Embrace 'rapid maturity' of oxygen market

Whether an oxygen provider won the second round of Medicare competitive bidding or not, the results are the same: a dramatic restructuring of the oxygen business model is necessary for continued viability in the category, market experts say.

With reimbursement cuts of 45%,  it is a new era of austerity that requires wringing every dollar out of every transaction, says Scott Wilkinson, executive vice president of sales at Goleta, Calif.-based Inogen.

“Forty-five percent is a hefty cut covering half the market,” he said. “There is a critical mass of players that it impacts and they need to make changes—it is really difficult to operate with a delivery model. The ongoing costs of fuel, labor and maintenance are going up, even in a time of modest inflation. They are getting squeezed.”

Providers that insist on continuing with delivery may find themselves in a financial hole they cannot climb out of, Wilkinson says, contending that the time has finally arrived to retire the trucks.

“Non-delivery started last July with Round 2,” he said. “You have to go in another direction. Non-delivery eliminates ongoing service costs and puts the provider in a position to cope with the new low reimbursement. The decreases won't stop—they may not be as dramatic as this one, but they will continue to head downward.”

Though he admits “there is no single, silver bullet solution for success,” Joe Lewarski, vice president of clinical affairs for Elyria, Ohio-based Invacare, says providers need to embrace the maturity level that their industry has reached.

“The homecare industry is being forced into rapid maturity and like in all maturing industries, the companies that drive out non-value-added activities and costs, while concurrently implementing revenue growth and diversification, will prove successful,” he said.

The companies best positioned to endure the new business climate are those aggressively driving operational efficiencies through their organizations, Lewarski said. In the home oxygen therapy business, support tactics include the implementation of a non-delivery oxygen model, driving patient education and compliance to therapy, geographic market expansion and same-location growth.

“Based on my prior experiences as a large independent oxygen provider, I believe the only viable opportunity to operate within the low reimbursement and high operational cost environment is through the full scale implementation of a non-delivery oxygen model,” he said.

The transfilling option

Once considered to be cumbersome and costly, providers are taking a new look at oxygen transfilling and are now embracing it, says Victoria Marquard-Schultz, general counsel and regulatory director for Westlake, Ohio-based Applied Home Healthcare Equipment and SuperFlash Compressed Gas Equipment.

“With the effort to cut oxygen costs, I'm seeing a huge increase in transfilling,” she said.

The attraction of transfilling, she says, is that the cost is roughly 55 cents per cylinder, including the labor to fill it. The systems to fill gas cylinders start at about $2,000 and can be leased, “which gives you a lot more bang for your buck,” she said.

Transfilling also opens up new markets for providers in the medical professional sector, Marquard-Schultz said, because dentists, physicians and veterinarians—all unaffected by bidding—need to have their tanks filled.

Stratifying products

Traditional tank oxygen is still the predominant modality for respiratory patients, but Medicare data shows that it is slowly waning, Wilkinson says. While there are more tanks than concentrators in circulation, he said portable units are showing the highest rate of growth.

“While tanks are most common, their growth rate is flat—it is an early indicator of change,” Wilkinson said.

The reason why cylinders continue to be the most-used modality, Lewarski says, is that they have a large installed base and are still needed as backup systems for concentrators.

Because the selection of oxygen delivery modality can be tied to hospital readmission, many providers are choosing to match the correct product to the patient need, says Doug Francis, principal and co-founder of Port Washington, N.Y.-based Drive Medical.

“High-performing providers are marketing this strategy to referral and payer sources and using their product expertise to differentiate their business,” he said. “Because companies are abandoning conventional tank business in favor of the 'non-delivery' strategy, they are finding that they are at a competitive disadvantage. Non-delivery, along with a 'one-size-fits-all' product selection strategy may have played a role in readmission rate increases for COPD Stage IV patients.”

A cylinder program that utilizes a suite of cutting-edge conserving technology can still be successful, Francis says, because providing pneumatic, electronic and auto-adjusting technology will give patients “the best of all worlds.”

Rob Kent, president and chief operating officer for Oklahoma City-based O2 Concepts, says his company is focused on helping customers make the transition to non-delivery with a new portable unit designed for performance, durability and economy.

“An easy 15-minute setup lowers operational costs and helps maximize return on investment,” he said. “These setups can be done at the patient's home or at the hospital upon discharge, greatly reducing overtime. We know to make non-delivery a success we have to offer the best total solution for five years-plus.”