Hospital HMEs face increased challenges

Saturday, January 31, 2004

YARMOUTH, Maine - If increased OIG scrutiny hasn’t encouraged hospitals to consider jettisoning their HME interests, mandated reimbursement cuts for wheelchairs and other equipment just might do the trick.

Those cuts, signed into law in December as part of the Medicare Prescription Drug Act, prompted Community General Hospital to sell the assets of it HME subsidiary, CGE CareSystems, to Apria in December.

The Syracuse, N.Y., hospital decided to get out of the HME business because reimbursement has been shrinking, and because Medicare is expected to introduce a national competitive bidding program for durable medical equipment, said company spokesperson Maria Damiano.

Community General isn’t alone in its worries.

“Some of the [hospital officials] I’ve talked to are a little concerned about the reimbursement cuts,” said M&A expert Rick Glass, president of Steven Richards & Associates, Tarpon Springs, Fla.

“Hospitals typically don’t run with big profit margins, and the cuts will have an oversized impact on them,”

The upcoming cuts present just one challenge. An April 2003 OIG Special Bulletin expressed concern that joint ventures between hospitals and DMEs, in many instances, may be disguised kickback arrangements. That is, the hospital does little more than funnel patients to its DME partner, which in return kicks back a share of the reimbursement.

“I’m hearing a lot of chatter about the government and others looking at those types of turn-key arrangements,” said Jeff Baird, a healthcare attorney with Brown & Fortunato in Amarillo, Texas.

As far as industry sources know, the OIG has not launched an investigation into a hospital/DME joint venture. Nevertheless, the April 2003 special bulletin has had a “chilling effect” on joint ventures between providers and hospitals,” said Neil Caesar, president of the Health Law Center in Greenville, S.C.

“People who are not committed are far less likely to do it, and people who are committed are far less likely to push the envelop,” Caesar said. “That is what the government wants.”

At one time, hospitals viewed HME as a logical subsidiary that contributed to the “continuum of care.” Running a profitable HME, however, requires a skill set, such as inventory management, that hospital officials often don’t possess. As a result, hospitals have increasingly decided to exit the HME business and focus resources on their acute care core businesses.

“Sometimes small subsidiaries become neglected,” said Bob Ciardi, managing partner with Provident Healthcare Partners, an M&A firm in Boston. “If you have a big fire in one corner and a little fire in the other, you are going to fight the big fire. The [hospital/HMEs] that are left are probably profitable. Otherwise, the hospital would have sold them off already.