The world at large may know Polk County, Fla., for the water-skiers of Cypress Gardens-or the fact that you drive through it on the way from Tampa to Disney World.

To the home medical equipment business, however, this metropolitan area in Central Florida has gained notoriety far beyond its modest size. It's the first and (so far) only laboratory for an experiment that HME industry groups have fought hard to stop-Medicare competitive bidding.

The federal government says Polk County is showing HME providers their future. But many providers will tell you they aren't sure this future is so bright.

The Time Has Come THE THREE-YEAR DMEPOS Competitive Bidding Demonstration Project, as it's officially called, is a few months behind its original schedule, but it continues to move forward despite industry protests. The bids are in, and the winning contractors have been chosen. With some exceptions, new Medicare beneficiaries in Polk County now must buy only from the Medicare-approved contractors if they need products or services in any of five categories: oxygen, hospital beds, enteral nutrition, urological supplies and surgical dressings.

As of midsummer, the opposition had practically admitted defeat. A lawsuit by the Florida Association of Medical Equipment Services against the project was still clinging to life, with a hearing scheduled in the 11th Circuit Court of Appeals in late September. The suit charged that the government broke its own law on advisory committees when it planned the Polk County project. But FAMES' request for an injunction had been turned down by a federal district judge after being upheld by a magistrate. Even opponents of competitive bidding seem resigned to its going forward.

For HME providers in Polk County, the key question this summer had shifted from how to fight the project to how to live with it-and maybe even profit from it.

For the rest of the industry and the public as a whole, the issue is whether the experiment (along with two similar projects slated for other locations yet to be determined) will be such a success, real or perceived, that it becomes a model for the whole country. The coming three years are supposed to answer that question.

The Political Pros and Cons Providers, consultants and industry advocates show plenty of skepticism toward Medicare's new cost-cutting scheme. They complain that it will force providers to cut back on service in order to live within the lower reimbursement structure and will narrow the choice of providers available to consumers.

Defenders of the program, in the Health Care Financing Administration and elsewhere, dismiss such talk. They say the program is friendly to small business, gives consumers plenty of choices and is already working to save taxpayers' money.

"This is the big test case" for competitive bidding, says Cara Bachenheimer, vice president of membership services at the Health Industry Distributors Association. One of the skeptics, she worries that politicians may be so charmed by the concept of competitive bidding that they rush to impose it nationwide. "There's a growing sense in Congress that competitive bidding is a good thing," Bachenheimer says. "Politically, the question is going to be whether it will be expanded before the results are in."

Others say that they don't need Polk County's results to know that competitive bidding makes sense. Rep. Fortney "Pete" Stark, D-Calif., has introduced legislation that would give the federal government blanket authority to use competitive bidding in HME and many other areas of Medicare reimbursement. Because the government uses competitive bidding for enormously sophisticated projects like Stealth bombers, Stark says, it should be able to do so for medical goods. And competition favors the well-run businesses, he believes. "Why would providers be against (competitive bidding) if they were any good?"

Adding Up the Numbers MARK WYNN, THE HCFA official in charge of the demonstration project, reports that it has already shown how competitive bidding can save money without compromising consumer choice. Based on the new prices established by the bidding process, Wynn says, "roughly speaking, we're saving 20 percent-about $1.5 million-in just that one county." Medicare had been spending more than $7 million a year there on HME, he notes.

While the full costs of implementing the program are not finalized, the final savings figure will take expenses into account, according to HCFA. As Wynn also points out, the demonstration project covers only about half the Medicare money spent on HME in Polk County; other HME products aren't affected.

The 16 winning bidders (chosen from a field of 30) range from multi-state providers to "literally mom-and-pop firms," Wynn says. Most have won contracts to provide HME in two or more product lines. The surgical dressings category has the fewest providers-four, and the oxygen supplies and equipment line has the most-12. The savings over previous reimbursement schedules, by category, range from a high of 31 percent for enteral nutrition to 13 percent for surgical dressings. In oxygen, the biggest spending category, price cuts average 18 percent.

More specifically, the monthly allowance for semi-electric hospital beds, a product that accounts for 81 percent of spending in the hospital bed category, has gone from $136.14 (its price in the Florida fee schedule) to a maximum of $95.66 in Polk County. That's a drop of nearly 30 percent. In oxygen concentrators, two product lines that account for 80 percent of the category both dropped slightly less than 18 percent. In enteral nutrition, the price of a feeding supply kit that makes up 32 percent of the category's spending dropped 25 percent, from $10.67 to $7.98. Enteral formula, which accounts for 37 percent of the category, fell 9 percent, from 61 to 56 cents.

It is important to note, however, that not all products are cheaper. For some items in the surgical dressings category, for instance, Wynn reports that "prices went up a little bit." What's more, he adds, in an effort to ensure Medicare beneficiaries get high-quality service, HCFA purposefully did not choose the lowest bidders in each category.

HCFA could have also saved more if it awarded contracts to only one business in each category, says Wynn. But it chose multiple winners "to let small suppliers participate and to give beneficiaries a choice." The project has "bent over backward to make sure that we have a level playing field for the smaller providers," he says, "and that's not usually done" by either the government or managed care payers. The program also eases the transition for beneficiaries by allowing them to continue using their current providers for oxygen, hospital beds and enteral nutrition products even if those firms are not in the demonstration project.

The main issue now, says Wynn, is to see how this bidding system "would work on a larger-scale basis."

Paying the Price TALK OF TAXPAYER savings sounds premature to some observers of the program who point out that it has yet to prove it can lower prices without lowering the level of service to Medicare beneficiaries. And gauging service can be tricky-a fact that has some industry advocates concerned. "The government is required to do an analysis at the three-year mark," Bachenheimer says. "But whether they'll do a good or bad job on that, we don't know."

Even if consumers have to settle for less-fewer visits from respiratory therapists, for instance-that may not be enough to overcome the program's political momentum. Wallace Weeks, a management consultant who has worked with HME businesses in Polk County and elsewhere, says Congress would probably not stop the program "until patients don't have adequate services, and it so bothers patients that they speak to their congressional representatives about the failure."

Observers seem to have less doubt about the impact of the program on the HME industry. For some companies, they say, it won't be a pretty picture: The strong will survive, and the weak will either go out of business or be bought up by bigger competitors. Among the victims, predicts Marietta, Ga.-based HME reimbursement consultant Jane Bunch, will be "a lot of good companies that just did not have the personnel and did not have the revenue to get into this game.

"If you're in HME for the right reasons, it's just sad," she says. "I know a company in Polk County that's very caring and gives fantastic service. It's hurting already, and it was left out. Where in the world do you go from there?"

Those left out when HCFA awarded contracts aren't the only ones in trouble, she continues. She expects some of the winners to go out of business, too. "A lot of companies felt they had to bid to stay alive, and they were right," she says. "But some don't have the monetary stability to stay in the competitive bidding project."

Most HME businesses also have little "real understanding" of their costs, adds Weeks, so they're likely to get into trouble by making bad bids and then having to live with them. "The fallout is not going to come directly from competitive bidding but from bidding without understanding the process."

Coming Out on Top WHERE SOME FACE peril, however, others may find opportunity. "People who understand their businesses will pick up the fallout of the companies that don't," Weeks predicts.

William "Butch" Vanderpool, owner of Auburndale, Fla.-based Health Care Diagnostics, says his business is in a good position after winning contracts for oxygen, hospital beds and enteral nutrition. Of the 12 firms that won the oxygen bid, he says, "we think we're the dominant player."

Vanderpool also expects a number of local HME firms, including some winning bidders, to go out of business or sell out under the pressure of the newly lowered Medicare prices. But he clearly doesn't expect his company to be on that casualty list. He says his firm, with revenue of about $4 million a year, will be doing $6 million to $7 million in sales next year-roughly a 50 percent increase.

In the oxygen category, where the bidding has resulted in product and service price cuts averaging 18 percent, Vanderpool says he's up to the challenge of maintaining his profit even though he must hike sales 25 percent to stay even. "I have no problem doing that," he says.

Health Care Diagnostics has helped itself by getting a clear idea of its expenses through activity-based costing, Vanderpool notes. The company has a wide enough reach, in both territory and among payers, to cushion any losses in Polk County Medicare business. Vanderpool also reports that while about 60 percent of his revenue comes from Polk County, only about 40 percent of it is through Medicare.

A Bid to Enter ANOTHER WINNING BIDDER, the Tampa branch of Housecall Medical Equipment, wasn't even active in Polk County before the bidding project came along. Now, it's signed up to provide oxygen products and hospital beds.

Far from seeing competitive bidding as a threat, Housecall views it as an opening. George Petruch, the Florida regional director for Housecall, a multi-state HME chain owned by Adventist Health System, says the company has corporate links to home health nursing agencies in the area and hopes to draw new business through them. "I just see the project as another avenue to increase our current market," Petruch says.

In his view, competitive bidding was nothing new or strange for a company used to dealing with private-sector health plans. "We realized that the final composite bids would not be far off what we were being paid under managed-care contracts," says Petruch. "I think we're already in a competitive-bid market. If you look at managed care, that's what it is."

Petruch says the real competition is now among financially strong companies vying to produce the best service. "There's already a lot of good competition out there for the Medicare dollar," he notes. "What this does is narrow down the field to those providing quality care."

That sounds good for the consumer-if not so good for the financially weaker firms that didn't make Medicare's cut. But some other industry observers also believe consumer choice will ultimately suffer as the "field" gets narrower.

Asela Cuervo, vice president for legal and government affairs at the National Association for Medical Equipment Suppliers, Alexandria, Va., says competition is eventually a casualty in government contracting. "If you look historically at other industries, what tends to happen is that a few companies become the dominant players, and then prices go up. That's the biggest caveat (to Medicare competitive bidding) from an economic basis."

Cuervo also reports that several states have tried HME competitive bidding in their Medicaid programs and have abandoned the experiments. "My understanding is that, for a number of reasons, they had more diversity of products outside a competitive bidding environment-which is what I think we're going to find out as the Polk County project unwinds," she says.

Demonstrations to Come ONE THING THE HME industry has learned by now is that it faces a tough fight to keep competitive bidding in check.

Currently, up to five demonstration projects with three sites each are authorized by the Balanced Budget Act of 1997, and these can cover metropolitan areas larger than the Polk County. No additional sites had been selected at press time in late September, but industry predictions place at least one of them in Medicare's Region C, which covers the southeastern United States and Texas. Also at press time, HCFA had scheduled a public meeting for Oct. 5 to explore which products should be covered in future bidding projects.

Faced with more competitive bidding mandates, HME industry advocates warn that the demonstration projects could be a Trojan horse to establish new, lower Medicare allowances nationwide. Under this scenario, HME providers all over should be studying the Polk County prices carefully, because before too long, that may be what they'll get, too.

Wynn denies any such plan, saying, "We're not going to use the prices from any one bidding site to set nationwide prices." However, he confirms that price data from demonstration projects will be added to other information, such as payments by managed-care payers and other federal agencies, to develop new reimbursement levels.

In Congress, meanwhile, the HME industry has found few friends in either party willing to criticize competitive bidding publicly. Asked if HME businesses have any allies in Congress, FAMES president Brian Seeley, says, "Yes-but not as many allies as enemies."

The big issue, he says, "is that Medicare dollars need to be saved, and we're a relatively easy industry to pick on because we're not strong in lobbying."

Valiant Efforts IT'S NOT THAT the industry doesn't try. In May 1998, NAMES asked its members to wage a "holy war" against competitive bidding with newspaper columns, letters to the editor and other means of public dissent. But that failed to open any visible cracks in the support for competitive bidding, which-as Bachenheimer notes-is bipartisan.

The demonstration projects were born of the BBA, which was crafted by Republicans. Florida's Democratic Sen. Bob Graham pushed to have the project in his state. Republican Sen. Phil Gramm of Texas wanted the government to try competitive bidding in his state as well. Now chairman of the Senate Banking Committee, Gramm has since turned his attention away from Medicare toward banking issues.

The General Accounting Office, the investigative arm of Congress, gave competitive bidding an assist in a May 1998 report that decried the high prices Medicare was paying for HME. "The use of competitive contracting for high-volume medical equipment and supplies...has merit," the GAO report said.

The Clinton administration also supports competitive bidding in Medicare far beyond HME. In its Medicare reform proposal released last June, the White House said the government should have authority to use competitive bidding in all areas of the Medicare B program other than doctors' services. Stark's bill follows the same lines.

Congress and the White House, however, are far from agreeing on any actual Medicare legislation. Stark, putting the blame on GOP stalling, says he isn't expecting any action soon on his competitive-bidding bill. Rather, he says, this and other Medicare measures he has recently introduced are "building blocks" for a future legislative package when Congress is more in tune with his ideas.

To Bachenheimer, the Medicare deadlock is a chance to buy some time. Any competitive bidding bill, she says, would only be passed as part of a broad Medicare reform package, and "I don't think there's going to be a reform vehicle this year-and probably not next year during the election. That's the saving grace."-HC

HCFA's competitive bidding demonstration projects require providers to go through a laborious bidding process to earn the right to Medicare reimbursement on certain HME.

Repeal of relevant BBA provisions? Improved HCFA pricing research and price-setting practices? Industry and individual lobbying efforts?

The president and many members of Congress want to cut Medicare costs by mandating that providers bid competitively for the right to get reimbursement on certain HME.

HCFA plans to use questionable IR data as one of its tools in deciding which providers' bids will be chosen in its competitive bidding demonstration projects.

HCFA's competitive bidding projects limit the choices patients have when they go to buy HME.

Unless handled properly, competition in the HME arena may favor low-bid providers, making it more difficult for service-oriented businesses to stay in the black.

Unless handled properly, competition in the HME arena may favor large HME chains, making it more difficult for small, family-owned businesses to stay in the black.