Quiet stability fled the oxygen market so long ago that
providers are all but committed to living with strife.
Manufacturers are no different as they feel the effects of the
uncertainty with fluctuating bottom lines.
From smaller equipment makers all the way to Ohio-based giant
Invacare, legislative and regulatory edicts continue to influence
buying patterns as providers wait for an elusive calm that will
allow them to catch their breath.
"We've often had peaks and valleys in response to bad news in
the marketplace," says Joe Lewarski, vice president of clinical
affairs at Invacare, Elyria, Ohio. "You will see some retraction in
purchasing, and we'll hear from some customers that they are being
cautious in their capital spending until they get more
information."
A recent presentation from Lewarski and John Lescher, director
of Invacare's Respiratory Group, reported that 2008 government
numbers showed approximately 1.5 million distinct annual Medicare
oxygen patient claims, with a monthly average of 1.12 million
patients. Lescher and Lewarski concluded that the combination of
claims, patient life cycle and annual net growth of approximately 5
to 7 percent (net meaning new starts minus discontinuations)
suggests about 45,000 to 55,000 new patient starts per month.
Despite the consistent numbers, it has been no easy ride.
Instead, providers who have managed to maintain steady (or better)
growth in 2010 have had to deal with the 36-month oxygen cap and
the 9.5 percent DME cut brought on by the competitive bidding
delay. Both factors have impacted cash flow and profit, a twin hit
that challenged even the most efficient providers.
In many cases, a population of patients who went off service at
36 months also remained on oxygen. "Adjusting to that as a new
benchmark and a new attrition rate was one thing that affected the
market, so people had to get an understanding of their oxygen
traffic, because capping changed the traffic pattern," says
Lewarski.
"Providers had to understand who was capping, who was staying,
average lengths of stay, and what was the overall turn rate. Where
and when in the rental cycle was the equipment coming in and out?
How can you lower the cost of doing business?"
Lewarski believes technology will prove to be the provider's
best response to continual turmoil, with elimination of routine
delivery and other non-value-added services as a crucial first
step. By allowing technology to replace non-reimbursed labor and
expenses, the profitability math can work out — even in a
volatile market.
Competitive Bidding Stunner
Lescher and Lewarski also note that oxygen took an undeniable
"beating" when CMS announced bid rates for the Round 1 rebid. The
mean concentrator price came in at $116 (with a range of $102.84 to
$125) for an average cut of 33 percent. The mean portable cylinder
rate wound up at $20.82, with an oxygen generating portable
equipment (OGPE) mean of $41.89.
Overall, payment for oxygen supplies and equipment averaged 31
percent less than under current Medicare allowables. The size of
the reduction stunned affected providers, who say they will have to
run a tight ship and walk a thin line if they are to have any
chance of staying in the business under the new rates.
"You've got to be ridiculously efficient, an astute buyer and a
heck of a marketer," says Chris Rice, whose company, Diamond
Respiratory Care in Riverside, Calif., was offered an oxygen
contract. "Any provider who won has to increase their market share
very quickly."
"I was very surprised when the rates came out that low," agrees
Patrick Clevidence of Medical Service Co. in Cleveland, where the
concentrator rate settled at $103, a significant decrease from the
current $173.17. "It kind of just felt like a punch to the stomach
that leaves you staggering. And then, once you get your focus, you
say, 'How do we provide the same service to our patients?'"
The question hovering over the entire sector is whether
providers in Round 1 can even stay in business at Medicare's new
reimbursements. While Rice believes it is possible — he
points out that many companies already have managed care contracts
at 70 percent of the current Medicare rate — he admits it
will be tough.
"Providers need to start now thinking about the new margins and
where they can expand to improve them," he says. "Even though the
most frequent items have been cut significantly, there are other
complementary product lines that are not part of the [bidding]
program. In addition, we need to look at technologies that truly
reduce cost and are not just 'fluff' or 'me-too' products."
Clevidence's company was also offered an oxygen contract. The
meager reimbursement is much lower than his company bid and much,
much lower than he expected the new rate to be — "I thought
$120, $125, $130," he says — but the company is going to
"give it the old try.
"It's going to be tough and it is going to be a good lesson in
economics and efficiencies and recreating your business like you
never thought you'd have to just to keep your head above water,"
Clevidence says, adding, "I hope our preparation is enough. We're
just as scared as the next guy."
Joe Priest, president of AirSep, Buffalo, N.Y., says while the
Round 1 pricing is disappointing, it is not so surprising. "You get
people who probably bid out of panic, and they throw bids in that
are potentially unsustainable — driving the remainder of
participants into a level of service that is really not
appropriate," he says. "Competitive bidding is a wild card. It is
an experimentation that the government is willing to take with home
care patients."
Despite competitive bidding, Priest agrees that the basic need
for prescribed home oxygen will not go away, regardless of the
reimbursement situation. "I really don't see anything that changes
the growth rate of this disease pattern, and as a result the growth
of the overall market," says Priest. "I expect demand to be fairly
consistent, year in and year out."
Satisfying that demand with a non-delivery system is a shift
that Priest expects to continue as ambulatory patients shape a new
dynamic in the marketplace. "My perception is that the market is
going to gravitate to a non-delivery mode, so I do believe there
are dramatic changes afoot here," says Priest. "We are in the early
stages of the transition from an aspect of home oxygen that
requires a substantial infrastructure delivery to a non-delivery
mode. I'm convinced it's not a question of if, just when."
AirSep plans to push the evolution with its Focus, the company's
new mini-weight portable oxygen concentrator. "It will be the
lightest POC in the world at less than two pounds," reports Priest.
"We already have the lightest with the FreeStyle, which is less
than 4.5 pounds. We think this POC will address about 50 percent of
the ambulatory market."
The home transfill model also continues gains due to
demographics and clinical need, and Lewarski believes that the
maturity and reliability of the product will only fuel that trend
as they near 200,000 units in the field.
"Our HomeFill model, which incorporates the stationary
concentrator and a home filling system, allows patients to fill
their own cylinders as needed," says Lewarski. "This is the model I
see servicing the largest majority of patients both clinically and
to meet lifestyle needs."
Ron Richard, president and CEO of San Diego-based SeQual
Technologies, which introduced the third generation of its Eclipse
POC (Eclipse 3) last year, also estimates that growth for long-term
oxygen therapy will continue to hover around 5 to 7 percent per
year for the foreseeable future. He, too, believes portable oxygen
technology will play an ever-increasing role in promoting mobility
and meeting the lifestyle demands of COPD patients.
But he adds that the climate of today's market requires a
delicate balance not only for oxygen providers but for
manufacturers as well. "It is a challenge to competitively make
excellent, reliable and durable equipment with all the pricing
pressures placed on home care providers," says Richard. "Providers
come back to the manufacturers and ask for pricing concessions so
that the return-on-investment model works out in their favor
…
"Eventually, home care providers may have to work with low-cost,
low-quality overseas products that have little or no warranty," he
continues. "You can't afford to repair the equipment, and you are
going to get to a point where you get to an exchange program and
just throw concentrators away."
With oxygen reimbursement falling by almost 50 percent over the
last three to five years, manufacturers are also struggling to cut
expenses while continuing to maintain quality. "We have FDA
overhead, we pay sales reps, and we have regulatory, certification,
parts and registration costs that are not going down," Richard
says.
More Changes on the Way?
In the midst of so much upheaval, most industry-watchers believe
that oxygen providers will likely continue to go out of business.
How many and at what rate is the big unknown.
Beyond the damage the dismal Round 1 reimbursements will do to
bottom lines, oxygen providers say they also have other concerns
— namely, that other payers will follow suit. That concern
resonates with Andy Ingram, owner of Home Assist Medical Equipment
in Laurinburg, N.C. Ingram isn't in the Charlotte competitive
bidding area, but he's worried anyway.
"I worry about when they are going to follow suit," he says of
private payers. "They don't follow Medicare in a lot of respects,
but when it comes to pricing, they're going to come right
along."
That could be devastating, he says.
"As it is now, we're not doing a great job of surviving on the
O2 rates," he says. With the 9.5 percent cut and the 36-month cap,
he notes, he gets paid about $103.80 a month if he keeps an oxygen
patient five years. The new Charlotte rate of $122.12 per month
would, when extrapolated over 60 months, come out to $73.28.
"Small providers like us, it's going to be really tough for us
to stay afloat," he says.
Rice concurs. "I think this industry is turning into a place for
mid- to large-sized providers and the independent is getting
squeezed out," he says. "To win a contract, you had to rely on your
volume purchasing power. In addition, you had to be very confident
that you run a tight ship."
Still, it could collapse, he says. "As a prior bid winner, we
went through a very expensive expansion. When the contracts were
cancelled [when competitive bidding was delayed in 2008], the prior
contract winners were left holding the bag," Rice reminds. "I'm
concerned that may happen again."
Clevidence says he expects that patients around the country will
suffer under the new rates. "I think there will be companies that
turn down the bids because they just can't do it at that price," he
says.
"Or they will try and will provide lackluster service and
lackluster equipment and patients will be ending up in the
hospital. And hospital re-admissions will be costing taxpayers more
dollars.
"I think," he says, "that the government forgot that all these
dollars [they are saving] are attached to patients and their
lives."
Additional changes to oxygen rules may be coming as well. In
June, CMS released its 2011 Proposed Medicare Physician Payment
Rule, which would move up to month 18 the responsibility for
providers to continue furnishing oxygen through month 36 (to
address the problem of traveling beneficiaries in months 18 through
36). The proposed rule also includes possible reconsideration of
the special payment rules for oxygen and capped rental items under
competitive bidding.
On the other hand, the much-hyped baby boom generation is no
joke, so demand and oxygen prescriptions will continue to flow.
Jay Vreeland, director of U.S. marketing, home respiratory care,
for Philips Respironics, points to the variety of equipment now
available for patients.
"As COPD prevalence and awareness grows, patients are getting
diagnosed and treated earlier. For home oxygen users, there is a
greater choice of solutions to help them to stay active and
maintain their quality of life in their own homes," he says. New
POCs, for example, make it possible for patients to "travel to see
loved ones, or even around the world," Vreeland says. "This freedom
was not possible in the past."
So technology, business savvy and perhaps even a legislative
Hail Mary could come to the industry's rescue.
"I am an optimist, and I believe that in the next 10 years or so
we are going to have other oxygen-generating technologies, and one
of these may be a paradigm-changing technology that allows us to
generate high flows and small packages with modest energy
consumption," says Lewarski.
"I think the Meek bill [H.R. 3790] to repeal repetitive bidding
is still a possibility. Obviously [as of press time] it does not
yet have a Senate companion, but legislators are taking a serious
look at this flawed program.
"It is easy to get bogged down in the bad," continues Lewarski.
"But at the end of the day, I truly believe that home care is going
to be the most important place for the provision of health care in
the long term.
"The role of care in the home is going to continue to grow in
importance as time goes on. It may not look exactly as it does
today, but we are the preferred point of care."
Susanne Hopkins contributed to this report.
GAO to Report on Home Oxygen Costs
In September, the American Association for Homecare
announced it had been called in by the Government Accountability
Office to comment on a report in the works on the cost of providing
home oxygen therapy.
In 2006, AAHomecare commissioned a study on the same subject
from research firm Morrison Informatics. That study showed
accompanying services including delivery, patient assessment and
education, routine safety inspections, maintenance, ongoing support
including refills, emergency services and related expenses such as
regulatory compliance account for the lion's share of costs in
providing home oxygen — 72 percent — while equipment
represents only 28 percent.
On Sept. 17, several providers who are members of the
association along with other industry representatives convened to
review the report. Those taking part were asked not to discuss
details, but the new GAO report on home oxygen therapy costs is
expected to be published in November.
Average Cuts for Oxygen in Round 1 CBAs
| Oxygen Supplies & Equipment | |
|---|---|
| Charlotte | 29% |
| Cincinnati | 34% |
| Cleveland | 37% |
| Dallas | 29% |
| Kansas City | 27% |
| Miami | 27% |
| Orlando | 33% |
| Pittsburgh | 37% |
| Riverside | 28% |
| Average | 31% |
