Competitive Bidding – More Fallout

Competitive Bidding – More Fallout

Taking a closer look at the results from the first round of competitive bidding it’s easy to understand why investors are concerned. As Diabetic Investor reported yesterday CMS announced cuts in reimbursement of 43% on mail order diabetic supplies. Under the old reimbursement rates companies were allowed $82.68 per month which has been cut to $47.53 per month. While the $47.53 covers 8 different supply categories, the most profitable item hit was test strips for glucose monitors.

In this critical supply category and profit center the winning bids ranged from a high of $23.08 to a low of $17.80 for a box of 50 test strips. To understand just how drastic a cut this is the lowest retail price Diabetic Investor could find for a box of 50 test strips was $21.94 for Wal Mart’s Reli-On meter. CVS and Walgreens test strips made by Home Diagnostics (NASDAQ: HDIX) are priced at $34.99 and $26.99 respectively for a box of 50. The lowest name brand product was the Accu-Chek Active which cost $29.34 for a box of 50.

Lost in much of the analysis that’s been done so far is even though supply company’s can purchase test strips below their winning bids, this does not take into account the cost to process an order and service the customer. Larger companies such as Liberty, CCS or Byram can spread this cost over a larger patient population and have more sophisticated, lower cost order processing systems. The problem with the winning bidders is that 64% are small suppliers with revenues of $3.5 million or less. It’s unlikely these smaller companies have the resources or sophisticated systems to process orders cost efficiently and handle the additional burden of customer service. According to industry sources order processing costs for these smaller players range from $50 to $75 per order.

Which brings us to the $64 question; Will these smaller players be able to make a profit? The entire competitive bidding process might just backfire on CMS if these small companies are unable to survive with such thin margins. Even worse these same companies will be forced to buy cheaper, less reliable meters creating greater costs in the long run. More than likely with margins so thin they will be unable to afford any quality customer support, making the patient the ultimate loser.

Although a glucose monitor does not appear to be a complicated device meter company receive millions of customer service calls each year. This is particularly true with meters that require coding. The fact is used without proper instruction meters can yield inaccurate readings.

Everyone is already well aware that the majority of patients do not monitor their glucose levels as frequently as they should. Diabetic Investor believes this will only get worse without the ability to receive customer support or being forced to use less reliable albeit cheaper monitors.

No one will disagree that the government needed to do something in an attempt to control the growing cost of diabetes. A goal that could have easily been accomplished by instituting an across the board 15% cut in reimbursement. In the long run the move to cut costs by the government may actually end up costing the government even more money. As everyone knows poorly controlled diabetes leads to cardiovascular problems, blindness and amputations. Rather than encourage more frequent testing and patient education, CMS has done the opposite. Once again the patient is the real loser here.

David Kliff
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