Question & Answer

Sunday, March 31, 2002

Ostomy supplies: 'It's just not worth it.'
REDDING, Calif. - Owen's Healthcare, a franchise of Option Care, has decided to sell its ostomy business (about 300 patients) to the Valencia, Calif.-based Shield Healthcare. It's not unusual for suppliers to shed the notoriously low-margin medical supplies business to focus on the more profitable respiratory and DME businesses. But CMS just released new ostomy codes earlier this year, and it's slated to release an updated - and providers hope - more profitable fee schedule this month. Regardless, the defection continues. Here's what Todd Dodds, Owen's division manager, had to say.

HME: Why did Owen's stop doling out ostomy supplies?

TODD DODDS: We were trying to be everything to everybody. When you start using that strategy and applying it to ostomy supplies, you lose money. You begin accepting things beyond what Medicare allows and pays for. Say a patient needs a Convatec bag, and they're allowed five. They want 10, and you're stuck between trying to please them and making money. It gets even trickier with MediCal. They say there shouldn't even be a limit. Reimbursement was a big problem.

HME: Were there other problems?

DODDS: Yes, time constraints. We had one person who was fluent in ostomy supplies. If she were ever gone, we had huge problems. That person spent 30% of her time with ostomy patients. Because of the personal nature of ostomy supplies, it involves a lot of advice giving and consultation. Also, it took us one full-time reimbursement person to take care of our ostomy claims.

HME: And ostomy supplies comprised how much of your business?

DODDS: About 6%.

HME: How unprofitable were ostomy supplies?

DODDS: At best, we broke even. Supposedly, the gross margin is 48% before adjustments. After adjustments, we're talking gross margins in the mid-30s. When you add fixed and variable costs to that, you barely break even. Also, the reimbursement's so low, it doesn't matter how much you sell.

HME: If it's not profitable for an HME supplier to sell ostomy supplies, who's going to do it?

DODDS: I'd rather have someone like Shield do it. They've gone with that niche and ran with it. It works. They're experts in what Medicare will allow, and they provide that and don't exceed it. One-stop shops aren't the best places for ostomy supplies. It's too intensive.

HME: The new ostomy codes and the hope of an updated fee schedule didn't sway you to keep ostomy supplies, even a little while longer?
DODDS: We were aware of those changes, but they didn't change our mind. It's just not worth it.