Respiratory med market demands determination

Monday, July 31, 2006

Simple economics dictates that when the cost of furnishing a product outstrips the revenue it earns, that particular venture should be terminated.
But we’re talking about health care, a market that has always had a slightly different set of rules from other businesses. Free market principles don’t usually apply in a sector that is governed by commercial insurers and federal bureaucracies, which remove the provider and consumer from the price-setting process. The provider must either accept the established rate and make the best of it or reject it and quit the business.
This is the situation facing providers of respiratory medications, which have undergone drastic Medicare rate cuts over the past year. To the great dismay of the HME industry, CMS slashed what many already considered to be a substandard $57 per month rate for dispensing inhalation therapy drugs albuterol sulfate and ipratropium bromide to $33. It is also considering reducing rates for brand-name respiratory drugs to generic levels.
Furnishing these medications in a conventional way has become fiscally impossible for HME and pharmacy providers, say respiratory med suppliers. Consequently, the industry is searching for new avenues to get these vital products to respiratory patients.
“I think everyone will need to re-evaluate their business models,” said Dan Fry, president of Windermere, Fla.-based Revlis Medical. “We’re still trying to sort through this mess and figure out a game plan going forward. It has become very difficult for smaller dealers to make money selling the traditional meds, and the current proposal to treat brand-name drugs the same as generics could cause the purchasing power of the nationals to become a non-issue.”
As with other areas of home medical equipment that have seen declining fee rates, it’s the service component that financial experts say breaks the Medicare reimbursement bank. Providers must figure out how to dramatically minimize the overhead costs that go into product delivery, which means ratcheting back service or removing it from the equation altogether.
“Service will suffer,” Fry said. “There won’t be too many companies that can justify
sending out an RT to do nebulizer setups—if they can justify sending anyone.”
Of course, patients will be the ones most inconvenienced by service reductions, Fry said, but that may also get them involved in lobbying legislators to
restore funding.
“If enough patients complain about the difficulty in ordering their meds due to a low level of service, then—and only then—do I think we will see the powers that be make changes to restore funding to a more realistic level,” he said.
Until that happens, folding back services is just “good business,” said Mickey Letson, president of Decatur, Ala.-based Letco.
“We’re emphasizing ‘good business,’ meaning that we are encouraging all our customers to try to keep expenses to an average of $25 per patient, per month,” he said. “This amount includes all call center people, billing and shipping. If a (provider) can reduce its overhead to this amount, it can still be profitable regardless of the current or pending cuts. Controlling costs is the key to survival and continued success.”
At this point, pharmacy mail order companies are best positioned to handle the respiratory medications business, Letson said, because “they have the business structure that can handle it very effectively when they are well organized and structured.”
For brick-and-mortar providers committed to finding a way to keep the segment afloat, the overhead issue is just part of the overall situation, suppliers say. Providers need to rethink every nuance in order to determine what aspects of the business still work and whether they can
be augmented.
For instance, Craig Bright of Hilton Head, S.C.-based MedQuip says the market is still “very good” for providing drugs to asthmatics and those with less serious conditions.
“We continue to expand our business due to our concentration on the pediatric market,” Bright said. “These patients usually just need albuterol and the provider can earn revenue on the compressor.”
The same goes for nebulizers, Fry said.
“Nebulizers have always been a precursor to oxygen therapy and as long as companies want to be oxygen providers, nebulizers will be something that doctors will count on them to provide for their patients.”
A positive development that providers can take solace in is that the marketplace has continued to grow, Letson said.
“Our sales are up around 40% to 50% this year,” he said. ”Those companies who choose to focus on profitable strategies are experiencing better margins this year than they did last year.
“I know that it is hard to believe, but I look for a major upswing in the market around the second quarter of next year,” he continued. “This is when we can expect the first new nebulizer medication to be released in around four or five years. The problem has been that when there are no new medications, the market will focus on existing medications and then gravitate to the most profitable ones. When this happens, CMS sees a spike in reimbursements and will always react to the spike. This reaction is usually a cut in reimbursement.”