Will You Be a Winner?

Astute providers have begun to assess the variety of business risks that they will be subjected to as a result of mandated competitive bidding for Medicare. Ultimately, about 65 percent of all providers will be directly affected by the competitive bidding requirement in the Medicare Modernization Act, and conventional wisdom is that the remainder will be indirectly affected.

For those providers that will be directly affected, there are risks associated with winning a bid that could produce consequences as disastrous as the risks associated with not winning.

The risks associated with winning a bid include, but are not limited to, lower profit margins, growing staff too fast, growing assets too fast, growing geography too fast, expanding product lines and being more concentrated in one payer — Medicare. Risks associated with not winning a bid include, but also are not limited to, quick loss of revenue, loss of customers, loss of referral sources, entering new markets (products, payers, geography) to replace revenue and being capable of bidding in a future competition.

Among all of these risks, the highest level of concern seems to be directed toward the prospect of losing a bid. But it is important to note that the risks, and the degree of each risk, are not the same for every provider.

For example, it is logical to assume that providers with all of their business in one competition area, concentrated in one product line and concentrated in Medicare stand to be hurt the most if they lose a bid. The other end of the spectrum is a regional or national company with a diverse product line and low exposure to Medicare.

Making a risk assessment on these factors alone, however, would be a mistake. Each provider should quantify his specific risks as best he can.

One way to quantify the overall risk is to ask the question, “What will my profit be if we don't win the bid?” The earlier the assessment is made, the more time the management team will have to prepare for the contingency.

The first thing to consider is that all revenue is not equal. The reason is that gross profit from the rental of oxygen equipment is likely to differ based on the payer. And the gross profit from oxygen equipment is different than that of mobility equipment. So, we want to make the assessment specific to the revenue that is at risk. For that, we need to consider the gross profit from Medicare for the at-risk product line.