Understanding Demand & Capacity

CMS has provided the last pieces of the puzzle for DME suppliers interested in submitting bids for Round 2021.  Together, beneficiary demand and bidder capacity drive the bid price, which CMS calls “maximum winning bid” (i.e., clearing price) for the lead item. That clearing price will set the bid price, called the “single payment amount” or SPA.  While CMS sets demand, each supplier submitting a bid provides its capacity, which includes historical capacity and estimated future capacity, which is the “number of lead item units that (a supplier) believe(s it) can furnish in the competitive bidding area (CBA) in one calendar year.” 

CMS ranks bidders from lowest bid amount to highest bid amount. CMS then uses the bidders’ capacities to determine where the bidders’ capacities equal demand, starting with the lowest bid amount and working up.  The greater a bidder’s capacity, the fewer suppliers will be needed to establish the maximum winning bid, which will lead to a lower SPA.  Here is an example, which assumes demand to be 100 units.

Situation A

In the table below, the Maximum Winning Bid is $90 because demand is fulfilled working up from bidder 1 to 7.

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situation b

In the table below, the Maximum Winning Bid is $86 because demand is fulfilled working up from bidder 1 to 6.

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For the first time, CMS has set forth guidance about beneficiary demand and bidder capacity available HERE.

Defining Demand:  CMS determines beneficiary demand for each lead item and provides it as part of the bid sheets.  Along with capacity, the definition of demand will determine how many bidders will be awarded contracts.  To determine demand, CMS will:

  • Determine the actual historic beneficiary utilization of each lead item

  • CMS will increase that historical utilization by

  • The estimated increase in the number of beneficiaries in the CBA; and

  • The estimated increase in utilization of the lead item in the CBA

Defining Capacity:  Each bidder defines its estimated capacity. First, CMS will determine if the bidder meets the “minimum financial threshold.” To determine if the threshold is met, CMS will use the bidder’s standard financial ratio, credit report and credit score/rating.

If the bidder meets the financial threshold, CMS will use the greater of the bidder’s estimated capacity or its historic capacity. CMS will also cap the bidder’s capacity at 20 percent of the demand amount CMS determined. This step allows CMS to ensure there are at least five suppliers in each CBA for each product category.

In some instances, CMS may adjust a bidder’s estimated capacity down. If the bidder has no experience in the product category or CBA, CMS will adjust the bidder’s capacity to zero. However, if a bidder has experience in both the product category and the CBA, CMS will use the highest capacity amount (estimated or historic). If a bidder has experience providing the product category, but not in the CBA, CMS will apply a formula and discount the estimated capacity by the resulting percentage. If a bidder’s capacity is lowered and CMS determines demand for the CBA/product category has not been met, then additional bidders will be added until the capacity is met, which will increase the SPA.  This step will result in higher SPAs than there would have been otherwise.

This means that bidders’ estimated capacity will be an important factor in setting the SPA for each product category in each CBA.

Small Suppliers:   Once the selection of winning suppliers is finalized, the SPA is then set based off the maximum winning bid for the lead item and calculated for all non-lead items. CMS then determines which percentage of bidders in the winning array of bids are small suppliers. If less than 30 percent, CMS will offer a contract to the next eligible small supplier(s) until the 30 percent small supplier target is reached. SPAs are not recalculated when a bidder is added to meet the 30 percent small supplier target.