Challenges abound for vendors

Monday, October 31, 2005

YARMOUTH, Maine - HME manufacturers face the unenviable challenge of maintaining R&D - the life blood of any company with aspirations to grow - while cutting costs and streamlining operations to offset reimbursement cuts.
"If providers are not healthy and can't support the current technology, access to technology and innovation will become difficult," said Joe Priest, president of AirSep. "If the government doesn't give providers time to adjust and keeps hammering them, it will get to the point where we say we can't afford to innovate anymore. Patients then lose access."
A recent study by Frost & Sullivan stated that large-cap medical device companies invest about 8% of their revenues in R&D. Small cap companies invest about 4%.
By comparison, Invacare, the largest HME manufacturer, invests between 1% and 2% of its annual revenue of $1.6 billion dollars on R&D. By medical device standards this is low, but by market standards, it is high, said Lou Slangen, Invacare's senior vice president of worldwide market development.
"If reimbursement were higher, there would be more R&D dollars available," Slangen said. "If you don't innovate or spend money on R&D and come up with products, all you do is end up fighting on price, and you better make sure you don't have any other expenses because there will always be someone who will sell for a nickel less."
Five years ago, Invacare developed products "because we could not because we had value added," Slangen said.
Reimbursement cuts, however, have forced the company to take a more focused approach toward R&D, developing products that meet consumer needs, make life easier for the healthcare professional and that create a better profit margin for the provider.
"When we develop products, we have to deliver to all three constituencies, but it often varies by product who as to who receives the greatest benefit."
Shrinking reimbursement also allows a company's R&D efforts less room for error, said Ron Richard, vice president of marketing for sleep manufacturer Resmed.
"It makes you sharpen your pencil and look at innovation in a different light," Richard said. "You have to hit a homerun more often than not."
Like most HME manufacturers, following reimbursement cuts implemented by BBA '97, Airsep re-engineered its operations to reduces expenses. The company did that for good reason: It's oxygen concentrator was priced at a level providers could not afford.
"We're sill focusing intensely on our current product and getting cost out, but the returns are diminishing," Priest said.
When that happens, companies need to innovate and come out with new products that create demand. But if reimbursement doesn't support the technology, there is only one other option.
"We have to find another business," Priest said.