In the coming days, the Centers for Medicare and Medicaid Services (CMS) is expected to make an announcement that could further depress investor confidence in the prospects of the oxygen equipment and service industry.

The agency is implementing a competitive bidding pilot program in 10 metropolitan areas for oxygen and nine other classes of durable medical equipment. Wall Street anticipates that the winning bids will be substantially lower than current payments.

The combined effect of this anxiety and the actual lost dollars from industry-wide payment reductions taking effect this year is taking its toll on the oxygen suppliers.

 “We know that the outcome will be less” than the current rate set by Medicare regulations, said Chris Kane, the chief operating officer for Pacific Pulmonary Services, a provider based in Novato, Calif. Kane also serves as a spokesman for an industry coalition called the Council for Quality Respiratory Care.

“Competitive bidding is going to transform the landscape of home oxygen therapy,” Kane said. “This will be a very disruptive transition.”

The oxygen industry is steeling itself for CMS’s announcement of the new payment rates under the competitive bidding program. More than 6,300 medical equipment suppliers submitted bids to CMS for the first phase.

In recently issued year-end financial disclosure filings, two publicly traded medical equipment companies acknowledged their Medicare business would suffer. Lincare, which posted revenues of $1.6 billion in 2007, projects that its 2008 revenues could decline by as much as $70 million in the Medicare market.

Lincare and Apria Healthcare, a similarly sized company, this week endured a Deutsche Bank analyst’s report that downgraded their ratings to “sell” based in large part on concern about the impact of the new Medicare policies.

For its part, CMS is counting on the bids for oxygen, along with other medical equipment ranging from powerful wheelchairs to diabetes test strips, to come out lower than the current rate. The agency bases its position on the results of small-scale test programs conducted from 1999 to 2002 in communities in Texas and Florida.

The rates, which are based on the median bids, will take effect on July 1. At the same time, CMS will begin accepting bids for an additional 70 metropolitan areas and plans to use the winning bids nationally after 2010.

Kane contended that bids from the companies that are lower than the current payment rates do not necessarily prove that Medicare is overpaying today.

“What’s missing from competitive bidding is a clearly defined service component,” he said. According to Kane, companies that provide fewer ancillary services to patients could low-ball their bids, driving out firms that have higher costs because they offer better-quality service.

But Kane predicts there also could be a longer-term gain: If CMS delivers bad news to the industry, oxygen suppliers could find it easier to plead their case against additional payment reductions on Capitol Hill.

“Moving from the speculative phase to the actual phase will help drive a more meaningful conversation between the industry and Congress,” Kane said.

Bids that come out substantially lower than current payment rates, already reduced by a 2005 law, “will validate what the industry has been saying all along,” Kane said. Oxygen makers maintain not only that their payments have been cut too severely, but that Congress should wait to see the effects of the reduced rates and the competitive bidding program before enacting further changes.

Lawmakers are looking at Medicare spending “through the rearview” without considering the uncertain effects of new policies just now being put in place, he added.

The House last year approved language that, among other things, would shorten the length of time patients pay rental fees on oxygen equipment from 36 months to 13 months, after which they assume ownership. Eager to find spending offsets to pay for other Medicare policy changes, Congress will revisit this legislation this year. Moreover,

President Bush’s fiscal 2009 budget request calls for the same change.

Lawmakers who support this policy change point to a report released by federal auditors in 2006 that compared the retail cost of oxygen equipment with Medicare’s costs in renting the same supplies. According to the Office of

Inspector General for the Department of Health and Human Services, 36 months of rental cost $7,215, compared to $587 to purchase the equipment. The oxygen suppliers protest that this analysis ignores the cost of servicing the equipment.

Meanwhile, the oxygen industry has been gathering allies in its campaign against more legislation. Sens. Blanche Lincoln (D-Ark.) and Pat Roberts (R-Kan.), for example, recently wrote the leaders of the Budget Committee to argue against cutting oxygen rates.

“We believe that further payment reductions this year, coming on top of several recent cuts and an estimated 20 percent reduction that will take effect over the next several months under current law, could jeopardize care for some patients and make benefit reform much more difficult to achieve,” said the letter, which eight other senators also signed. Reps. John Tanner (D-Tenn.) and Phil English (R-Pa.) distributed a similar letter in the House.