Oxygen Outlook

• By David Kopf
• Feb 12, 2008

How can providers bridge the gulf between regulatory reality and sustained profitability

No segment of the HME provider industry better illustrates how providers must deal with a rapidly changing marketplace. Fortunately, there is a solution: with a blend of technology and revised business models, they just might be able to chart a new course that twists and winds the through rocks and crags sprouting up around them. But they have a limited window of opportunity in which to do it; 2008 will be the year to make that change happen.

For years, oxygen has always been a stable and steady business: Patients needed oxygen services, and providers delivered them the products and the refill services that sustained those patients. Providers also managed the equipment and ensured that patients had access to the latest offerings available. But all that has gone out the window.

The Problems
“I think 2008 is gearing up to be the perfect storm,” says Ralph McBride, vice president of business development for HME provider Advanced HomeCare Services. “I think we’re in a fragile industry.”
There’s good reason for alarm: A chief concern is the Centers for Medicare & Medicaid Services’ National Competitive Bidding (NCB) program, which is not only a fait accompli, but has been fast tracked. As we report in this issue’s news section (page 8), CMS has already announced the next 70 metropolitan statistical areas (MSAs) for round two of the competitivebidding program before announcing the results of the first round.

“There are a lot of nervous people in that the winning bidders haven’t been announced in the first 10 MSAs,” says Ron Richard, senior vice president of sales for SeQual Technologies Inc., which manufacturers oxygen equipment.

“Coming from an 18 million-person population MSA that covers 27 counties in three states, I think it’s outrageous to start the next round without seeing what has been accomplished in the first round,” says Tom Ryan, president and CEO of Farmingdale, N.Y. HME provider Homecare Concepts, in regards to the newly announced New York MSA. “I think they need to slow this down and see how this works in some of the smaller MSAs.”

Also, HME providers of home oxygen services are focused on looming rental caps, which go into effect in 2009. As Ryan points out, the industry is already into the rental cap program, and that poses another key problem. Since the rental cap is associated with the patient, rather than the equipment or provider, that means once their 36-month period is up, they are stuck with their oxygen equipment, regardless of what technical advances come along, because there is no possible government reimbursement.

“That’s a huge misstep the government has made on this,” says Joe Priest, President of oxygen system maker Airsep. “With this change in ownership, they’ve ruined it for the patients. The providers will hurt, but the patients will really suffer.

“The shame of it is that it will take a while before patients will start hitting their caps,” he continues. “Providers can tell them, but it’s hard for patients to see what that means.”
To make matters worse, Congress might consider cutting oxygen therapy even more in the name Medicare reimbursement cuts, according to the American Association for Homecare. AAHomecare reported in January that an aide to the Senate Finance Committee specified oxygen as an area for Medicare cuts and that the cuts would come in the form of reduced payment rates instead of shortened rental timelines. A senior staff member for a Ways and Means committee agreed that reduced payment rates would be the preferred method, AAHomecare reported.

That news is more than just industry scuttlebutt. There is good reason to cut (at least from a budgetary standpoint): Congress is trying to postpone physician pay cuts that would otherwise amount to the tune of between $12 billion and $15 billion, it shouldn’t surprise anyone if its gazed landed on home oxygen therapy products.

At the end of the day, the industry faces several “great unknowns” when it comes to assessing what all these changes will do to the business of providing oxygen services.
For instance, rental caps will indeed cut some patients off, but there is already a certain number of patients would stop using the equipment anyway, says Joe Lewarski, vice president of the respiratory group for Invacare.

“For many companies 20 to 25 percent of patients will exceed the 36-month rental cap,”he says. “But at the same time, there’s always been an attrition rate and relatively high turnover of patients. They cycle off their therapy, change therapy, end their therapy or change providers.”
“The magnitude of regulatory changes is yet to be understood,” says Jay Vreeland, director of marketing for the Home Respiratory Care at Respironics Inc. “We all know reimbursement isn’t going to get better. These are definitely challenging times.”

The Opportunities
Regardless of competitive bidding and impending rental caps, the demand for providing oxygen remains — and is poised to grow. Case in point: Chronic Obstructive Pulmonary Disease (COPD) will become the third leading cause of death for Americans by 2020, according to the American Lung Association. The association says 12 million Americans are currently diagnosed with COPD, and estimates an additional 12 million Americans to be undiagnosed COPD sufferers.

Early detection and treatment of varying respiratory disorders will also boost oxygen patient numbers, especially considering the increased COPD awareness efforts in the healthcare industry in general, SeQual’s Richard notes.

With patient need that is growing by leaps and bounds, there is obviously a strong marketplace for oxygen services. But how should HME providers position themselves despite all the regulatory and reimbursement problems they face in order to best deliver oxygen products and services this year?

The Solutions
“I think HME providers can look at this from two different perspectives,” Lewarski says. “One is to look at where the technology is going and how it will help their business. The other is to look at where the industry is headed.”

Where products are concerned, Lewarski says HME providers should not expect any “paradigm changing” technologies to enter the market. Instead, he says the focus will remain on portable oxygen concentrators (POCs) and transfilling systems, which dramatically reduce oxygen business overhead by eliminating the need to deliver refills. The entire business model of refilling oxygen is costly because of all the infrastructure involved. Diminishing those overhead costs in the face of reduced reimbursement could be the key piece to the puzzle of surviving this uncertain market.

The traditional model of delivering and refilling oxygen services is dominated by service overhead. All those trucks and drivers and maintenance staff making regular runs to patient locations accounts for at least 70 percent of oxygen business overhead, Richard says. Whereas the up-front capital expenditure for technology hovers between 25 percent and 28 percent, he says.

“Delivery is an unproductive use of time – there is no therapy or education that goes with it,” Priest says. “It’s just a truck that delivers.”
“If you’re not looking at no-delivery modalities, you’re behind the game,” McBride says.
While POCs and transfilling systems do have a higher cost of entry, Vreeland says transitioning to a non-delivery model still greatly eliminates that overhead. Homecare Concepts’ Ryan says his business has seen decreased operations expenditures after investing in POCs and transfilling systems. “Obviously, the cost for the products is significant, yet we felt this was
the way to go,” he adds.

Moreover, now that POCs and transfilling systems have had some time on the market and have matured and been refined “now is a good time, if not a better time to jump in” and invest, Lewarski says.
POCs are of particular interest to Priest and Vreeland, because of the increasing numbers of ambulatory oxygen users, which make up approximately 60 percent of overall oxygen users, according to Priest. “Over the next three to seven years, I think we will see POCs go from single digit use to more than 50 percent,” Priest says.

“I think 2008 really will be the year of the POC,” Vreeland adds, citing POC’s ability to let patients travel and live their lives to their fullest. Furthermore, he adds that POCs give patients control over their devices. They can choose to go on battery power, or plug them in via the recharger, just like a laptop or any other portable electronic used nationwide.

However, Lewarski advises that technology is only part of the puzzle. Providers need to spend equal time – and perhaps more – ensuring that their business model matches the industry’s changing conditions.
“In the face of that, providers are starting to appreciate that you have to be more efficient in the delivery of care and service,” he says. “Most of the answers revolve around removing costs without diminishing service.”
Involving, Educating Patients The silent majority in this landscape is the patients. Ultimately, rental caps, competitive bidding and the difficulties those regulatory changes make for HME providers all trickle down to the patients — and that might be an ace in the hole for providers.

Patients who cannot get new technologies, or who are forced into ownership of equipment they would rather rent are the final pressure point. And with increasing numbers of oxygen users, that point of pain could result in a political backlash for over-zealous regulators. Enough emails, phone calls and angry letters to enough

Congress members could reverse things in the patients’ — and providers — favor.
“The patients are wonderful advocates,” Ryan says. “I think it’s prudent on the part of providers to let their patients know that in a short period of time that they are set to own their equipment, and let them know it is becoming theirs. It’ll be a shock to some.”
“We need to have everyone of our patients get on the phone with their Congress members,” Advanced HomeCare Services’ McBride explains. “It needs to be real.”

Another part of that reality is that providers should also have direct dialogs with their representatives on the Hill. If, as former Speaker of the House Tip O’Neil said, “all politics is local,” then a face-to-face meeting between a provider and his or her representative might have some traction when it comes to reversing legislation and regulation. At the least it will demonstrate that, contrary to popular media scare stories, HME providers run reputable businesses that provide a vital service in their voting districts.
“We’re the whipping boy,” McBride says. “I think more providers need to invite their representatives to visit them in their place of business."

Cash Sales
There is another way HME providers can leverage patient sentiments, as well: Capitalize on their willingness to take Medicare out of the equation altogether. Richard points out that as more baby boomers reach retirement, they will have deep enough pockets to afford products such as POCs, which will let them get the most of life, regardless of whether or not they’ll be reimbursed. Cash sales could be a key element of a healthy oxygen business.

“If I were a dealer right now, I’d be switching gears a bit, and looking at how I can fix up my retail business — improving the floor space and things like that,” Richard says. “I’d still strive to match products to patient needs, but you can give them more options.”

And of course, that will present new sales challenges to HME providers, especially as patients become increasingly savvy about their product options. In the era of easy online research, Priest says Airsep now receives 10 to 20 direct patient inquiries a day about its products.
“I do believe there is going to be an education of the patient that historically did not exist,” Priest says.

“Previously, patients bought what they got. Now they can recognize features and benefits between models.
Priest adds that it is still providers who will ultimately make the patient-product connection. “Sales happen on the floor,” he says. “You have to have a face-to-face meeting, as well as education and implementation, and that is an in-person process.”

In terms of timing, the manufacturers and providers interviewed for this story all advise that HME providers must act sooner, rather than later to create those efficiencies, rather than wait for any new earth-shattering technologies or last minute Capitol Hill calvary charges to ride to the rescue. Now is the time to act.            “If I’m sitting around waiting for something new to change my business, then I’m probably going to miss the bus,” Lewarski says.
  

This article originally appeared in the February 2008 issue of HME Business.