The Outlook for HME: 2004-2008

Based on a report presented at Medtrade 2003 by Wallace Weeks of The Weeks Group, the following summary looks ahead to market growth, competition and other factors that will affect the HME industry from 2004 to 2008. While the report was prepared before Congress’ passage of a Medicare reform bill that includes competitive bidding and reimbursement cuts within this period, the good news, according to Weeks, is that the industry has plenty to be optimistic about. To put the long-range preview in perspective, Weeks first highlights the “wide-angle” view, which is an overview of what the industry may go through in the next five years. The “telephoto” view zooms in on specific segments of the industry to examine the results we could see by 2008. Once settled on what the future of the industry and markets will be like, “we are compelled to answer the question ‘What do we do about it?’” says Weeks, who also offers some specific business strategies for providers to focus on when adjusting to meet market changes during the five-year timeframe.

Note: Spending projections in the report are based on a CPI freeze for Medicare reimbursement, but do not reflect the effect of reimbursement adjustments to FEHBP as included in the Medicare reform bill.

The Wide-Angle View

Our company research and industry forecasts indicate that the home medical equipment business will be characterized by three conditions over the next five years: growing demand, channel diversification and continued consolidation.

Growing Demand

More demand is exciting news for the industry, and a good place to start a look at what’s ahead. Sales to consumers will grow from approximately $18 billion currently to $21 billion in 2008. And that’s a conservative estimate because it assumes no increase in Medicare spending.

The overall average annual rate of growth will be 3 percent, but some product lines may grow as fast as 19 percent. Sales of diabetes products, for instance, are expected to increase at approximately this rate, as is the smaller category of walkers.

The following forces will drive the growth in demand:

• People are living longer. That is no surprise, but the numbers behind this factor might be. In 1980, life expectancy was 73.7; now it is 77.2 and climbing. By 2008, it will be 78.
• The population is aging quickly. The nation’s senior population is growing at a rate 3.6 times faster than that of the total population. As a whole, the population is growing at 1.3 percent each year, while the senior population grows at 4.5 percent per year.
• Consumer awareness of health issues and options is increasing. This growing awareness is driven by media, support groups and, probably most important, by our industry. Consider the huge amount of advertising that is directed to home care products.
• Reimbursement cuts will continue, especially among the government payers. When you consider the rate of growth of the senior population and the per capita spending for health care for seniors compared to the per capita spending for the under-65 population, it seems that government reimbursement can easily be overwhelmed. Government payers will have no choice but to cut reimbursements. Because the most dramatic increases in the senior population will begin in 2007 (the baby boomers hit 65 in that year), we can consider these next five years only the prelude to real cuts. Private-sector health plans have stopped losing money and have become profitable, and the prospect of their increasing profitability through 2008 is plausible. Therefore, we expect that private health plans will be easier to work with on a go-forward basis.
• The wealth and disposable income of seniors is growing in real dollars. Inflation is predicted to remain relatively constant at 2.5 percent per year for the five-year period, and capital markets have begun to stabilize. These conditions will favor real growth in income that may be used for health care.

Channel Diversification

In the next five years, we will see strong growth in newer channels of distribution like mail order and the Internet. As our industry has grown and opportunities have been uncovered, enrepreneurs have found new channels to deliver products and services. There was a buzz when Sears decided to put lift chairs and bath aids in its mail order catalog, and again when mass merchandisers like Wal-Mart became big players in the pharmacy business and included HME. Now we have networks of HME providers and Internet-based businesses.

Over the next five years, we will see further development of the manufacturer-direct channel, and we could even see the beginning of an HME benefit management channel just as we have for prescription drugs.

Millions of consumers now accept that their medications can be provided by a pharmacy that is 1,000 miles away, and they appreciate the convenience. Some consumers are beginning to accept that their wheelchairs, diabetic supplies and ostomy supplies can be purchased the same way.

Consolidation

Consolidation will continue and may even escalate in the five-year horizon between 2004 and 2008. HME is in the early part of the “mature” stage of its industry lifecycle. Generally, during this stage in any industry, it is common to consolidate.

Ultimately, an industry may wind up with only three or four players that produce the majority of its sales. But there may be a host of other participants that produce a small share of the expenditures and can remain very profitable.

At present, the combined market shares of four of HME’s top public providers represent an estimated 14.6 percent of the industry’s business: Apria, 6.3 percent; Lincare, 4.8 percent; American HomePatient, 1.8 percent; and Liberty Medical, 1.7 percent.

There is plenty room for consolidation to continue. We will not likely see three or four players control 50 percent of the HME market by 2008, but we will be closer to that situation than we are today.

The Telephoto View — and What You Can Do with It

Zooming in to the telephoto view of the industry, four market segments — respiratory services, diabetic supplies, mobility products and home infusion — make up about $13.3 billion in revenues at the consumer level, and revenue for these four sectors will continue to grow.

Projections show that from 2004 to 2008, respiratory will grow from $4.5 billion to $4.9 billion; diabetes will grow from $2.7 billion to $4.7 billion; mobility will grow from $1.3 billion to $1.5 billion; and infusion will grow from $4.8 billion to $5 billion.

Now that we know how certain market forces and segment growth will shape the HME industry, what can you do as a provider so that your own company revenues will increase? The answers to that question, of course, can be as diverse and unique as the businesses that make up the industry.

We can, however, make some general recommendations for your business strategy, whether your company operates with a traditional business model and intends to stay that way, or your company reaches consumers through newer channels.

The traditional HME company should execute the following strategies well, and can use others, too. The strategies that are a “must” include:

• Payer diversification — The goal of this strategy is to keep your company from becoming unprofitable because of the actions of any single payer. It is difficult to have less than 40 percent of revenues coming from Medicare, but most providers could become unprofitable with the loss of any payer that makes up more than 15 percent of company business.
• Improved controls — Controls are what allow businesses to operate efficiently, and efficiency is governed by how well the controls enhance throughput and quality. Controls are driven by management information, policies and procedures. They are a critical source of competitive advantage for the businesses in this industry. Since raising unit prices is next to impossible, a great deal of HME profitability rests in the control of businesses.
• Getting closer to the consumer — Competition will continue to play a significant role in HME growth. Businesses are entering the industry at a rate faster than demand is increasing. In order to create customer relationships that can’t be easily broken by lower prices and the convenience of mass marketers, providers with traditional business models should, first, select the right customers and, second, offer them the best overall solution. Selecting the right customers means focusing marketing efforts on getting the customers that your company can best serve, and on serving those customers well. The traditional business model lends itself to the general strategy of providing the best overall solution, not to being the low-cost provider. Analyze your market, and be sure that you can measure the characteristics you need to create strong customer relationships, such as fewer failures and faster resolution of problems. Use these metrics to prove that you offer the best overall solution.
• Precision marketing — With narrowing profit margins, it has become too expensive to cast a wide net to land only a few customers. However, the cost and effort of market planning is less for companies that use wide-net techniques. Precision marketing requires research and planning to become efficient at getting the right message to the right people, but the result is a lower customer acquisition cost and a better retention rate.

Those providers reaching consumers through newer channels, such as mail order, the Internet and manufacturer-direct, can use the strategies mentioned, with the exception of getting closer to the consumer. Providers working in these newer channels also can consider becoming the low-cost provider for some lines, especially those that can be sold for cash. But being the low-cost provider requires solid use of controls as we have discussed — without exception.

Finally, developing a product/service niche will also work well in newer and mass market channels. A niche can be product-specific, market-specific or both (sometimes referred to as a super-niche).

By definition, a niche market has no real competition. In most industries, HME included, niche market companies develop higher profit margins. Unless someone stumbles across a niche, the opportunity will only be found through market research and brainstorming. Successful niche marketers then become good at precision marketing.

The five years from 2004 to 2008 will yield plenty of good opportunities for the HME industry. Some of the challenges that providers face will become inflection points that allow smart companies to move to the top of the heap. The providers that capture these opportunities will be those who recognize and deal effectively with market dynamics by working smarter to innovate and provide superior solutions for their customers.

Wallace Weeks is founder and president of The Weeks Group, Melbourne, Fla., a consulting firm that specializes in total business improvement for small businesses, specifically in the area of post-acute health care. He may be reached by phone at 321/752-4514 or by e-mail at [email protected].