Setting sail into a stormy sea of change

Monday, May 31, 2004

The Medicare Prescription Drug Act has launched the HME provider into uncertain seas. Not since, the Balanced Budget Amendment of 1997 and the Six Point Plan of 1989 have HMEs faced such momentous change to their business. If the legislated changes are implemented, the cheese will not be exhausted, but it will be moved. The challenge? A new route to respectable profitability. Before reporting the following suite of stories, we asked HME providers for new opportunities and new ways to cut costs. Here is a look at some of the areas providers are exploring as they begin to respond to new reimbursement pressures.
By John Andrews, contributing editor
The government giveth, the government taketh away. Therein lies the rub.

On one hand, federal legislators - led by Rep. Bill Thomas, R-Calif., - approved a series of measures in the Medicare Prescription Drug Act designed to rein in a Part B system they believe is out of control. Across-the-board reimbursement cuts, a six-year price freeze, competitive bidding and inherent reasonableness fee adjustments are aimed at squelching program cost expansion.

Not surprisingly, the HME industry has taken great offense, contending that lawmakers are sadistically stripping legitimate businesses of their livelihood by aggressively winnowing reimbursement levels to unprecedented lows. And piling competitive bidding on top of everything else is adding insult to injury, industry representatives say.

Although the new law’s repercussions have yet to be felt, the companies that lean heaviest on Medicare are expected to absorb the full brunt of the blow. And based on recent data collected by industry consultant Louis Feuer for Van G. Miller and Associates, that contingent could be much larger than originally thought.

“I surveyed 315 HME companies and when it comes to Medicare dependence, there is some scary data,” said Feuer, president of Miami-based Dynamic Consulting and Seminars. “I don’t have all the numbers yet, but I can tell you the amount of revenue that comes from Medicare is very high - between 75% and 90%. That’s why we’re seeing panic.”

AAHomecare’s financial survey reports a lower Medicare percentage, but that doesn’t necessarily translate to less provider dependence. Instead of measuring companies individually, lead surveyor Bill Cron based his findings how much of survey respondents’ total sales revenues come from Medicare. In 2003, 44% of some $3 billion in sales revenues came from Medicare, down 2% from 2002.

Even with the decrease, the industry still gets an inordinate amount of its revenue from Medicare, said Cron, professor of marketing at Texas Christian University’s M.J. Neeley School of Business.

Private fee-for-service insurance remained at 18% of total sales revenues in both surveys, while managed care grew from 18% to 24%. Commercial/institutional business fell from 16% to 10%, while retail sales went from 2% to 4%.

For years, financial experts have been advising HME providers to diversify their business mix in order to minimize the impact of chronic Medicare reimbursement cuts. Most likely Medicare dependency numbers fall somewhere between Cron and Feuer’s surveys, but even so it underscores the point that at least half the industry relies too much on an increasingly volatile source for revenue.

If any time seemed ripe for seeking new business directions, it’s now. Still, the potential for a Medicare crisis has been looming for some time, which begs the question: Why haven’t more providers weaned themselves off Medicare?

Feuer says it boils down to this: “People think it’s a wonderful business. If you furnish products and services, you get paid for your efforts.”

Indeed, Medicare has traditionally been a reliable payer, but Cron asserts that too many providers have used it as a crutch, making it harder for them to abruptly shift toward free market-oriented options.

“HMEs were set up as purveyors for an entitlement program,” Cron said. “It’s extremely challenging to deviate from this entrenched pattern.”

But Kevin O’Donnell, president of Lewisville, Texas-based Healthcare Resources of America, is blunt in foretelling their fates if they don’t.

“It has come to a point where providers have to change their entire business model,” he said. “It’s time to recognize that HME providers have always been retailers … invisible retailers, perhaps, but retailers nonetheless. If they don’t redefine their business, others will take over the market.”

That is already happening to a certain extent, noted Jack Evans, president of Malibu, Calif.-based Global Media Marketing.

“There is a new breed of HME opening up that is retail-based,” he said. “They realize that reimbursement will be substantially cut, but see an opportunity with people who need the product and are willing to pay for it. Of the new businesses I see, they are doing 40% to 60% cash sales, as opposed to 10% to 15% for traditional HMEs. We’re not just talking about new businesses, but a new mentality.”

Evans concedes “there’s no golden answer” to making a retail segment work, but adds that the latest entrants are taking a more entrepreneurial approach than those who tried and failed in the past.

“Historically a new HME store would hire a sales staff and wait for referrals to come in - but that’s just one component,” he said. “Having a successful retail operation means having a showroom, a high profile location, a solid advertising campaign and strong marketing support. The people behind these new companies understand this.”

Vince DeStigter, president of Jackson, Calif.-based Western Healthcare, has recognized the value of retail sales for a long time and says he’s only going to increase it in the future.

“You’ve got to have retail - it has raised us up to where we should be and without it we’d be dead,” he said.
Options for diversification
Here are some potential markets for HME companies looking to diversify:

- Worker’s compensation (reimbursement still strong)

- Third-party insurance

- Over-the-counter cash sales (ADLs, diabetic supplies, pediatrics, mobility aids, bath safety products, health and beauty aids, herbal remedies)

- Specialty distribution (EMT equipment, outpatient therapy, school and industrial first aid supply, hospital equipment repair)

- Franchise operations - partnering with mass merchandisers such as Wal-Mart