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.
Second, it must be remembered that the result from the following algorithm is really the answer to “What will my profit margin be if we don't win the bid?” Also remember that management's role is to find the appropriate ways to adjust to the business environment, so the answer from the algorithm may not be the final word in the matter.
The algorithm is:
(Total Revenue-Revenue at Risk)-(Cost of Goods-Cost of Goods
at Risk)-G&A Expenses/(Total Revenue-Revenue at Risk)=Projected
Net Profit Margin
Or
(Projected Revenue-Projected Cost of Goods-G&A
Expenses)/Projected Revenue=Projected Net Profit Margin
Note these tips on using the algorithm, then assess your company's risk from competitive bidding:
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Total revenue is from all lines and all payers. Use the recent annual amount.
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Revenue at risk is the revenue that could be lost as a result of competitive bidding. Use annual revenue allowed.
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Use the total cost of goods as reported on the income statement.
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Cost of goods at risk is the sum of annual purchases that would go away if the bid is lost.
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G&A is general and administrative expenses.
Remember that the result of this calculation only represents certainty if (1) a company is in a competition area and elects not to participate to some extent; or (2) a company in a competition area is not awarded a contract and does not alter its operations.
The purpose of this assessment is to allow home care companies to develop appropriate plans for competing. Using it may lead some to conclude that they should not submit a bid.
Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. He can be reached at 321/752-4514 or by e-mail at wweeks@weeksgroup.com.
