Moving the HME Industry Forward

General Healthcare

Options for Competitive Bid Loser

May 9, 2016

AMARILLO, TX – On many levels, competitive bidding is nonsensical and unfair to DME suppliers. In my mind, the most egregious result of competitive bidding is the inability of a DME supplier to plan ahead for more than three years.

For example, let’s say that a supplier is awarded a contract for respiratory in round two. The supplier gears up, borrows money, hires employees, and builds up inventory. And then the supplier has “the rug yanked out from under its feet” and does not win the Round Two Recompete contract. What bank would want to make a working capital loan to a DME supplier when the bank knows that the supplier’s business model might disappear in three years?

To compound the problem, the failure of a DME supplier to receive a contract can be based on an arbitrary CMS decision. It is one thing for a contract not to be awarded because the supplier bid too high, or did not have the necessary licensure, or did not have the necessary accreditation. It is another thing for the supplier not to receive the contract because its financials do not meet unpublished CMS “financial standards.”

Said another way, in disqualifying a supplier’s bid CMS will say to the supplier: “Your financials do not meet our standards. However, we are not going to tell you what those standards are.” Let me give you an analogy. Let’s say that the State Bar of Texas issues a rule that requires all Texas attorneys to reapply for their law license every year.

As to whether or not an attorney is issued a law license is based on (A) whether he/she has taken the requisite number of continuing education courses (an “objective” measure) and (B) whether he/she is, in the eyes of the State Bar, “competent” (a “subjective” measure). And so I apply for my license for the next three years, but the State Bar tells me that my application is rejected because I am not “competent.” I ask the Bar why it concludes that I am not competent enough to receive a law license and the Bar says: “We are not going to tell you.”

One might argue that if a DME supplier believes that Competitive Bidding is unfair, then it can simply not participate in Competitive Bidding. This is a disingenuous argument. At the end of the day, the DME industry primarily serves the elderly and the main payer for the elderly is Medicare. The Competitive Bidding program covers most of the main DME products used by the elderly. If a DME supplier is frozen out of the Competitive Bidding program, then it has lost a big portion of its customer base.

So much for my editorializing. Let’s talk about what a DME supplier can do if it is not awarded a Competitive Bidding contract.

• Assume that ABC Medical Equipment, Inc.’s bid is disqualified. ABC will have received a disqualification letter. The letter will give the reasons for the disqualification. The letter will further give the supplier “x” number of days to request CMS to conduct a second review of the supplier’s bid in order to determine if the disqualification was proper. The best way for the supplier to request the review is to submit a letter to the CBIC (with supporting attachments) pointing out why CMS was wrong in disqualifying the supplier. The CBIC will send the review request to CMS. CMS will review the review request and then relay its decision to the supplier. If the disqualification was due to alleged lack of licensure or accreditation, then this is a “black and white” issue. Either the supplier had….or did not have…..the licensure/accreditation at the time of the bid submission. If CMS was wrong, then it should be easy for the supplier to prove CMS’s error. On the other hand, it is much harder to establish CMS error if the disqualification is based on substandard financials. We do not know what CMS’s standards are in evaluating financials. And so the supplier is put to the task of trying to “prove a negative.” Nevertheless, the supplier can present arguments (including, perhaps, documentation and a letter from the supplier’s CPA) that support the supplier’s financial viability. Having said all of this, the supplier needs to be aware that the odds of a reversal of the disqualification are low.

• 100% Asset Purchase – Assume that XYZ Medical Equipment, Inc. is awarded a CB contract for CBA 1 (Respiratory), CBA 2 (Enteral), and CBA 3 (Beds). ABC is not awarded a CB contract. XYZ can sell 100% of its assets to ABC. Pursuant to the Novation process, the CBIC will remove XYZ from the CB contract and add ABC to the contract. The entire CB contract is now in ABC’s name and XYZ is out of business.

• Partial Asset Purchase – XYZ sells some, but not all, of its assets to ABC. The assets that are sold are related to XYZ’s CB contract. Pursuant to the Novation process, the CBIC will remove XYZ from the CB contract and add ABC to the contract. The whole contract is now in ABC’s name. XYZ continues to operate in the non-CB space.

• 100% Stock Purchase – John Smith owns 100% of the stock of XYZ. Smith sells all of his stock to ABC. XYZ is now a wholly-owned subsidiary corporation of ABC. With the CBIC’s permission, XYZ can add ABC to XYZ’s CB contract. XYZ and ABC can agree that ABC will have access to all CBAs/product categories under XYZ’s contract…..or they can agree that ABC will have access to a specific CBA/product category combination.

• Partial Asset Purchase (“5% Transaction”) – ABC can purchase 5% or more of XYZ. Alternatively, XYZ can purchase 5% or more of ABC. ABC and XYZ are now “commonly-owned.” With the CBIC’s permission. XYZ can add ABC to XYZ’s CB contract. ABC and XYZ can agree that ABC will have access to all CBAs/product categories under XYZ’s contract…..or they can agree that ABC will have access to a specific CBA/product category combination.

• Carve Out – XYZ can sell those assets associated with CBA 1/Respiratory to ABC. In so doing, pursuant to the Novation process, the CBIC can “carve out” the Round 1/Respiratory portion of XYZ’s contract and transfer it to ABC. In last Monday’s Medtrade Monday article, I give a detailed discussion of how the “carve out” works.

Subcontract – XYZ and ABC can enter into a Subcontract Agreement in which XYZ will be the “contractor” and ABC will be the “subcontractor.” XYZ will need to notify the CBIC of the subcontract arrangement. XYZ will be responsible for intake, assessment and coordination of care. ABC can handle much of the “heavy lifting” such as delivery, set-up, patient education, and repair/maintenance. XYZ will pay fair market value compensation to ABC for ABC’s services. The subcontract arrangement can for the life of Round Two Recompete or it can be a temporary fix for ABC until it finds a contract supplier to purchase or “buy into.”

Jeffrey S. Baird, JD, is Chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or jbaird@bf-law.com.