bids, while ensuring that payments do not exceed the amounts that would otherwise be paid had the Competitive Bidding Program not been implemented.

19. After the Fact: Gaining Access to a Competitive Bid Contract

20. Introduction • Assume that ABC Medical Equipment, Inc., is not awarded a CB contract. • If ABC wants to participate in CB, then ABC has six options.

21. 100% Asset Purchase

22. 100% Asset Purchase • Assume that XYZ Medical Equipment, Inc., is awarded a CB contract. • XYZ cannot sell its CB contract to ABC. • However, XYZ can sell 100% of its assets to ABC and ask the CBIC to (i) remove XYZ’s name from the contract and (ii) add ABC’s name to the contract.

23. 100% Asset Purchase • Here is how it works: • On 4/1/21, ABC and XYZ sign a letter of intent for ABC to purchase 100% of XYZ’s assets. • On 4/1/21, XYZ will send a notice to the CBIC informing it of the pending sale and of the fact that ABC and XYZ will want ABC to take over XYZ’s CB contract.

24. 100% Asset Purchase • On 5/1/21, XYZ and ABC will sign an Asset Purchase Agreement, a Bill of Sale, and a Novation Agreement and will submit the Bill of Sale and the Novation Agreement to the CBIC. • The Novation Agreement states that if the CBIC approves ABC taking over the CB contract, then ABC will assume XYZ’s obligations under the CB contract as if ABC was the original party to the contract.

25. 100% Asset Purchase • Also on 5/1/21, ABC will send in documentation to the CBIC that shows that ABC qualifies to be a contract supplier. • If ABC previously submitted this documentation when it bid on the round covered by XYZ’s CB contract, but ABC’s bid was denied only because ABC bid too high, then ABC does not need to submit additional documentation.

26. 100% Asset Purchase • Assume that ABC submitted a bid for the round covered by XYZ’s CB contract, but that ABC’s bid was disqualified for reasons other than the bid price. • On 5/1/21, ABC will need to submit documentation that cures the problems that led to the disqualification.

27. 100% Asset Purchase • On 6/1/21, the CBIC will notify ABC and XYZ whether or not the CBIC approves ABC taking over the CB contract. • If the CBIC approves ABC taking over the contract and signs off on the Novation Agreement, then XYZ’s PTAN will be removed from the CB contract and ABC’s PTAN will be added to the CB contract.

28. 100% Asset Purchase • When a Bill of Sale is executed, then it means that (i) assets are transferred and (ii) the purchaser pays money for the assets. • XYZ is placed in the unenviable position of transferring its assets before CBIC approval. • ABC is placed in the unenviable position of paying money before CBIC approval.

29. 100% Asset Purchase • In order to protect XYZ, a right of rescission will be included in the Asset Purchase Agreement: if the CBIC does not approve then the assets will go back to XYZ. • In order to protect ABC, the purchase proceeds will be placed in escrow. If the CBIC approves, then the proceeds will be released from escrow to XYZ. If the CBIC does not approve, then the proceeds will be released from escrow back to ABC.

30. 100% Asset Purchase • The dates set out above are just examples. • The rules say that XYZ must notify the CBIC of the sale at least 60 days before closing. • The rules further say that the parties must execute and submit the Novation Agreement at least 30 days before closing.

31. 100% Asset Purchase • From a practical standpoint, if XYZ notifies the CBIC of the sale on 4/1/21, and the parties submit the Novation Agreement and Bill of Sale on 4/8/21, then the CBIC may approve the transfer of the contract in mid-May. • Further, if the CBIC does approve, the effective date of the transfer of the contract will be made retroactive to the date of the Bill of Sale.

32. Partial Asset Purchase

33. Partial Asset Purchase • Instead of purchasing 100% of XYZ’s assets, ABC can purchase those assets of XYZ that are associated with XYZ’s CB contract. XYZ will retain the balance of its assets. • XYZ will continue to own and run its business that is not associated with the CB contract that ABC is taking over.

34. 100% Stock Purchase

35. 100% Stock Purchase • Assume that John Smith is the sole stockholder of XYZ. • Smith sells all of his stock to ABC. • As a result, XYZ (a contract supplier) becomes a wholly-owned subsidiary corporation of ABC (a non-contract supplier).

36. 100% Stock Purchase • ABC cannot “bill its Medicare CB patients through its subsidiary, XYZ.” Even though ABC owns XYZ, they are still separate entities (with different tax ID numbers). • Subject to patient choice, ABC can refer its Medicare CB patients to XYZ.

37. 100% Stock Purchase • Because ABC and XYZ will be “commonly-owned,” XYZ can ask the CBIC to add ABC’s PTAN to XYZ’s CB contract. • More on this later.

38. 100% Stock Purchase • The “60 day notice” does not have to be given to the CBIC. • A Novation Agreement is not required. • XYZ will need to update its CMS-855S with the NSC to show that ABC is XYZ’s new owner.

39. Partial Stock Purchase

40. Partial Stock Purchase • If ABC purchases 5% or more of XYZ’s stock, then under CB rules, ABC and XYZ will be “commonly owned.” • Assume that ABC purchases exactly 5% of XYZ’s stock. • XYZ will update its CMS-855S to show that ABC is a 5% owner of XYZ.

41. Partial Stock Purchase • Once the NSC’s records show that ABC is a 5% stockholder of XYZ, then XYZ will ask the CBIC to add ABC’s PTAN to XYZ’s CB contract. • This is accomplished by XYZ filing a Contract Supplier Location Update form with the CBIC.

42. Partial Stock Purchase • XYZ can request that ABC’s PTAN be added to a specific CBA/product category combination. For example, if XYZ’s contract covers multiple product categories in the Phoenix and Salt Lake City CBAs, then XYZ can ask that ABC’s PTAN be added only to that portion of the CB contract associated with the Phoenix CBA/oxygen product category.

43. Partial Stock Purchase • Assume that the CBIC grants XYZ’s request and adds ABC’s PTAN to XYZ’s CB contract. • ABC will bill and collect under its own PTAN. ABC will not “bill through” XYZ. • If the CBIC alleges that either ABC or XYZ breached the contract, then the CBIC will likely terminate the entire contract . . . meaning that neither ABC or XYZ is a supplier in the CB program.

44. Partial Stock Purchase • It is unlikely that ABC will be responsible for recoupment actions against XYZ . . . and vice versa. • In the future, if ABC and XYZ desire to bid for the same product category in the same CBA, then they will have to submit one bid for both companies. • This is because they are “commonly owned.”

45. “Carve Out” of CB Contract

46. “Carve Out” • On July 11, 2014, CMS published a proposed rule entitled “Revision to Change of Ownership Rules to Allow Contract Suppliers to Sell Specific Lines of Business.” The rule was finalized on November 6, 2014. Interestingly, only one comment from the DME industry was filed. The new rule, found at 42 CFR§ 414.422 (d) (4), states:

47. “Carve Out” • For contracts issued in the Round 2 Recompete and subsequent rounds in the case of a CHOW where a contract supplier sells a distinct company, (e.g., an affiliate, subsidiary, sole proprietor, corporation, or partnership) that furnishes a specific product category or services a specific CBA, CMS may transfer the portion of the contract performed by that company to a new qualified entity, if the following conditions are met:

48. “Carve Out” • (i) Every CBA, product category, and location of the company being sold must be transferred to the new qualified owner who meets all competitive bidding requirements; i.e. financial, accreditation and licensure; • (ii) All CBAs and product categories in the original contract that are not explicitly transferred by CMS remain unchanged in that original contract for the duration of the contract period unless transferred by CMS pursuant to a subsequent CHOW;

49. “Carve Out” • (iii) All requirements of paragraph (d)(2) of this section are met; and • (iv) The sale of the distinct company includes all of the contract supplier's assets associated with the CBA and/or product category(s); and • (v) CMS determines that transfer of part of the original contract will not result in disruption of service or harm to beneficiaries.

50. “Carve Out” Of Competitive Bid Contract: Further Guidance • The final rule results in some unanswered questions, the most important of which is: What does CMS mean by “distinct company?” CMS has recently issued guidance that addresses this question. Specifically, in a Change of Ownership Fact Sheet published in April, there is a section entitled “Transferring a Portion of the Contract.” It states: