Is oxygen a new retail opportunity?

Saturday, September 30, 2006

Oxygen has not traditionally fit the retail channel for a number of reasons: It's a highly clinical product that requires expertise, it is medically necessary equipment covered by Medicare and commercial insurance and patients view it as an entitlement. The equipment--no matter how sophisticated--is hardly considered to be a merchandiser's dream.
Yet as CMS remains intent on chopping reimbursement rates, limiting payment periods to 36 months and continually finagling with conventional respiratory services, it becomes more and more difficult for providers to continue operating profitably. And with other HME items like mobility equipment, bath aids and wound care supplies making inroads with the cash-paying public, retail may not be such an outlandish idea to consider, some manufacturers say.
"We're seeing more out-of-pocket investment for many different types of medical equipment, including respiratory," said Bob Fary, vice president of sales for Santa Barbara, Calif.-based Inogen. "Compared to their parents, baby boomers are relatively affluent and the economy has been generally good to them so they're used to having the best. They won't settle for 'el cheapo' anything."
Joe Priest, president of Buffalo, N.Y.-based AirSep, agrees it makes sense.
"We're preparing for it to be rented or sold outside of Medicare," he said. "There is a sizable population willing to come up with additional funds for the new technologies out there. It has reached a point where the government simply cannot provide everything and we shouldn't expect them to."
The ideal retail product, Priest said, may be a portable unit that is light but more in the middle of the weight range.
"We're convinced that the portable will be an appropriate product and we'll be seeing cost reductions to the point where it's more financially viable for patients," he said. "Although there are units that weigh less than 5 pounds now, I think the future is with those that are around 10 pounds."
Whether or not providers choose to pursue a retail direction, there's no denying that current business models are becoming less feasible, said Dr. Robert Hoover, senior vice president of global clinical services for Longmont, Colo.-based Sunrise Medical.
"There are a host of pressures on HME providers that are forcing them to reconsider their business models," he said. "All providers interested in staying in business should be conducting, if they have not done so already, a careful analysis of their costs of doing business. Without knowing your costs--and not just the cost of acquiring new equipment--you will have difficulty participating in competitive bidding."
With services such an integral part of the respiratory provision, there is little doubt that companies will have to find ways to extract it from the equation. Fary calls it a "non-service model." How and if it can be accomplished rests with company executives, he said.
Manufacturers are currently upbeat about the state of technology, with portable concentrators and liquid systems creating an ambulation boom for oxygen patients. Still, Hoover fears R&D momentum may slow unless policy-makers start recognizing its benefits.
"The proposed rule issued by CMS last month finally recognizes that new technologies are in the marketplace and potentially afford beneficiaries the opportunity for greater independence and improved lifestyle," he said. "One of my concerns, however, is that the payment policies proposed by CMS do not go far enough in promoting development of new technologies by providing adequate reimbursement for new devices like the DeVilbiss iFill transfilling device or portable concentrators."
For example, he explained, oxygen concentrators on the market today are almost exclusively dependent on molecular sieve technology for oxygen separation from room air. Molecular sieves--small clay beads--require a certain "mass" in order to extract enough oxygen from room air to provide the necessary therapeutic flow rates. There is a physical limitation on how small that pile of clay beads can be and still get enough oxygen.
"Devices could have batteries the size of hearing aids but if extraction technology doesn't change and get smaller, neither will oxygen concentrators," Hoover said.
Providers are also hesitant to commit to innovative new products, even if it will benefit the patient and their own operating costs, said Pam Jackson, director of marketing for San Diego-based SeQual Technologies. What they need to realize, she said, is that superior products can help them better serve patients, expand their product offerings and improve their operations.
"Providers should embrace new technologies where they make sense, such as in streamlining and improving operational efficiencies while attracting new patients," she said. "The early adopters are already improving their marketing abilities and creating new competitive advantages."
Providers need to look at their individual businesses to see where technology can help in reducing costs, Jackson said.
"Some have advanced into the new frontier, enhancing the array of what they offer their patients restructuring their operation, such as reducing logistics, storage, inventory, delivery and other issues," she said. "Like the great westward migration of the last century, others will follow as they realize the potential for future gain."