Moving the HME Industry Forward


Does the Median Bid Scheme Violate the 5th Amendment?

June 9, 2014

BAYONNE, NJ – Many of you recently saw me on the New Jersey TV (NJTV) clip with my boss Michael Bologh, but this brief appearance only told a small part of my story. For years I have researched the haze of legal questions surrounding the bidding program.

It may sound ludicrous at this late date to announce that the HME industry has been the victim of an unfair government pricing scheme within the bidding program. However, before you burst out in sarcastic laughter, ask whether the median pricing scheme was actually ever legal as well. Until now, this has not been done. If we are to successfully renegotiate any program reforms, this question is worth a close look. To accomplish this, we must understand the concept of “fair market value.”

Why is “Fair Market Value” so Important?
Recall that the 5th Amendment forbids the government taking of private property without “just compensation.” The courts in turn have defined “just compensation” as the ‘fair market value” of an item. There are good reasons for this Constitutional requirement, as it sought to end a long history of tyranny against private citizens and their possessions. However, we must understand how the law actually defines “fair market value” (P.S. It’s not what you may have thought).

Merriam Webster’s Law Dictionary posits two essential conditions that must be met:
1) The price must represent the prevailing rates charged by the majority of suppliers in a region, (or just simply the average price).
2) The agreed upon price must be determined without any pressure or coercion being exerted upon either the buyer or seller. (This is especially important when the government is attempting to determine a single price to be applied across an entire region.)

Do you remember the CMS policy requiring contracted suppliers to assume full liability for orphaned beneficiaries and their capped rental items—which also mandated them to provide fresh equipment—even when the capped payments have nearly expired? After loud protests, CMS quickly backed down and agreed to issue a fresh 13-month capped payment cycle. For oxygen equipment, an additional 10 installments would be granted.

However, this was not done out of any sense of kindness to our industry. While CMS did not admit it, the original policy had raised the specter of government “taking.” As mentioned, the 5th Amendment forbids government action that confiscates private property without just compensation.

In this case, we are dealing with “regulatory taking,” legally defined as “an appropriation or diminution of private property rights by a governmental regulation that exceeds the government’s legitimate police power.” More specifically, we are talking about administrative rulemaking that distorts and reduces the “fair market value” pricing of HME products and services.

While Congress can delegate authority to an executive branch agency to carry out a program, the “Separation of Powers” doctrine prohibits it from delegating powers that deny basic Constitutional rights without allowing the right of judicial review; this holds true regardless of the congressional ban on judicial review of bid awards* (see note at end of paper). This point has been sorely missed by our industry.

A good example is the median composite bid methodology. While CMS asks suppliers to provide weighted composite bids by quantities of items to assure itself the best volume discounts, CMS would not properly weigh the number of supplier bids at each price level. In other words, by selecting the unweighted median bid, CMS is wildly distorting the “usual and customary” or average fees for products and services.

Furthermore, in government bid competitions there is an understandable tendency for a small minority of bidders to offer irresponsibly low bids, thereby dragging down the midpoint of the price range disproportionately.

Median Pricing vs Average Pricing
If a hundred bids are submitted, and the bottom twenty bids are irresponsibly low, with the rest much higher, the bottom twenty will drag down the median bid disproportionately because median pricing only looks at the range of prices—requiring that half the prices will be higher and half lower than the median bid. The correct approach would have been to average the bids. This will weigh the number of bids at each price level, and yield a more accurate picture of prevailing prices.  

Example: Twenty-two bids are placed with prices at $1, 2, 3, 4 and 5. Only one bidder bid $1, three bid $2, four bid $3, eight bid $4 and six bid $5. The median bid is $3 (the midpoint between $1 and $5), but the average bid is $4.10.  The median bid is about 25% lower than the average price!

“Just compensation” under the Fifth Amendment would require a plan that reflects prevailing market rates, i.e. the pricing offered by the majority of suppliers. Median pricing does not reflect this and is distorted.

The Final Rule specifies that the median composite price will be the final bid price awarded. This means that many of the bid winners will be coerced to accept distorted pricing that is likely lower than the fair market value and that most will be underpaid. (The term coerced is correct because the typical HME has been relying on Medicare for 40 to 70% of its revenue and would sustain irreparable damage through the loss of Medicare participation. (Ref. Sharp Healthcare vs. Leavitt).

Our industry has failed to grasp the consequences of this methodology and round one and two bidders have been saddled with unexpectedly low pricing that will severely impact beneficiary health and safety, as well as threaten the solvency of the bid winners. Meanwhile, HHS is touting the “massive savings” and the program’s “success.” But was it all legal?

To help us answer this all important question, we can now go back to our earlier definition and ask whether the median pricing scheme could withstand the legal requirements that it:
1) represents prevailing prices charged by the majority of suppliers; and
2) was determined without coercion being placed upon HME providers.

I believe I have answered both questions and it is a resounding NO. The bidding program clearly does NOT meet these requirements. However, I would caution that I am not an attorney, and a legal expert would ultimately have to examine the merits of this case. Regardless, we certainly now have another compelling argument to extract reforms through the rulemaking process.  

Is There Hope?
While many of us might be tempted to demand we rush into a lawsuit, I would advise we first consider legislative options. Tom Ryan (president and CEO of the American Association for Homecare [AAHomecare]) and my friends at AAHomecare, have looked endlessly into the question of lawsuits, and have come away with the conclusion that litigation is off the table for now because of the projected astronomic costs—which our industry can ill afford. However, there may be another option, aside from endlessly trudging the halls of Congress to gather support for new legislation.

While many of us are familiar with CMS’ onerous rulemaking strategies, few of us know that we, as an industry, have the right to enter into the rulemaking process as well. After all, we are a government “of the people, by the people and for the people.”

This can be accomplished through either a process called “formal rulemaking” or “negotiated rulemaking.” I will spare you the technical details here, but suffice to say it could offer a quick, low cost avenue to bringing the needed changes. In our favor are the broad concerns in the House and Senate over the fallout from the bidding program.

I believe we could draw wide support from Congress for a new rulemaking session with our industry representatives directly involved. The results could be implemented in a matter of months.

I welcome your comments to

(A special thanks to JAMES’ General Counsel David Barmak, whose generous support and provision of trial transcripts and other research resources has been invaluable to my efforts).

*Footnote; The issue of the ban of judicial review in the bidding program is discussed in my other paper, “APA Judicial Review.” For our purposes here, it is sufficient to know that the such congressional bans can be challenged over constitutional violations, especially where an executive branch agency is acting outside its statutory powers. Ref. Texas Alliance vs Sebelius.

Herb Paserman, a 30-year-veteran of the HME industry, is marketing manager at Jerrys Drug and Surgical, Bayonne, NJ.