Memorandum

CMS announces national mail order competitive bidding program results for diabetic supplies; strip payment reduced 68% – February 13, 2013

Executive Highlights

  • On January 30, the Centers for Medicare and Medicaid Services announced the results of the national mail order competitive bidding program for diabetic supplies. The allowable payment for a 50-count box of strips will be $10.41 ($0.21 per strip), down 68% from $32.50 ($0.65 per strip) currently.
  • On April 1, the current payment amounts for mail order (i.e., $32.50 for a 50-count box of strips) will be applied to the retail arena. On July 1, the new national payment amounts as determined by the national competitive bidding program for diabetic supplies (i.e., $10.41 payment amount for a 50- count box of strips) will go into effect in both the mail order and retail arena.

On January 30, the Centers for Medicare and Medicaid Services (CMS) announced its new allowable payment for mail order blood glucose strips – $10.41 per 50-count box ($0.21 per strip), down 68% from the current allowable payment of $32.50 ($0.65 per strip). The reduction is part of CMS' national mail order (NMO) competitive bidding program for diabetes care supplies. The new payment amounts are scheduled to take effect on July 1. Payment amounts for mail order diabetic supplies will also be applied to the retail arena, as mandated by the 2012 American Taxpayer Relief Act (ATRA) (better known as the “fiscal cliff bill”). Beginning April 1, the current payment amounts for mail order diabetic supplies will be applied to retail and beginning July 1 the NMO payment amounts will be applied to retail. This means that the allowable retail payment amounts for a 50-count box of strips will decrease from the current retail amount of $35.91 ($0.72 per strip) to the current mail order amount of $32.50 on April 1 ($0.65 per strip), and to the NMO payment amount of $10.41 on July 1 ($0.21 per strip).

The new costs of strips are startlingly low compared to current CMS fee schedules for mail order strips ($0.65 per strip) and compared to the results of the Round 1 Rebid program ($0.28-$0.31 per strip). For background on the competitive bidding rounds and results, please see the primer at the end of this report. However, we note that within the blood glucose monitor industry there is precedence for lower bids (as a reminder, the $10.41 payment amount [$0.21 per strip] is determined by the median of the winning bids selected by CMS). Notably, in August 2012, Walmart introduced the ReliOn Prime program, which sells test strips in Walmart stores at $9 per 50-count box ($0.18 per strip). Although not a loss leader per se, Wal-Mart obviously has other profitability goals related to pulling people with diabetes into the store. Another example comes from the US Department of Defense, for whom Abbott Diabetes Care supplies Military Treatment Facilities with Precision Xtra strips for $0.23 per strip (payment amount for 2009). We also suspect that such low strip prices exist for third party payers who have forged high-volume supply partnerships with blood glucose monitoring companies (e.g., Kaiser Permanente via an exclusive partnership with J&J LifeScan); in these cases, they are giving lots of volume in exchange for a lower price. With over nine million members, we estimate that Kaiser has upwards of 765,000 people with diabetes who receive Kaiser care (assuming a representative US population such that 8.3% of members have diabetes [National Diabetes Fact Sheet, ADA 2011]).

The question going forward will be how these pricing adjustments will affect patients, payers, retailers, and large, medium, and smaller industry players. While arguably improved access and lower out-of- pocket costs for Medicare patients is a positive (Medicare beneficiaries pay only 20% out-of-pocket for the cost of covered supplies), it remains to be seen if the industry manages to sustain itself. Historically, patients have been helped by the major players effectively subsidizing R&D and education costs for the “no-name brands; what the world will look like without this subsidization remains to be seen. Short- term, it is a definitely positive that CMS would have lower healthcare costs, though we would question over time em>the impact of lower-quality tests. Some patients may simply stop testing and prompt higher costs longer term. It is claimed that no complaints were logged from patients during the test but we would question whether this would be the case across the board if all higher quality strips disappeared. Overall, the longer-term effects on product innovation, diabetes device industry welfare, and patient care quality are less easy to discern. In an increasingly margin-squeezed industry, it will clearly be harder for brand name players to operate at a profit, maintain high quality, and invest in R&D to make better products that drive patients outcomes. Whether or not the top people will stay in the field is also a major question.

  • If these prices “stick”, future device innovation will be hampered by lower R&D investment from major blood glucose monitor players. Because R&D spending is usually determined as a percentage of profits, with unwavering price pressure in Europe and growing price pressure in the US, we expect significantly tighter R&D budgets – we assume this will affect both internal innovation and the ability to acquire innovative technology (e.g., how Abbott acquired MediSense in 1996 and TheraSense in 2004, how J&J acquired Inverness in 2001, etc.).
  • The payment adjustment will likely intensify pricing pressure broadly for the blood glucose monitoring industry. Recent quarterly financial updates from the Big Four blood glucose monitor competitors certainly suggest as much. During J&J’s 4Q12 financial update, management partly attributed the company’s US performance (10.6% year-over-year decline for the quarter) to the impact of mail order, which we expect to magnify upon implementation of the national mail order (NMO) program in both the mail order and retail segments. In Abbott’s results call, management forecasted an impact on the company’s 2013 US sales from CMS’ competitive bidding program. Roche’s 4Q12 call also spoke to increasing pricing pressure; however, management did not characterize the US marketplace specifically. For more reading, J&J’s report is available at https://closeconcerns.box.com/s/zw6t88ktm1x8qs9c20w2, Abbott’s report is available at https://closeconcerns.box.com/s/opw9qyhmffbxz5sd1cvs, and Roche’s report is available at http://www.closeconcerns.com/knowledgebase/r/acf5ba2d. Bayer has yet to report. We do point out that many payers are already paying significantly lower prices than Medicare has been paying and so the ripple affect overall, though significant, may not be as large as some forecast.
    • The growing price pressures may motivate companies to accelerate their transition from providing singular healthcare products to healthcare solutions (e.g., from a blood glucose monitor to a blood glucose monitor that sends data to the cloud and presents actionable, automated data and pattern recognition to providers and patients). Indeed, J&J’s recent Medical Device’s Business Review discussed this particular transition, “In the current economic climate, payers are demanding demonstration of the value and impact of glucose monitoring. So in response, we’re proactively partnering with payers on a variety of programs to improve care and demonstrate outcomes.” (Our coverage is included in the 4Q12 report, referenced above.) There is little doubt in our mind that the effects of pricing pressure are poised to have negative consequences on R&D spending and product innovation. However, we believe it is a positive for patients that companies will increasingly focus on creative partnerships with industry and more holistic, solutions-oriented approaches to diabetes care.
    • Potentially, blood glucose monitoring companies may seek greater profit margins on meters to compensate for lower strip prices (importantly, the competitive bidding process did not include meters). Broadly, however, we imagine it will be difficult for companies to move away from the “razor blade” model (low or zero margins on meters, higher margins on strips) given that the system is both ingrained in sales strategy and that low cost meters are expected by patients. Certainly, companies will have to creatively approach overall sales and company structures to find potential cost- saving strategies.
  • It’s possible that the Big Four blood glucose monitoring companies (Roche, J&J, Abbott, Bayer) have already weathered some of the negative impact of this program. CMS has an anti-switching provision that prevents Medicare suppliers from “influencing or incentivizing” patients to switch to a new brand to another. In other words, a supplier will not be able to offer coupons or discounts to persuade patients to switch to lower-cost meters and strips. Consequently, we imagine that suppliers would have switched consumers to lower-cost brands prior to CMS’ issuance of NMO competitive bidding contracts. The indirect effects of the lower Medicare payments (e.g., pricing pressure that results in lower attainable profit margins) are likely still impending.
  • In light of this news, we expect industry to fight against the new price. Campaigns could be grounded in several arguments, including: 1) concerns about product quality and strip accuracy; 2) reduced budgets to invest in R&D and create products that make it easier to manage diabetes; 3) the competitive bidding process, in general; and 4) patient access to brand name products. The 50% percent rule and anti-switching provision (see below) were implemented to address this latter concern, but is difficult to discern whether access will be appropriately protected.
    • The new proposed ISO standards may help alleviate some product quality concerns by moving the entire industry towards greater accuracy. However, the lower strip prices will likely mean less money to invest in better manufacturing and product innovation – if certain manufacturers cannot meet the standards, this may force many to exit the business or consolidate. The most recent timeline projection for the new ISO standards came during EASD 2012: Dr. Lutz Heinemann (Science & Co., Dusseldorf, Germany) commented that the new standards could come into effect in early 2013. As a reminder, the current ISO accuracy standard is that >95% of the results must be within15 mg/dl [<75 mg/dl] or 20% [>75 mg/dl]. According to Dr. Heinemann, the proposed standard is that >95% of the results must be within 15 mg/dl [<100 mg/dl] and within15% [>100 mg/dl]). See page 257 of our EASD full report for Dr. Heinemann’sdiscussion: http://www.closeconcerns.com/knowledgebase/r/5bd05a97.
    • The general effectiveness of CMS competitive bidding auctions have been widely questioned. The most notable example of this is an open letter to President Obama, signed by 244 economists, expressing concerns about the quality of the data obtained from competitive bidding auctions in general. The signers suggest that by allowing non-binding bids and by setting the contract equal to the median of the winning bids, the CMS system incentivizes “low-ball bids” that cannot be realistically implemented. They also take issue with the system’s lack of transparency with regard to how many winners each auction has. To read the letter, which further details concern about the fundamental flaws of competitive auction, please seehttp://www.cramton.umd.edu/papers2010-2014/further-comments-of-concerned- auction-experts-on-medicare-bidding.pdf.
  • Potentially, winning suppliers could choose not to accept their CMS contract – as noted above, bids are nonbinding and national payment amounts are determined based on the median of winning bids. Since the final payment is a median amount, it will likely be lower than presumably some suppliers would accept. We wonder what companies bid at less than the median price, as well as whether these bids would provide them with any profit margins.

COMPETITIVE BIDDING PRIMER

The durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) competitive bidding program was created in December 2003 and has since held three rounds of bidding – Round 1, Round 1 Rebid, and Round 2. The national mail order (NMO) competitive bidding program for diabetic supplies was conducted in concert with Round 2. The 2013 American Tax Relief Act mandated that the NMO program results be applied to the retail setting as well. The single payment prices established by the NMO are set to go into effect in both the mail order and retail segment July 1. For a brief review of the competitive bidding program, we’ve included a timeline below.

  • December 2003 – The Medicare Prescription Drug, Improvement, and Modernization Act established the durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) competitive bidding program, in which CMS solicits bids from contractors for selected DMEPOS products. The program was intended to reduce costs to CMS and Medicare beneficiaries. The first round of competitive bidding, Round 1, was held in ten metropolitan statistical areas (MSAs; defined by the US Office of Management and Budget based on population density) in 2007. Importantly, mail order diabetic supplies were included under selected DMEPOS products.
  • July 2008 – Round 1 single payment amounts for competitive bidding products went into effect in 10 MSAs; however, after two weeks, the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) terminated supplier contracts in order to implement bidding process changes. Though MIPPA delayed the competitive bidding program, it simultaneously imposed a nationwide 9.5% reduction for all Round 1 items in 2009. At this time, CMS planned to conduct a Round 1 Rebid in 2009, a Round 2 program in 2011 in 70 additional MSAs, and a national mail- 0rder (NMO) competitive bidding program for diabetic supplies to be implemented after 2010.
  • March 2010 – The Affordable Care Act of 2010 expanded the Round 2 program to include 91 MSAs and mandated that all areas of the country would be subject to competitive bidding programs or beholden to competitively bid rates by 2016.
  • November 2010 – CMS announced that the national mail-order competition for diabetes care supplies would be conducted in 2011. Additionally, CMS finalized the 50-Percent Rule and Anti- Switching Provision as part of the competitive bidding program. The former “required bidders for mail order diabetic supplies to demonstrate that their bids cover at least 50 percent, by volume, of all types of diabetic testing strips on the market.” The latter “prohibits contract suppliers from influencing or incentivizing beneficiaries to switch their current glucose monitor and testing supplies brand to another brand.” For a fuller description, please see CMS’ publication at http://www.dmecompetitivebid.com/Palmetto/Cbic.nsf/files/R2_Fact_Sheet_Mail- Order_Diabetic_Supplies.pdf/$FIle/R2_Fact_Sheet_Mail-Order_Diabetic_Supplies.pdf.
  • January 2011 – The Round 1 Rebid Program went into effect in nine metropolitan areas. The bidding resulted in an average 55% price decrease for mail order strips in these nine locales, as the Medicare payment for a 50-count box of strips dropped to $13.88 - $15.62 (average: $14.62). Prior to Round 1 Rebid, CMS payments for mail order strips in the nine metropolitan areas averaged $37.55 per 50-count box of strips in the retail segment and $32.36 in the mail-order segment. Nationwide, retail averaged $37.67 and mail order $32.47.
  • July 2012 – CMS hosted an open public meeting regarding the inherent reasonableness (IR) of Medicare fee schedule amounts for non-mail order (retail) diabetic testing supplies. IR authority is used to change Medicare payments that are deemed “grossly excessive” – at least 15% higher than appropriate. To this end, CMS could chose to evoke its IR authority and apply competitive bidding prices from the mail order diabetic supply program to the retail setting. For our coverage of the open floor discussion, please see our July 25, 2012 Closer Look at http://www.closeconcerns.com/knowledgebase/r/a8833356. Overall, while we felt the public generally supported using IR to lower long-term medical costs, great contention existed as to whether CMS should bring retail payment amounts in line with the results of competitive bidding in the mail order arena.
  • January 2013 (a) – The American Tax Relief Act (ATRA) stipulated that CMS’ current payment adjustment for diabetes care mail order supplies (i.e., the 9.5% payment reduction established by MIPPA July 2008) be applied to the retail arena in April 2013, and that payments established under the national mail order competitive bidding program for diabetic supplies (i.e., the $10.41 single payment amount for 50-count box of strips) be applied to the retail arena July 2013. The new legislation can be found in section 636 of the ATRA at: http://www.govtrack.us/congress/bills/112/hr8/text.
  • January 2013 (b) – CMS announced the results of the national mail order diabetic supply and Round 2 competitive bidding program. According to CMS, the NMO program has resulted in a 72% average payment reduction from current fee schedule amounts, with average Medicare allowable monthly payments for mail order diabetic supplies (e.g., strips, lancets, batteries) decreasing from $77.90 to $22.47. CMS intends to announce contract suppliers in spring 2013 and for the program to go into effect July 1. For CMS’ press release, please see http://op.bna.com/hl.nsf/id/nwel- 94fslg/$File/DME%20CB%20Media%20Fact%20Sheet%20FINAL.pdf. The full listing of diabetes care products and competitive bidding payment amounts can be seen here: http://www.dmecompetitivebid.com/Palmetto/Cbicrd2.Nsf/files/NMO_SPA_Chart.pdf/$File/N MO_SPA_Chart.pdf.
  • For a deeper dive, Director of CMS’ Chronic Care Policy Group Laurence Hirsch’s congressional testimonial on competitive bidding gives additional background and explanation of the process: http://www.hhs.gov/asl/testify/2012/09/t20120911a.html.

Close Concerns Questions

Q: What percentage of Big Four sales/strip volume goes to CMS?

Q: Will private payers demand lower prices as a result of the new payment amounts? For example, via exclusive supply agreements?

Q: Will patients experience any out-of-pocket benefits from the lower payments? If so, will the lower prices incentivize them to test more often?

 

Q: Will strip reimbursements for non-insulin using type 2s be impacted in the longer-term (i.e., resemble current European reimbursement paradigms)?

Q: Will companies be able to profitably supply strips at the new rates? Q: Will R&D investment and product features decline?

Q: Will the program have any unintended consequences on CGM?

Q: What innovative approaches will companies use in the face of lower profit margins? Will R&D be allocated to new cost-cutting strategies? To demonstrating outcomes? To integrating care?

Q: Will companies consolidate? Will there be more acquisitions in the future at lower valuations?

Q: Will increasing pricing pressure further fragment the market (i.e., by motivating companies to either pursue high volume, low product margin sales or low volume, high product margin sales)?

-- by Kira Maker, Adam Brown, and Kelly Close