HMEs may need to reinvent themselves

Monday, January 31, 2005

MELBOURNE, Fla. - HME will be a much different landscape after all the provisions of the Medicare Modernization Act are implemented and in response providers will have to radically alter the way they look as well, industry observers contend. What shape that may take, however, is up to providers themselves.

Intense economic pressures from the five-year CPI freeze, competitive bidding and FEHBP cuts will cause sharp declines in revenue and profit margins and HME providers simply can’t continue to operate in the same manner under those repressive conditions, said Wallace Weeks, president of The Weeks Group and author of a new strategic report on the post-MMA industry.

“Over the next five years, margins will fall by more than $3.7 billion a year,” Weeks said in his report, “Succeeding in Homecare After MMA.” “This equates to nearly 17% of the industry’s annual revenue. Overall, Medicare’s allowable charges for DME items will decline at least 11% over that period.”

Bill Cron, who routinely tracks provider operations in the AAHomecare Financial Survey, agrees that a major shakeout is due for the HME industry as a result of MMA. And while previous government initiatives like the Balanced Budget Act of 1997 have forced companies to adjust their procedures, the industry hasn’t seen anything like this before, he said.

“This time providers are going to have to really think about changing their processes,” said Cron, professor of marketing at Texas Christian University’s MJ Neeley School of Business. “There’s no denying that things will have to be different.”

At the same time, Cron believes that, as in the past, the industry will rise to the challenge.

“Over the past 20 years, the government has successfully squeezed the system and providers have responded by doing what it takes to make money,” he said. “The question becomes then, Is there enough slack in the system this time for providers to yet again decrease their price? My guess is yes.’”

Likewise, healthcare consultant and activity-based management specialist Tom Pryor sees the need for drastic change, but expresses confidence in the industry’s ability to do it.

“This has happened in other industries, so it doesn’t take a crystal ball to see it happen in homecare,” said Pryor, president of Arlington, Texas-based Integrated Cost Management Systems. “Industrial parts distributors have seen their margins erode and they used ABM to cost out their transactions and create a profile. At least one company decided that if a customer didn’t match that model, they couldn’t afford to do business with them.”

Yet even before the full brunt of MMA even takes effect, healthcare supply channels are already evolving, and if HME providers are to continue having a stake in it, they will have to assess their whole method of delivery, said Kevin O’Donnell, president of Copper Canyon, Texas-based Healthcare Resources of America.

“Already the commodities that were in HME’s domain have been diluted into different, broader segments of retail,” he said. “The government is pushing even more products in this direction and mail order companies like Liberty Medical have positioned themselves well. I foresee the supply chain becoming dominated by companies like this, as well as new entities that strive to become the Amazon.coms for homecare.”