Sage advice: develop new revenue streams

Monday, October 31, 2005

IRVINE, Calif. - As the founder of Homedco and former CEO of Apria, Jerry Jones, 63, knows a thing or two about HME. Last month, Jones, who recently joined a group of industry veterans to form Access Point Medical, a manufacturer of HME products, told HME News what he believes providers must do to survive and thrive in a competitive bidding environment. Here's some of what he had to say.
HME: Will the HME provider under competitive bidding look different than he does today?Jones: The DME cost structure is built around two areas: cost of goods and labor. The higher portion of their costs are in labor, customer service, billing and delivery. They have to stop sending a truck 20 miles with a $20 item and acknowledge that they are going to ship that out UPS or Fed Ex. They can't send a clinician to a patient's home all the time. They are going to have to require some patients to come see them. A lot of companies in the CPAP business, for example, have classes where patients come in and get their training rather than in the home.
HME: Rotech began drop shipping CPAPs a while back and that outraged a lot of providers who claimed it would reduce outcomes.
Jones: I thought that was a great use of serving the customer. The customer wants to pay less and they are willing to give up on certain things. Rotech devised a program that served the needs of their customer.
HME: What should a company do to prepare for competitive bidding?
Jones: Companies have to prepare their revenue streams so they are not substantially impacted. It doesn't mean they abandon the rental business they have today. It means starting to build revenue streams in other areas. Companies also are going to have to look for ways to build revenue streams where they can do less delivery and more simplified billing. They'll also have to pursue ongoing non-third party revenue streams. One will be service contracts on owned equipment. Our industry for years has focused on what the insurance company will pay for. It is critical to get out of the mindset. You've to figure out how to sell other things.
HME: That seems like a tough mindset to change.
Jones: Individual companies are afraid to do things because they are afraid it will put them at a competitive disadvantage, but they have to do the smart thing rather than what they think the market is doing. There are a high percentage of companies that will supply a piece of DME based on what the referral source requires with no consideration for what the reimbursement pays. I'm a zealot in this area: You look at what the reimburser will pay, and you maximize your margins with the cost of goods. You match the product with the reimbursement. If a reimburser will pay for a top line product, wonderful. But if they pay very little and you give them top quality, you are doing yourself a disservice.
HME: Why do many providers find it hard to walk away from referrals that don't pay well?
Jones: They say, 'I have to take a little of the bad with the good.' But my premise, and I believe it and I've seen it happen, is referral sources learn who the turkeys are who are willing to take the bad orders, and they will feed them to you all day long until you say no.