Medicare's new policy strains small firms

— -- Ron Rudderman, who runs a small company in Florida that sells mail-order glucose meters, test strips and other items needed by diabetics, is caught up in a big change sweeping Medicare.

For the first time, Medicare is requiring companies that sell products in 10 broad categories, including diabetic supplies, wheelchairs and oxygen equipment, to compete for the government's business.

The change could save the government program billions, but possibly cause thousands of small companies to close, merge or sell.

The competitive bidding policy will replace the current way Medicare pays for those medical supplies, which is based on a "fee schedule" determined by the agency. After years of debate, including concerns from some businesses and consumer advocates that the move could result in less choice for patients, bids for the first 10 metropolitan areas in the program were submitted Tuesday.

From those bids, Medicare will set a specific amount it will pay for each item, such as a glucose meter or a walker, then select the winning contractors, setting aside about 30% of the slots for small companies with less than $3.5 million in annual revenue. Winners will be announced in March.

Bids from another 70 metropolitan areas will by added next year. By 2010, most of the USA will be included.

Based on pilot tests, Medicare estimates that competitive bidding will save the agency $1 billion a year by 2010. Patients, too, may save. As prices come down, patients will pay less for their share of costs for medical equipment.

But the agency acknowledges that suppliers will be "significantly impacted" by the new rules. The move may fuel merger and sales activity among companies affected by competitive bidding, which was called for in the Medicare Modernization Act of 2003.

In August, Medco Health Solutions, mhs one of the nation's largest pharmacy benefit managers, said it would purchase PolyMedica plmd for $1.5 billion in cash. PolyMedica includes Liberty Medical, which is the nation's largest mail-order diabetic-supply company. Liberty is well-positioned to submit lower-cost bids than smaller competitors.

Among smaller home care companies, decisions to bid for the business, stay out or sell have consumed owners.

Rudderman, who has run his company for 11 years, decided to sell, estimating that a business with a "couple of thousand" customers would not long be able to compete.

"While I was not 'forced' to sell my company, these conditions are creating an environment that makes it increasingly difficult to remain in business without serious risk of seeing the value of my company diminish," says Rudderman, whose Diabetic Medical Supply company in Coral Springs, Fla., will close at the end of October.

If he did not win a bid, Rudderman estimated an initial 10% to 15% loss in revenue, followed by up to 50% loss when the program goes nationwide.

Still, some observers say they aren't seeing a lot of sales activity yet, with buyers sitting it out, waiting to see the prices set by Medicare.

"Buyers hate unknowns," says Dexter Braff of the Braff Group, a health care services merger and acquisitions company in Pittsburgh. "There is a lot of fear that prices (set by Medicare) could be bizarrely low. If they are, people will say 'I don't want to do it at all.' "

Diabetic supplies, wheelchairs and home-oxygen equipment suppliers representing more than $7 billion worth of purchases by Medicare are among the vendors covered by the program's first phase. "The government is estimating a savings of 25% (from this strategy), although Wall Street is estimating a more conservative 10% to 15% savings," says Jennifer Bowman, director at Avalere Health, a private research group in Washington.

Medicare estimates that 15,973 suppliers, most of whom are small businesses, will submit bids in the first round. Of those, an estimated 60%, or 9,584, will win contracts.

"If you're going to let the free market work, it has to be dog-eat-dog. This is a precursor to a whole different philosophy (by Medicare) on how to do health care," says Robert Laszewski, of Health Policy and Strategy Associates, a consulting firm whose clients include health insurers. "The most efficient players will dominate."