Respiratory Rx dynamic favors small providers

Wednesday, June 30, 2004

To say the respiratory medication business is daunting would be a tremendous understatement.

First, providers have been grappling with a 15% reimbursement cut for inhalation therapy drugs since Jan. 1. The fee reduction, part of the Medicare Modernization Act, came in response to a General Accounting Office/Office of Inspector General report that estimated providers paid only 17% and 34% of the average wholesale price for albuterol and ipratropium, respectively.

If that wasn’t enough, providers will have to operate under a new reimbursement structure in 2005 known as average sales price plus 6%. The ASP+6% reimbursement model is a formula opponents say has punitive overtones and is designed to wring every last drop of profit out of the supply equation.

Respiratory giants Lincare and Apria have already announced that they will exit the inhalation therapy drug business unless the ASP+6% structure is changed. This year’s lower allowable rate winnowed Clearwater, Fla.-based Lincare’s first quarter revenues by more than $12 million and shrank Lake Forest, Calif.-based Apria’s by $9 million, according to financial results released in April.

Lincare predicted in an annual report filed with the Securities and Exchange Commission that the ASP+6% provision, if implemented, could result in an aggregate 80% reimbursement cut under 2004 rates.

Even so, industry observers don’t believe the new reimbursement model will be rescinded or modified and argue that providers must accept the new reality. But if nationals like Apria and Lincare can’t operate under ASP+6%, who can?

Under the circumstances, small providers may have the best shot at success, said Mickey Letson, president of Decatur, Ala.-based Letco.

“ASP+6% will definitely harm some companies, but overall it should favor small providers,” he said. “Respiratory medication supply is an adolescent market. Of the 18 million COPD patients out there, only about half of them have been diagnosed. If you look past the doom and gloom, there is a lot of opportunity out there to build a business.”

Indeed, naysayers abound when it comes to ASP+6%, but Marcus Kruk, vice president of Orange Beach, Ala.-based HME Services, points out that respiratory medications and delivery devices have been in the government’s crosshairs for years.

“If all the reports on the demise of respiratory medication supply were placed in one issue of HME News, it would go cover to cover,” Kruk said. “But I think the business can still be built.”

Many figure the ASP+6% equation to be a money loser across the board. Yet Kruk notes that wiggle room can be found if one looks long and hard enough.

“When people saw 6% of the average sale price, they said, ‘I know what I pay, and it isn’t worth it,’” he said. “But if you look at what you’ve got with brand-name and generic drugs and balance them out, opportunities for margin still exist.”

Unlike other product categories, the referral source list for respiratory medications is short. Basically, there are three physicians in control of prescriptions and two of them are primary care gatekeepers: general and internal medicine practitioners. Pulmon-ologists are also on the list, but their involvement is marginal, sources said.

Gatekeepers are by far the most in-demand of all referral sources in healthcare, so competition for their attention is fierce – especially from pharmaceutical manufacturer sales representatives. If market research conducted by the pharmaceutical industry is correct, HME sales reps have a 90-degree uphill climb just to get in the door.

Letson relates these statistics: Of 100 sales calls made to gatekeeper physicians, only 50 will get beyond the waiting room. Of those who get inside, only 25 will get more than two minutes of the doctor’s time. Out of 150 sales calls, the physician reportedly will only remember five.

“This applies to people who spend millions trying to get in to see the doctor,” Letson said. “Imagine what homecare’s numbers are.”

Despite a seemingly impossible reimbursement matrix, an imposing sales call gauntlet and logistical challenges, the business is worth pursuing because respiratory medication patients will eventually become highly coveted oxygen patients, said John Durkee, national sales manager for Rainsville, Ala.-based ABC Plus.

“Is it profitable for a small provider to market respiratory meds as a segment of an overall respiratory business? The blunt answer is not directly,” he said. “They don’t own a pharmacy and they can’t bill for meds, but if they say ‘no’ to a referral source, the business will go to someone who says ‘yes.’”

Small providers need to keep in mind that even if accepting capped rental assignment on a compressor nebulizer for $15 a month is a losing proposition, in the long run it could pay off because that patient will most likely become an oxygen user, Durkee said.

If providers are to convert obstacles into a competitive advantage, they need to make quick, to-the-point presentations that explain the benefits of their program.

“When I train my sales force, I teach them to act just like a pharmaceutical rep,” Letson said. “Physicians are looking for real life solutions to their problems. You’re there to detail a product - to show why your product is better and generates better compliance. They do not want to get a rote presentation. They want to know why your patients are more compliant.”

One thing that shouldn’t be included in the physician discussion is the reimbursement issue, Kruk added.

“It’s still business as usual to them,” he said. “Doctors aren’t concerned with what’s going on with allowables - they just want someone who provides good service and disease and outcomes management for nebulizer patients.”

Durkee agreed, saying physicians don’t consider the provider’s fiscal interest when writing a prescription.

“They really don’t care if you make any money or if a medication is profitable,” he said. “The business is still profitable right now, but whether it will continue to be next year is anybody’s guess. Ask CMS.” HME
Category: Respiratory Medications
Key Referral Sources:

Primary care physicians (family and internal medicine practitioners) and, to a lesser degree, pulmonologists.

Effective Marketing Techniques:

- Because primary care physicians are strapped for time, give a short, to-the-point presentation on the benefits of your respiratory medication program.

- Be sure to emphasize patient compliance as well as disease management and outcomes measurement facets of the program.

- Accepting below-margin assignment on some items holds potential for future business as nebulizer patients become oxygen users.