Competitive bidding has arrived, and providers in the first 10 MSAs are scrambling to prepare their bids, with CMS expected to open its 60-day bid window at any time. The two major challenges those who wish to bid face in the short time period before the bidding deadline are collecting the capacity data required by CMS to submit a bid, and preparing a winning bid price that still leaves the company with a reasonable profit margin.

The first place to look for this data is your HME software system. Operating with inaccurate or incomplete information can cost you big in this high-stakes game.

In order to place a bid, you will need to compile key information related to the products previously provided to customers in the competitive bid area. In order to help CMS understand your projected capacity for bid products, you will be required to submit information regarding:

--the total revenue collected in the CBA during the past calendar year;
--the portion of that revenue that was from Medicare beneficiaries;
--the total number of customers served in the CBA;
--the percentage of those customers who were Medicare beneficiaries;
--the total number of bid products you provided, by individual HCPCS, to customers in the CBA, and how many of those were provided to Medicare beneficiaries.

Look to software system reports that provide information on product and payer mix that can then be restricted by some type of geographical indicator, such as county, city or zip code.

In order to formulate a bid, you need to know your total cost of providing the product. Acquisition costs account for the bulk of total costs, but you must also factor in costs associated with delivery, patient education and set-up, reimbursement and general administrative overhead.

Techniques such as activity-based costing can help you zero in on the total cost of providing an oxygen concentrator versus a hospital bed, thus allowing you to formulate a bid that still assures a reasonable profit. But unless you have been collecting activity-based cost data specific to each product you provide, it might be difficult to complete those calculations prior to the bid deadline. Bidders gearing up for the next round should take heed and begin collecting and analyzing activity-based costing data now.

At a minimum, you should be able to calculate gross profit margin data from your HME software system if it includes a purchase order system that communicates with your inventory tracking and utilization data. If you tell your system when you acquired a product and how much you paid for it, chances are you can match that up with utilization data on specific rental products in order to determine gross profit margin percentages by HCPCS code.

Generally, a six-month or less return on investment on a piece of rental equipment results in a profitable transaction. To calculate ROI, take the acquisition cost and divide it by the allowable. For example, a hospital bed with a mattress and rails that costs $600 will have an ROI of 4.3 months if reimbursed at $140 per month.

If you compare the monthly depreciation to the allowable, 10 to 20 percent of the allowable should be allocated to depreciation.

To calculate the monthly depreciation costs, take the acquisition cost of the equipment and divide it by the reimbursement life of the equipment. On an oxygen concentrator that has an acquisition cost of $600 and a 36-month reimbursement cycle, the monthly depreciation cost is about $16.60 per month, or 7 to 10 percent of the allowable depending upon the region of the country. On items that now fall under the new capped rental rules, the monthly depreciation percentage is much higher due to the shorter rental cycle. These items are now more like an installment sale than a rental and should be evaluated by ROI rather than under a depreciation method.

General and administrative costs make up the rest of your fixed cost of providing products to customers. An examination of your fixed costs is not complete without examining your processes. Every duplicate process must be eliminated in order to produce efficiencies that can improve profit margin.

If you have not implemented bar-coding, perpetual inventory management, document imaging, batch cash posting and electronic claims filing for the vast majority of your billing, you have room to improve your efficiency.

Competitive bidding means that in the long run, the most efficient participants win. Needless to say, controlling costs is a large portion of a winning strategy.

Using all of the features your software offers coupled with the right software will allow you to operate with a complete information set to make the most informed decisions.

Roberta Domos is the owner and president of Domos HME Consulting Group, a national, full-service consulting firm that provides accreditation, reimbursement and operations support to DME providers. She can be contacted at (425) 882-9706 or through her Web site at hmeconsulting.com.