Analyst comments on bidding: DME bids appear a bit worse than expected.

Michael Matson is a senior analyst at Wells Fargo Securities and emailed out his analysis of the round 1.2 bids this morning (I'm on his email list). He follows the sleep and negative pressure wound therapy markets, but many of his comments and concerns regarding the round 1.2 bids apply to all HMEs. Here's a summary of his analysis:

* Summary. Yesterday, Medicare published the winning bid amounts from round one of its durable medical equipment (DME) competitive bidding program. On average, the bids are 32% below current reimbursement levels which is worse than the 26% that was seen in the previous aborted round one. And on average, CPAP bids are 34% below current reimbursement levels which is worse than the 29% that was seen in the previous aborted round one. There were no NPWT bids since NPWT was not included in round one (it may be included in round two). The new reimbursement levels go into effect on 1/1/11 in nine cities (9% of US). Medicare will conduct bidding for round two in 2011 with round two reimbursement levels going into effect in 91 cities (64% of US) on 1/1/13. At this point, we expect bidding to reduce ResMed's CY 2011E and CY 2013E EPS by $0.03 and $0.21, respectively, and KCI's CY 2013E EPS by $0.35 (if NPWT is included).

* Bid Levels A Bit Worse Than Expected. We think most investors expected the round one bids to come in 20-30% below current reimbursement. So at 32% below, we think that the bids may be viewed negatively. And since the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) required a 9.5% cut to DME, the new reimbursement levels are actually about 16% lower than those from the previous aborted round one. Here are the average reimbursement declines by category: oxygen, -31%; standard wheelchairs, -23%; complex wheelchairs, -14%; diabetic supplies, -56%; enteral supplies, -28%; CPAP, -34%; hospital beds, -36%; walkers, down 33%; and support surfaces, -49%.

* Medicare Addressed Other Criticisms Of Bidding Program. In the previous aborted round one, HMEs had complained that contracts were being offered to out-of-town firms and that the bidding process was biased towards larger HMEs. On a conference call yesterday, Medicare noted that 72% of the HMEs that will be offered contracts already have a market presence in the areas where they are being offered contracts. Additionally, 48% of the HMEs that will be offered contracts are “small” suppliers with revenues of less than $3.5MM.

* One Key Question Is How Private Insurers React To Medicare Cuts. The impact could be worse if private insurers also cut reimbursement. In our Q2 2010 HME Survey, 89% of respondents expect private insurers to follow Medicare's reimbursement cuts with cuts of their own.

Mike Moran