Home Delivery vs. Non-Delivery

Technology Has Created a Crossroads, But Which Method Will Put Providers on the Road to Success?

• By Elisha Bury
• Jun 01, 2008

Lately, the oxygen business has sounded like the refrain of a country-western song. We've lost funding thanks to cuts, and further losses are pending as Congress threatens to peel back the rental cap even further to 13 or 18 months. With the announcement of winning bidders in the first round of competitive bidding and the projected savings for the Centers for Medicare & Medicaid Services (CMS) of 22-32 percent in some areas, many providers may well lose their oxygen business altogether, even if they didn't lose the bid.

For the past year, the mantra Work smarter, not harder has been heralded as the solution to reimbursement woes. Manufacturers have rolled out technology to reduce deliveries, and GPS technology bent on improving delivery efficiencies is no longer the domain of meandering travelers. But as providers vie for business-sustaining theories to put into practice, which oxygen avenue makes the most sense for the bottom line?

The Truth About Home Delivery

The tried and true oxygen model of delivering tanks to patients on a weekly to monthly basis has seen its popularity slide in recent years, especially as fuel costs continue to soar and reimbursement continues to dwindle. Still, many providers are resistant to change a model that encompasses serious investments in personnel, inventory and trucks, but is this model sustainable?

"When you look at people that are delivering concentrators and cylinders and/or liquid systems, there's definitely an opportunity for those people, even under competitive bidding, if they have volume and density — in other words, a high volume of patients in a dense area," says Tom Williams, managing director of Strategic Dynamics, Scottsdale, Ariz. "The more you spread out from that model, the more difficult it is to make money because your delivery costs are so high on a month-to-month basis."

The challenge for providers then becomes how to create volume and density. A client base that is close together can be switched so that all of those patients get delivered oxygen. Another option is for providers to actively ramp up the volume of patients using delivered oxygen in a geographic area. Another more challenging strategy to increase volume and density is to join forces with a competitor through a merger or buy-out, Williams says.

Patient lifestyle also may dictate a delivery model. "If you have a patient that is only using oxygen at night or is not very active and not using much portable oxygen, in many cases, it may make more sense to stick with a more traditional approach with those sorts of patients," says Kim Snyder, U.S. marketing manager, home respiratory care, Respironics, Murrysville, Pa.

To evaluate if the home delivery model makes sense for your business, consider the following:

Williams says providers have to look toward business efficiencies and not to manufacturers to reduce costs. "Providers should expect manufacturers to start increasing prices, not lowering them," he says. Manufacturers have already done much to reduce costs, including off-shore manufacturing, reducing tradeshow participation and implementing other cost-savings measures.

Get all patients on delivery, whether that's liquid or compressed gas, to create density and volume.

Concentrate the route with fewer drivers and fewer trucks.

Drive down liquid costs by installing a bulk tank on the premises.

For full-line providers, occasional deliveries, if only yearly, could provide opportunities for cross-selling. "As COPD patients age in their disease process, many of them will often need a nebulizer, CPAP, walker, wheelchair, bathroom aids or hospital bed," Williams says.

Full-service providers can also bundle deliveries, such as nutritional feedings and home infusion to create efficiencies, says Joe Lewarski, Invacare's vice president of the Respiratory Products Group, Elyria, Ohio.

Snyder recommends that providers improve cylinder exchange, even if that means something as basic as making sure drivers collect five tanks for every five tanks delivered.

Improve route efficiency by considering a robust GPS system that maps out calls to reduce extraneous mileage.

Consider a hybrid delivery model. Tom Bannon, president of Responsive Respiratory, Fenton, Mo., says using the company's Cyl-Fil, a device that allows patients to self-fill portable tanks from a large one, significantly reduces the amount of deliveries. He says that deliveries for a patient using six cylinders a month can be reduced to once every five months with Cyl-Fil. "You do make a delivery, but if a patient is using six cylinders a month and you see that patient every five months, now you reduce deliveries to twice a year, maybe three times a year," Bannon says. For this model to work, providers must adapt deliveries to handle the large tank size, typically 144 pounds.

Is Non-Delivery the Right Choice?

Technology has spurred growth across many industries, and respiratory is no exception. Innovations by manufacturers have addressed patients' worst fear — running out of oxygen — with devices that allow providers to refill their own cylinders or simply turn on a portable concentrator for instant oxygen.

Though transfilling devices offer a non-delivery strategy, acquisition costs have kept many providers at bay.

"It costs you more to get into it, but you eliminate that delivery cost that's going to be there forever, for as long as the patient is on oxygen," Williams says. Mathematically speaking, if each delivery costs an average of $50 over 36 months, delivery costs could total around $1,800, not counting equipment costs. Even if the non-delivery device costs a little more, Williams says, eliminating the delivery costs will put more money in a provider's pocket in the long run. Studies have shown that many oxygen patients live much longer than three years. The longer the patient lives, the more money a provider makes when using a non-delivery device because that means fewer deliveries.

Snyder says a non-delivery model helps providers get a handle on hard-to-contain factors, like gasoline costs, insurance, driver salaries and vehicle maintenance. According to Williams, a non-delivery model has other benefits as well: reduced inventory, which means providers can work out of a smaller location, and decreased customer service calls from patients who need emergency oxygen deliveries.

"The key here is it's not just simply saying I want to go to this new modality," Williams cautions. "It really requires a change in the business model."

Providers must consider what they will do with trucks, cylinders and personnel because those things cannot be eliminated immediately. Williams says providers should figure out a "phased-in approach," which could increase costs in the short-term.
Lewarski says switching modalities means a change in business philosophy, going from an operation-driven variable expenses to a capital-driven fixed expenses. "It takes a willingness to invest in more capital assets that drive down operational expenses so that you write smaller checks for overtime, fuel, vehicle repairs, etc.," he says. "Overtime, fuel costs and other variable expenses are typically incremental and less visible unless aggregated; they are spread out every two weeks or every four weeks, depending on how you pay your bills and employees, whereas if you invest in a fleet of HomeFills tomorrow you are often looking at a single, large number that you'll have to finance or write a check for."

One major benefit of a non-delivery model is that it eliminates much of the behind-the-scenes processes that go into oxygen delivery, from tracking lot numbers to cleaning and refilling tanks. Transfilling devices are a self-contained system, Lewarski says, which means providers only need to track the initial delivery.

"Many home care companies live by the triage: You treat the urgent issues first," Lewarski says. "In the hierarchy, (it's) new orders and setups, reorder deliveries and then you do the routine things later, which are often very important — follow-up calls to patients, more sales calls, quality assurance programs, paper trails for your benchmarking and your quality assurance." By reducing some of the backend work, employees can be rededicated to concentrate on operational tasks that often slip through the cracks.

Since providers in the past limited their service areas to contain the costs of deliveries, non-delivery brings additional opportunities, especially for small to mid-size providers with one or two locations, says John Lescher, Invacare's director of product management, Elyria, Ohio. "One of the things we're finding is providers who are adopting the non-delivery model are allowing their areas of service to open up," he says. "They're looking to call on areas outside their normal geographical area."

To evaluate if the non-delivery model makes sense for your business, consider the following:

Take a look at your patient base. How many are active or highly active? If it's more than half, a non-delivery model may make sense. If all of your patients are close by, however, delivery could still be viable.

Determine what you will do with unneeded inventory, people who will be downsized and trucks. Consider selling off assets and using the proceeds to purchase non-delivery devices.

Consider restructuring the fleet. Lescher says providers can downsize to smaller vehicles that are more fuel efficient for initial setups of newer technologies.

Formulate a transition plan. Start putting new patients on non-delivery models or start putting patients in certain geographical locations on non-delivery models. Williams cites the example of a provider who decided to implement a non-delivery model. He immediately reduced his trucks and drivers from three to two by switching to a 12-hour workday and delivering six days a week. Then he put all new patients on non-delivery devices and did a massive marketing push to increase new patients. "Gradually, what he's doing is building up his non-delivery fleet to the point where he will be able to eliminate delivery as patients expire," Williams says. "He'll consolidate down to one truck and then eventually no trucks."

Are POCs in your future?

By now, portable oxygen concentrators should be synonymous with airplanes in your mind. Surely, POCs function as a travel device, but can they also double as an oxygen model?

"I think the question that the providers have to ask themselves is: The units that are available, can they be used as a single-source solution?" says Tom Williams, managing director of Strategic Dynamics. In other words, can the device be used 24 hours a day, every day?

For the devices currently on the market, the answer lies with manufacturers. Certainly, some devices are marketed as a single-source. In that instance, the POC can be infiltrated into the business model as another non-delivery option that vies with transfilling devices, as long as the patient can tolerate the device.

"The choice becomes one of trying to match the patient's lifestyle to the reimbursement to the business model that the provider has," Williams says.

For POCs that are not marketed as single-source, those devices function as travel options for active patients, and can be paired with a stationary concentrator to serve as one half of a non-delivery model.

Williams says providers must have a written business plan that includes a financial analysis that proves that changing modalities is economically viable. The analysis should include the short-term and long-term ramifications of switching. Ideally, a finance person with a CPA or MBA can provide activity-based costing to help providers make the decision, though Williams says the cost of this service might be problematic for smaller providers.

Figure out how you will continue servicing existing patients on different technology.

Be sure to educate physicians/referral sources about why you are switching to non-delivery.

Evaluate your staff, Lescher says. Does your staff possess a willingness to embrace change? Is your delivery and clinical staff able and willing to work differently and educate patients differently?

When calculating profitability for non-delivery modalities under the challenge of the 36-month rental cap on oxygen, Lewarski says providers may need to objectively analyze the probabilities and risks for their business. "Let's assume I'm running a company that's consistent with the Medicare data, suggesting that about 20 percent of my patients will reach the cap," he says. "That means that out of every 10 new patients, eight of the patients will end their service in less than 36 months. Assuming the equipment is not damaged, I'll be able to return the equipment to my fleet and redeploy the asset as needed." Under that probability equation, a provider will likely rent an oxygen asset substantially longer than 36 months.

Improving Business Strategies

Successfully determining which oxygen model works best means knowing your local market and knowing your business.
"I think there's a belief out there that I may make less money but I'm still making money with the model I'm using, so let me continue with what I'm doing and everything's predictable," Williams says. "If I'm a provider, at some point I have to say to myself, either my model is working and I can live with the gross profit that I'm making on a per patient basis or I have to change my model — one or the other."

With a little planning and a financial reality check, switching to non-delivery is a manageable process.
"I think the key is we've got to get owners in the financial management of these companies to run numbers, go back to the managers and say we cannot do this any longer and be profitable," Bannon says. "We need to change the way we do business so we can be profitable."

Regardless of the model, Williams says providers must become efficient and effective in every phase of operation across the entire business. "It's going to have to become like a McDonald's franchise," he says. "When that kid puts the French fries in the grease oil and he presses the buzzer, when that buzzer goes off, those French fries come out. It's not like the kid looks at it and says, 'I'm not quite sure they're done yet. I'll give it another five seconds.' The buzzer goes off and they come out. It's two shakes with the salt shaker and it's done. It's a very repetitive process, and I think the providers are going to have to get to that same methodology."

This article originally appeared in the Respiratory Management June 2008 issue of HME Business.