Why some HMEs say 'No' to high-tech O2

Wednesday, May 31, 2006

In April's HME News Poll, 66.7% of providers responded that despite recent cuts to Medicare respiratory reimbursement, they would not invest in oxygen equipment designed to reduce deliveries and a company's overall operational costs. The remaining third apparently believe that, while more expensive to purchase initially, this new technology will lower their overall costs of providing oxygen over the useful life of the equipment. While not enough data exists to explain the poll results with total certainty, there are a few things we can say.
First, it appears that the providers willing to embrace this technology desire to eliminate the monthly or more frequent deliveries of home oxygen. A few simple calculations help explain their thinking.
Let's assume, for example, that you have used an activity based cost model and determined that your delivery costs are $50 per delivery. If the useful life of the equipment is eight years, you can theoretically save $50 per month for 96 months or $4,800. Even if you send a clinician to the home each quarter over the life expectancy of the equipment, you are still saving dollars. Using the same example, you save $50 per month for 64 months (96 months minus 32 months) or $3,200 in savings.
If you run the numbers, even with Medicare's 36-month cap on oxygen, this technology produces savings.
Two-thirds of respondents, however, indicated that they are not convinced this new technology offers real savings. The question is why?
There are several plausible reasons.
First, these providers may be tightening up their asset utilization and placing more units into service before they purchase new devices.
Second, they may be repairing existing devices and extending their useful life. Using units that are fully depreciated is always more profitable than buying new devices.
Third, the mix of patients for a given provider may cause them to pause and reflect on whether they should purchase new technology. The oxygen business has three types of oxygen patients. They are the nocturnal patients who only need oxygen at night; the homebound patient who is in the later stages of his disease process and rarely goes out of his home; and the ambulatory patient. Those patients who are ambulatory more than 12 hours per week can benefit from no-delivery devices.
Fourth, patient preference, referral source demand or the clinical requirements of the patient may require that other technology be used.
Fifth, economic models that help the HME provider determine which method of oxygen delivery is clinically appropriate for the patient and cost effective for the provider may not have been employed.
Sixth, some HMEs have already gotten very creative in reducing their operational costs and may believe that further reductions are not possible without severely changing their service delivery model.
Seventh, manufacturers may not have created enough of a value proposition to motivate HME providers to purchase the new technology. HMEs need to see real savings--not theoretical savings.
Eighth, regulatory uncertainty breeds caution. We are in an era of unprecedented cuts and changes in the regulatory environment. It is natural behavior for HME providers to conserve cash in times of uncertainty.
The Bottom Line
The number of patients requiring home oxygen is increasing steadily. COPD is the fourth leading cause of death in the United States and is predicted to be No. 3 by 2020. Oxygen, while not as profitable as it was years ago, is still a viable, growing business and, when compared to gross margins and EBITA in other industries, lucrative. HME providers can benefit from the following strategies. They must increase the number of oxygen patients that they serve by increasing their market share. As they do so, they must increase their return on investment (ROI), return on assets (ROA), return on equity (ROE) and revenue per employee.
HME providers must also continue to aggressively manage their cost structure and change their business models to ensure efficiency and reduce their dependency on Medicare. Some of the currently delivered services will have to be re-examined. Some services will have to be eliminated, reduced or provided sparingly. Services that stay will be those that provide a measurable benefit to patients or referral sources. Evidence will be required to document the service requirement. Lastly, activity-based costing and Six-Sigma will become watchwords for the future.


Tom Williams is managing director of Strategic Dynamics.