Keeping Afloat

An oxygen and sleep market overview

• By Joseph Duffy
• Nov 01, 2010

Oxygen and sleep providers have much in common these days: the air they are breathing is heavy from an uncertain future and the sleep they are losing is from the anxiety over Medicare’s funding challenges: cuts, caps and competitive bidding.

Oxygen providers have been through a lot recently – a 36-month rental cap and 9.5 percent cuts across various oxygen categories – and now competitive bidding contracts take effect January 1, 2011, in nine of the United States’ largest metropolitan areas. An additional 91 areas are scheduled to start the bidding program later in 2011. With all things considered, contract-winning providers in these nine CBAs are looking at up to a possible 41.5 percent drop in revenue.

As our industry looks for the wheels that can carry it through these unprecedented changes and ultimately deliver the highest standard of patient care, Respiratory & Sleep Management tapped industry experts to help explain where the market stands, where it’s going and what providers can do to help build a better future.

The State of the Industry

“The challenges homecare providers will face in the next two to three years will test the entire fabric of the industry,” says Ron Richard, CEO of SeQual Technologies Inc. “Homecare in this country has matured over the past three decades. Historically the concept of sending a patient home and providing oxygen was driven by medical centers and payers to reduce cost, free up beds needed by more acutely ill patients and improve the quality of life for a patient who simply needed supplemental oxygen along with their medications. This trend became mainstream practice in the late 1970s and continues to be the choice of physicians and patients. Homecare providers offer patients and the medical system viable lower cost alternatives to receiving care in higher cost facilities. But in the face of continued cuts in reimbursement related to oxygen therapy it will become more difficult for providers to offer the same quality of services or technology.”

According to John Gallagher, vice president of Government Relations of VGM & Associates, the current funding challenge falls more in the structure of funding as opposed to the amount of funding. He says providers are faced with the eminent challenge of fighting the perception that oxygen is overpaid.

“We concede that stationary oxygen may be overpaid, but contend that portable is so drastically underpaid that providers need the stationary revenue to keep them afl oat,” says Gallagher. “Overall, the system works, but as soon as the concentrator’s reimbursement is attacked again, providers will be in trouble. The bottom line is that we have to get away from fee for product and move to fee for service.”

Tim Hatt, Director of Home Medical Equipment for HME provider Wright & Filippis Inc. , also supports moving toward a fee-for-service model

“One of our biggest problems is the continuing, hostile policies that have emerged in Medicare – the oxygen cap and the competitive bidding program in particular,” says Hatt. “Unfortunately for patients and providers, oxygen is still reimbursed as if the payment were simply for the equipment alone. Of course, much more goes into delivery, setup, patient education, maintenance and servicing of the equipment.

“So while we have an obligation to provide quality oxygen therapy to Medicare beneficiaries, there are some policy makers in Washington complaining that you could pay much less for an oxygen concentrator bought over the Internet or at Walmart, ” he adds.

Overall, providers are dealing with a number of challenging financial issues, says Joseph Lewarski, Vice President and General Manager of the Respiratory Group, Invacare Corp.

“Many providers are still adjusting to the last O2 reimbursement cut (to pay for the NCB delay) and the impact of the lost revenue from capped O2 patients, both of which significantly impacted cash flow and profitability,” he says. “These issues are compounded by a weak financial/lending market, pre- and post-pay audit pressure, lower-than-expected overall healthcare service utilization rates and continued increases in operational expenses. ”

Let the bidding begin

Competitive bidding weighs heavy on the industry as its implementation date looms after the impending holiday season. Patrick Dunne, MEd, RRT, FAARC, of HealthCare Productions, seems to sum it up for many industry providers:

“Clearly the No. 1 challenge will be the impact of competitive bidding if and when implemented,” says Dunne. “The proposed payment rates are well below what most HME suppliers consider to be their actual costs of providing both product and services needed for consistent, high-quality outcomes. Home oxygen providers now face an uncertain future. Those who sign a competitive bidding contract will soon find the rates are entirely too low, whereas those who do not sign will not have access to Medicare patients. In the final analysis, patients needing oxygen will suffer the most.”

Concerns for the patients and providers in both the oxygen and sleep industries, due to competitive bidding are mounting. Dunne says that the future of home oxygen is in serious jeopardy, which comes at a time when the demand for this vital therapeutic controller medication is expected to increase, as does the incidence of COPD.

Richard says that reimbursement cuts will force providers to eliminate or drastically reduce services, and one key area will be to cut back on delivering oxygen to the patient’s home.

Richard further predicts that the decline in reimbursement due to Round One implementation will force providers out of business and further consolidation in the industry, which would mean that over the next few years patients will have fewer choices as to what providers they receive services from and it will decrease the element of competition in the market. Referral sources will also be impacted due to consolidation and providers exiting the LTOT sector.

“Nearly every provider I have talked with has been focusing on some type of cost reduction strategy,” says Lewarski. “Most are trying to find the balance of providing good service and care with the ability to operate profitably. Many have been focusing on the elimination of nonvalue added activities, a key one being oxygen delivery (cylinders and liquid) and delivery-related expense (cylinder filling, tracking. cleaning, etc.) through the introduction of non-delivery oxygen systems such as the HomeFill and portable oxygen concentrators. ”

At the end of the day, it’s about providing high-quality patient care, which Gallagher points out can be in serious jeopardy with competitive bidding.

“The average reduction to oxygen payments was 31 percent, which is well below the average profit margin for an oxygen provider,” he says. “Just like in the other nine bid categories, something’s got to give. We’ll see one of two things happen. Either bid winners will close their doors because they can’t make the drastic adjustment that would need to be made to survive at the new rates, or we’ll see providers make those drastic adjustments and patients will suffer. It’s a no-win situation. One area of concern is what will happen when providers who are forced to close their doors dump patients (not grandfathered) and there are not enough bid winners to pick them up in a timely fashion? Will it take a death to wake the public and Congress up to this flawed program?”

Don’t sleep on it

Lewarski says that the sleep market continues to grow although slower than previous years. He points out that sleep has been riding a wave that will be fading as reimbursement pressures continue to push down payments for both the diagnostic and treatment components. “As reimbursement declines and the sleep market matures the typical process of commoditization begins to unfold,” Lewarski says. “This will force providers to evaluate the products and services they provide and like other mature elements of the homecare business, start eliminating the value-added components that were subsidized by higher margins. ”

Another problem with the sleep market is Medicare’s complex documentation for CPAPs and sleep treatments, including required face-to-face visits by doctors after three months of PAP therapy.

“The historically low CPAP adherence rates and concerns about potential overutilization rates have encouraged payors to increase the medical necessity and documentation requirements for sleep, which seems somewhat punitive as compared to other chronic therapies, such as diabetes, congestive heart failure and hypertension, which also carry historically low rates of compliance to treatment,” says Lewarski. “The responsibility of the three-month physician face to face really falls on the patient, although the penalty for failing falls on the HME provider. Based on anecdotal reports from many providers, up to 50 percent to 60 percent of Medicare CPAP patients are not meeting the adherence criteria, either as a result of failing to the four hour per night, 70 percent of the nights compliance threshold or failing to see their physician for the second face-to-face visit. ”

Richard calls providers in the sleep sector who face reimbursement cuts while having to comply with reporting patient compliance the “sleep police.”

“When sleep providers can’t get patients to be compliant with their CPAP therapy they either don’t get paid or have to take the equipment away from the patient,” says Richard. “To add to the confusion the provider is asked to make sure the patients go back to their doctors for follow-up visits to insure quality care and the patients are using their therapy. Compliance across the board for patients utilizing medications to general therapies has been documented as being just above 50 percent, depending on the metrics applied to measuring compliance. But asking the providers to enforce compliance and document it using more expensive technology while faced with 30 percent cuts in reimbursement is again challenging and in some cases doesn’t seem fair. ”

A leak in the 36-month cap

Needless to say, cutting oxygen funding to three years while requiring providers to serve the patient for five years has had tremendous impact.

“I have always believed that the 36-month cap is unfair to providers and patients,” says Richard. “Oxygen is a regulated substance under the FDA and I don’t know of any drug that has a cap on it when it comes to treating a chronic disease. It’s like telling a patient with diabetes, ‘you can be treated for your condition under coverage but for only 36 months.’ CMS needs to reverse this notion that oxygen is a commodity and should be capped because of some funding issues or actuarial tables. Patients with COPD are being discriminated against, in my view, by applying a 36-month cap.”

The industry’s response to cuts, caps and competitive bidding is H.R. 3790, a bipartisan bill that would replace the Medicare competitive bidding program with other types of cost-savings, and would reduce reimbursements to home medical equipment providers but preserve patient access to medically required equipment and services in the home. So far, the bill has 255 cosponsors in the U.S. House of Representatives with broad bipartisan support. More than half of both the Democratic and Republican delegations in the House support H.R. 3790.

“After 20 plus years in homecare, I am still an optimist but I have to admit I have some concerns about our ability as an industry to land favorably on these key issues,” says Lewarski when asked whether the industry will see an end to the 36-month cap and an approved reform package. “ Oxygen reform is needed but getting the key stakeholders to agree on the definition of a reform package has proven more complicated than I believe many expected. Clearly the savings suggested and savings generated by the cap and competitive bidding only make matters worse when the government is bleeding money.”

According to Dunne, for the most part, home oxygen providers have handled the 36-month cap quite well and the numbers of patients hitting the 36-month cap have, so far, been manageable. However, under the competitive bidding rates, Dunne says this aspect of the program may well be the straw that breaks the camel’s back for many home oxygen providers.

Fight the good fight

Many providers say expanding on your retail sales when it comes to oxygen or sleep services is a possible solution.

But Gallagher says retail options directly related to oxygen and sleep are limited. So instead of thinking oxygen or CPAP, he suggests you think about the type of patient that uses these items.

“With oxygen, its generally going to be a frail, elderly individual,” says Gallagher. “They might need items to help them around their bathroom, like a grab bar or even walk-in tub, or maybe a bedside commode. With CPAP, many times it’s going to be a person who needs to lose weight, or maybe it’s a person whose troubles relate to their sleep habits. If weight is an issue, think about exercise equipment, dietary supplements, or even teaming up with a local Weight Watchers or Jenny Craig program. For those who have issues with their sleep patterns, consider offering therapeutic beds as a retail option.

“The bottom line is that in every adversity there is opportunity,” he adds. “The demographics are in our favor. The baby boomers will demand quality healthcare. Providers need to maintain cash flow and look for those opportunities.”

The worse thing you can do as a provider is nothing. Every expert contacted for this article said he has contacted a member of Congress to express concerns about the oxygen and sleep market. Here’s what they suggest:

“The providers need to support the key industry groups on both the state and national level, especially AAHomecare,” says Lewarski. “Providers must get involved; the grass roots, local activist is still one of the strongest voices in Washington. For an industry with thousands of providers, I typically see only a couple of hundred in D.C. at our industry legislative activities. Providers also need to rally the referrals sources and especially the patients, because they will ultimately be the ones most impacted by the changes. ”

“The unfortunate reality is that many providers are not surviving. We’re seeing drastic shifts in the industry,” says Gallagher. “ Many are tightening their belts, but most are counting on a shift in policies to keep them in business. They’re banking on the fact that competitive bidding cannot survive and the oxygen policy will be revised to eliminate the 36-month cap (even if that doesn’t equal an expansion of the bucket of money allocated to oxygen). Those hanging around believe appropriate adjustments will be made by Capitol Hill and in Baltimore that will allow CMS to more appropriately play gatekeeper to the Medicare Trust Fund and allocate reimbursement dollars — all just in time for an infl ux of baby boomers into the market. Is this realistic in a deficit reduction environment? I am not sure. What I do know is that Congress has got to hear from providers and beneficiaries alike. If you are not educating your beneficiary and employees about the impending outcome of Competitive Bidding and the 36-month cap, you are making a big mistake.”

This article originally appeared in the Respiratory & Sleep Management November 2010 issue of HME Business.