How to make money in HME. Part II

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10/26/2010

I received an interesting email yesterday  from an HME provider I've known and respected for several years. This provider, who asked that I not use his name, had a "few thoughts" on a blog I posted last week, "Just the facts, please." In that blog, I suggested that providers ought to diversify away from Medicare oxygen and more vigorously pursue retail sales. However, after reading and considering this email, I'm reminded once again that there's usually more than one way to skin a cat. Here's the email:

I just read your blog and have a few thoughts.

Patient spending on health care: It is true that patient spending on health care is on the rise - even for DME. But I be believe most DME suppliers (including my company) do not stand a chance in the retail space. Most retail DME purchases are for commodity items and they will be purchased online or at mass market retailers like Wal-Mart. But the bigger issue is that our entire organizations are designed around an insurance reimbursement model. Our services are defined by insurance companies. Our costs are geared around insurance reimbursement. So moving after the cash market is a much bigger lift than it may appear on the surface. Finally, people expect their insurance to pay for the stuff we provide. The mentality is that if my doctor wrote a Rx, my insurance will pay. Changing that mentality it much bigger than the industry.

Medicare oxygen: You describe the top line growth of 5-6% annually. It would be more accurate to say the census growth is 5-6% annually. No one knows what the top line (i.e. revenue) change will be - but my guess is it will go down considerably. I think your numbers are in the right ballpark on the number of new Medicare patient starts per month (but if you include other payers the number is a good bit higher). But here is the thing - there is plenty of opportunity for suppliers to make money in the Medicare oxygen business. It will require a lot of management (coming in at 10 and leaving at 1 will be tough most days) and planning. But the growth in demand will leave plenty of opportunity to make it all work out. And because companies are going to exit the market it is conceivable for companies to grow at double-digit rates for years on end (at least in census) despite the challenges. At my old company we sold microfilm equipment until 2002. I don't think there was a single image placed on microfilm after 1990. So we had 10 years for great margins and very little competition. It did eventually come to an end but we maintained a nice business for a dozen years after the industry "ended." There is a lot of money to be made in a declining market. And this market is not really declining when measured in census.

So I would say companies remain better off if they stay specialized in whatever areas they have expertise. Diversification will hurt most companies in this industry. They are simply too small to dedicate the energy, people and money into another area.

To me, all these changes do make it difficult to plan a clear exit strategy and I think that is a big part of the industry malaise. Everyone that has ever worked in this business has watched as everyone and their brother was successful and selling their business for some decent payday whenever they were ready to get out. That has created a disincentive for owners to make good long term investments in people, processes and assets. Perhaps as people recognize they will own their businesses for a long time they will run better businesses.

Mike Moran