Pharmacology Update
Buried within approximately 700 pages of complex, often confusing legislation, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) contains significant changes and reforms that wait to be unleashed on service providers of home health care. The behemoth legislation easily separates into two components: The prescription drug coverage segment and the first set of significant changes to the balance of Medicare provisions in 40 years. The prescription drug coverage part is voluntary. Beneficiaries need not subscribe, and indeed might find cheaper ways to purchase their medication. However, the reforms or modernization aspect of the bill will directly impact many aspects of home health care, including general and respiratory services.
In typical government style, the legislation describes what must be done, but not how. Service providers therefore ask appropriate and probing questions about how the new legislation will impact business practices. Provident Healthcare Partners has analyzed the changes and summarized five key issues that should be on the radar screen for every home care provider.
1. Demand for Services
Demand for services will increase. A very familiar set of circumstances combined with new reforms will make service provision more attractive. While the population of Medicare beneficiaries steadily increases, substantial efforts continue to decrease the length of hospital stays, which often means early discharge and follow-up with home care. In addition, newer same- day and outpatient surgical techniques appear with amazing regularity and often require temporary, post-operative home care. Some key revenue enhancement features include:
Recognition of nurse practitioners as attending physicians in hospice programs.
Attractive financial incentives to drive more beneficiaries into managed care plans.
Coverage of preventive services will tap into a reservoir of untreated patients who will require various health care services.
New coverage of demonstration programs that will focus on outreach, consumer directed and continuity care for chronic diseases, even to the inclusion of pediatric palliative care.
Greater payments for rural providers, under Part A and B service rates, will also promote increased use of services.
More injectables will be recognized for reimbursement.
2. Reimbursement Considerations
In spite of increasing the scope and patient base for service provision, the MMA does contain some weighty policies regarding reimbursement. Most revolve around those payments that have been frozen or reduced:
For infusion services, drug payments have been frozen to 10/1/03 AWP levels.
For inhalation services, reimbursement is at 85 percent of AWP. Starting in 2005, a new cost base will be recognized, the average sale price (ASP), in an effort to stem cost overpayments that have occurred from the use of AWP.
Ambulatory surgical centers will experience a reduction in payments and a freeze in rates as movement towards a prospective payment system progresses.
A reduction and freeze in rates at a time when more beneficiaries are being solicited and more emphasis placed on preventive care is concerning.
3. Competitive Bidding
This part of the bill has implications for DME providers, including those who fabricate and supply orthotics. Competitive bidding is scheduled to begin in 2007. Points to consider include:
-A five-year freeze in the CPI on supplies is not subject to competitive bidding.
-A reduction in payments for certain ?off the shelf? items in 2005. In this regard, the bill looks at payments made under the Federal Employees Health Benefit Program (FEHBP) as a model for Medicare reform, a position not universally accepted. Data published by the Office of the Inspector General (OIG) in 2002 suggest reductions could be made in the range of 3 percent to 22 percent.
4. Accreditation and Quality Standards
-As has been the widespread experience with NCQA, JCAHO and other health provider's review and examination programs, mandatory accreditation will herald yet a new era in home health care paperwork. Providers will be faced with:
-The necessity of face-to-face patient encounters to create a prescription for reimbursable items such as wheelchairs.
-Adherence to quality standards (many of which wait to be written by the Secretary).
-Review by accrediting agencies.
-Much more paperwork.
5. Medicare Payment Advisory Commission (MedPac)
This aspect of the MMA portends a negative impact on service providers. Established in 1997, MedPac will study home health care profit margins. Perhaps as a result for the current and popular cry for transparency in business relationships, the study will likely result in further payment cuts.
These five select areas suggest that there are no easy answers to questions of business profitability and growth. Every situation is unique. The MMA was forged in a political frenzy of disagreement and partisan posturing.
After only a few months, allegations of data misrepresentation to Congress have surfaced and started the political fires burning again. While most analysts suggest that it is unlikely that the bill in its entirety would be repealed, there could be substantive reforms to the reforms in the process, and the business landscape could once again mutate.
While many respiratory therapy and home health care providers have already cut expenses, they may be forced to take additional cost management measures. Balancing a company?s fiscal health, while keeping abreast of regulatory changes and providing and maintaining quality services, is a monumental juggling act.
The economic ripple has already started, but even in the midst of this challenging environment, there are reasons for optimism as HME providers consider their strategic alternatives. This transitional period may be the perfect time to rethink the future--and plan for it.
To help RT and HME providers focus on the future, particularly in the face of these Medicare reimbursement cuts and the changing landscape, Provident Healthcare Partners recommends that service providers seriously consider several business strategies:
Shoestring Operations
Streamlining operations and reducing overhead are extremely effective strategies for improving margins, provided that the quality of services offered isn't negatively impacted. While larger players will certainly be affected by Medicare's new rules, they have the size and scale to withstand such changes. They also have the financial resources to grow their customer base, particularly if their small competitors raise prices or face lapses in quality of service.
Diversification
Adding new revenue streams seems like an obvious idea, particularly if you have a solid and loyal client base, willing to embrace added offerings. Diversification through the addition of new product lines is often a capital-intensive activity. Time, manpower and overhead must be considered, particularly with an emphasis on cost management. Factors to be weighed should include: Management expertise, personnel requirements, initial cash output and return on investments, to name but a few. Boosting marketing, sales and advertising also will build revenue; however these options require free capital and solid cash flow management. Benefits beyond improvement to the bottom line could include cross-sell opportunities and retention of customers.
Strong patient bases will help weather the changes, hence current growth through acquisitions, expansion or partnerships would be advisable. Despite the Medicare Prescription Drug Act's negative impact on RT and HME reimbursement, large health care companies are still investing in growth strategies, including making strategic acquisitions. Many market leaders are eager to add to their patient base before their competitors do, and they're doing it through external growth.
Why is this? Medicare's cuts signal a decrease in the total market dollars available, making each customer incrementally more important. Buyers, such as Lincare and Apria, are in constant pursuit of strategic acquisition candidates, and their ability to successfully complete key acquisitions is critical to their growth and expansion plans during the next few years. Consolidation remains strong because strategic acquisitions increase market share while simultaneously giving an acquirer a quick competitive advantage.
While many industry experts say it's too early to predict the specific impact the Medicare reform will have on the market, all agree that it has changed and RT and HME providers will have to change with it.
This article originally appeared in the June 2004 issue of HME Business.