Breathing Room

Any way you look at it, home oxygen providers are finding it more difficult to breathe under current market conditions.

As Medicare continues to slash reimbursements, oxygen providers are facing a 36-month rental cap and an equipment transfer to beneficiaries that takes effect Jan. 1, 2009. The challenges are even greater for providers in the first 10 competitive bidding areas, where oxygen rates have been reduced by an average 27 percent.

And with gas at more than $4 a gallon in some parts of the country, delivery costs are skyrocketing. If you add to that the rising costs of labor and other expenses, it’s easy to see providers who operate on the traditional delivery-based oxygen model are getting squeezed as they work to maintain profits.

So what’s a provider to do?

“The natural solution is to move to technologies that reduce and eliminate some of those operational costs that don’t really contribute to the care of a patient,” says Joe Lewarski, vice president, Respiratory Products Group, at Elyria, Ohio-based Invacare and a former provider who ran a home care and pharmacy business for 13 years.

Oxygen-generating portable equipment, or OGPE, including portable oxygen concentrators and home transfill systems, is still relatively new on the scene, but more providers are looking to these technologies not only to shave costs and implement viable business strategies but also to meet patient demands.

“The patients we’re serving today are more active and ambulatory oxygen consumers. They want to travel,” Lewarski says. “And ambulation is good clinically. There’s data that support the fact that the more patients move and ambulate, the healthier they are.”

According to Joe Priest, president and COO of Buffalo, N.Y.-based AirSep — which introduced its LifeStyle, the first portable concentrator, in March of 2002 — “Over the next three to five years, we believe that OGPE will do for ambulation what the stationary concentrator did for in-home use. It will eventually become the dominant mode for ambulation.”

But, he continues, while “economics is a huge driver right now,” the decision to implement OGPE — and whether that is successful — “is, frankly, dependant upon the circumstances of each provider.”

Understand the Model

Before you begin to consider OGPE, you must understand that it is a radically different way of doing business.

“It’s a change in business model and a change in philosophy. It’s a change in how you spend your money and how you balance your money, and it’s going to change the way your business looks on paper as well,” says Lewarski.

First, providers should understand the fundamental differences between the two oxygen models. The traditional delivery model is an operations-driven business that requires variable expenses to be paid as they are incurred, Lewarski says. For example, if you have overtime in any given week, your payroll goes up. Your expenses also rise if you put more fuel in your truck that week.

With OGPE, spending shifts from operational costs — fuel, vehicles, overtime, time spent filling cylinders, etc. — to capital for new equipment that offsets those costs. “You purchase equipment that costs more on the front end but the operational costs are greatly reduced,” he explains.

“The biggest advantage for providers is that these systems can significantly reduce their operating costs because they specifically eliminate recurrent delivery costs … and delivery costs are going nowhere but up right now,” notes Kim Snyder, U.S. marketing manager for Murrysville, Pa.-based Respironics’ home respiratory care. She adds that, based on a 2006 study from the American Association for Homecare, delivery and other expenses associated with providing home oxygen account for a whopping 72 percent of the total cost.

According to Dan Easley, president and CEO of Inspired Technologies, North Huntingdon, Pa., providers spend on average $1,500 to $2,400 per year to service a patient, depending on the frequency of delivery. “It’s fairly easy at that point to understand how if you invest in a non-delivery system how quickly it will return for you,” he says. But, he advises, “if you look at it in terms of cost of a piece of equipment versus other types of equipment only and don’t factor in the service cost, you’ll never make the leap, and you’ll wind up finding in two to three years that your cost structure is uncompetitive.”

With OGPE, it is easier to control costs, one aspect that convinced provider Todd Tyson to make the switch. For example, he points out, fuel costs are unpredictable and so is overtime, which can fluctuate depending on traffic and call volume.

“The one thing in my company I had no control over was labor and costs,” says Tyson, president of HiTech Healthcare in Norcross, Ga. “By purchasing this type of equipment and implementing it into our program, we were actually able to know what our costs were. It’s easier to control what’s going on with your assets than your human resources.”

Bernie Lambrese, a consultant and former provider, switched nearly a third of his patients to Invacare’s HomeFill system in 2003 and saw an immediate return on the investment.

“It made a huge difference in terms of profitability and cash flow,” says the senior partner of Providence, R.I.-based Healthcare Strategies. “For each patient we converted … we saved several hundred per patient per year.”

But that said, OGPE isn’t the right solution for everyone, manufacturers warn.

“It’s not an across-the-board strategy that works for all patients in all geographies,” Easley cautions. “It’s one that you need to be able to implement in your cost structure and then be able to restructure those costs using technology to do that.”

Following are some steps industry experts recommend to help evaluate whether OGPE is right for your company, along with advice on incorporating these products in your business.

Analyze Current Business

If your company is considering the move to OGPE, one of the first things to do is take a close look at your current business.

“Know where your business is, how you spend your money, how you make your money and how it’s divided up throughout the business,” adds Lewarski. “You need to have activity-based costing of your business so you really understand where you’re spending money and not spending money.”

One of the most important calculations is figuring out how much it costs your company to make an oxygen delivery. Remember to include expenses such as fuel, vehicle maintenance, insurance, paying the driver and other labor costs associated with tracking, filing, taking orders, cleaning and maintaining equipment, creating work orders, etc.

“A number of providers tend to underestimate just how expensive it is to service patients who require deliveries,” Lambrese says. “Every time a delivery is made, a piece of paper needs to be filed. The more patients you have on service, the more inventory you need to order and warehouse and lot numbers you need to keep track of.”

Once you have a firm grasp of the costs associated with doing oxygen business, think about how you might shift that spending in your company, Lewarski recommends. For example, if you reduce or eliminate some of the costs associated with delivery (lot tracking, refilling tanks, etc.), can you reduce the number of trucks out on the field, shift working roles or expand part of your business elsewhere without expanding your resources?

When you are thinking about OGPE, you also need to decide you’re in the business for the long haul, advises Scott Wilkinson, senior vice president of sales and marketing for Inogen, Goleta, Calif. “With competitive bidding, you’ve got a situation where providers don’t know if they’re in the game or out of the game,” he says. “They know they need to convert to non-delivery, but they need to know they’re in the game before they make that investment.”

Look at Reimbursement

You’ll also need to take a hard look at how your company is getting reimbursed for the products it is providing and consider the future of those reimbursements.

“For the past 10 years, we’ve seen continued pressure and downward reimbursement,” says Lewarski. “We’re not going to see a reversal of fortune here … We’re going to continue to see lowering of reimbursements until the feds are satisfied it’s low enough.”

One of the things that drained profits from Lambrese’s former company was paying for oxygen contents. “If you have an ambulatory patient, the more they walk and use portable cylinders, the more it costs to refill them, though you don’t get an increase in reimbursement from Medicare to refill them,” he says.

If you’re located in one of the 10 cities where competitive bidding will be implemented July 1 — whether you have won a contract or plan to grandfather oxygen patients — things get even trickier.

The average reimbursement for oxygen contents in the round one CBAs is $140 per month and portable equipment is $22, which comes out to $162 a month, Lewarski points out. “Medicare pays you $130, and you hope to get the rest of the balance from the patient. How many deliveries a month can you do for $130?”

Respironics’ Snyder says competitive bidding has built new interest in OGPE because providers are going to have to evaluate their oxygen business even more carefully in order to bid effectively in round two — or maybe even to stay in business. “Competitive bidding is forcing providers to look at how they can become more efficient,” she says.

Study Your Patient Base

While looking at oxygen costs, look at your patients, too. How many oxygen patients do you have? How many deliveries do they receive? Where do they live? What modalities are appropriate based on their needs?

Deliveries can average $50 to $75 per stop when you take into account all of the associated costs, making it difficult to stay profitable with patients who consume the most deliveries, Lewarski says. For example, if you have a patient who receives four deliveries a month, costs can be $200 or more to service that patient alone.

And highly ambulatory patients, who are the ideal candidates for OGPE, often need four to five deliveries per month, Easley notes.

If a patient lives far from your location or your other patients or is in an area that is difficult to deliver to, costs increase further. The price of gas is the most obvious expense when considering geography, but don’t forget locations that increase the time your driver has to spend in the field — such as crowded urban areas — that can drive up labor costs. If a patient lives downtown where it is difficult to find parking, or if the driver must battle heavy traffic to get there, that eats into your bottom line.

“In either case you’re facing significant logistical and geographic issues in delivery,” Lewarski says. “There’s a high cost associated with that, and there are time issues associated with that.”

Also take into account the clinical needs and activity level of your patients. According to Ron Richard, senior vice president of marketing and sales for San Diego-based SeQual, an average 80 percent of patients are moderately to highly ambulatory. “When you see patients ordering 10 to 15 cylinders, that’s a good indication they’re getting out quite a bit,” he says.

For most oxygen providers, transitioning completely to a non-delivery model is impossible because there will always be nocturnal or non-ambulatory patients for whom the use of such technology is neither appropriate nor cost-effective, Richard says, adding he prefers the term “limited delivery” (versus “non-delivery”) because the provider is reducing deliveries while still servicing patients as needed.

Compare Technologies, Products

So, based on an in-depth analysis of your company’s costs and patients, you also need to figure out which technologies and products will work best for your business, Wilkinson says. In converting to a non-delivery model, some providers may use only transfill systems and some may use only POCs, while it might be cost-effective for others to employ a mix.

From an economic standpoint, Wilkinson says, one major advantage to transfill systems is simply that they are cheaper. They also use light cylinders weighing two to three pounds, making it easy for patients to move about. However, the transfilling unit itself is cumbersome, and patients are “on the clock” once they leave the house.

POCs are generally more expensive and heavier, but “the patient trades some weight for freedom,” Wilkinson says, because they can travel without worry. Inventory management is also easier since there is only one unit to track.

But remember that every new oxygen product won’t be appropriate for all patients. Providers should match the right system to each patient according to their lifestyle and their physician’s goals.

Some patients may only leave the home for an hour or so a day and prefer the lighter pack that comes with a transfill system, Wilkinson says, while patients who leave their homes for longer periods or those who like to travel might be better served with a POC.

“In a perfect world there would be one product that serves all the patients, but there isn’t one,” he says. “It is important to match the product to the patient. If you put the wrong product with a patient, the whole thing blows up.”

HiTech’s Tyson has transitioned about 35 percent of his oxygen patients to OGPE over the past year-and-a-half using a combination of different products, including a transfill system and three different brands of POCs.

“You have to look at every patient individually,” he says. Some need continuous flow while others need a high-liter flow, and some can handle units that weigh only a few pounds while others can deal with heavier weights. As a service to his patients, Tyson says, “we let them have a choice as long as it is the appropriate therapy for them.”

In one advantage for POCs, Snyder says, some providers have turned their patients’ travel from a time and revenue drain in arranging for out-of-area oxygen service into a revenue-generating opportunity. “Many are now renting those portable concentrators to patients for use during their trips, so that turns travel from a cost center to a potential revenue opportunity,” she says.

Calculate the Costs

Next, review company finances to figure out whether it is feasible to invest in OGPE and how much you can afford to spend.

Start-up costs for individual providers vary widely based on factors including size, location and payer mix, but in any case, OGPE is expensive, says Irina Fursman, vice president of commercial operations for DeVilbiss Healthcare, Somerset, N.J. “It’s a substantial capital investment,” she says. “Providers need to be financially strong to be able to make an investment, and not every provider can invest in it at a very fast pace.”

If you buy 50 units at $2,000 each, that’s a $100,000 investment. And 50 units is not a lot for most providers, Fursman notes. You may only be able to afford to put your new patients on the equipment, she explains.

Fortunately, most manufacturers provide financing packages or leasing arrangements so you don’t have to come up with all of the cash at once.

This way “their outlay of cash is amortized over a longer period of time so that they can operate from working cash flow, pay down leases and be cash-positive while transitioning to a business model with these new assets,” Lewarski says.

That’s what Lambrese did.

“It wasn’t a huge investment for us because we didn’t pay up front,” he says. “It’s like leasing a car; the difference is at the end of lease period (36 months for Lambrese), the equipment was paid for. That was the real value.”

Because there are a number of options available, providers should evaluate both manufacturers’ products and their terms before deciding which brands to go with, he counsels. “They need to take into consideration who they can work with as far as durability of equipment and the ability to negotiate a fair purchase price or lease package,” he says, adding that a lease payment may cost about $50 to $75 a month — around the same cost as making a delivery.

Most manufacturers offer guides to help estimate initial costs, but some of the expenses to take into account include warranties for equipment, the interest rate if you’re leasing, developing new policies and procedures and training staff.

“There is a lot of work [in implementing these new technologies],” Fursman says. “It is an investment in time and resources, and it should not be underestimated.”

Get a Plan

How you integrate OGPE into your business will depend on the size of your company, your patient base and the amount of money you are able and willing to invest.

“You’re not going to wake up one day and all of a sudden [decide] you’re not going to do delivery and start obsoleting all your basic equipment,” states Easley. “You’ve got assets that are working for you.”

Here are a few possible implementation strategies:

• Start with new patients. Easley recommends separating new business from base business and putting all new ambulatory patients on the new equipment whenever possible. “You want to be very aggressive in implementing non-delivery on those new patients,” he says.
• Target the most cost-intensive patients. For many providers, it makes sense to start with “frequent fliers,” as Lewarski calls patients who receive more than two deliveries a month. “In many companies, the 80/20 rule applies,” he says. “Just by selecting that target group first, they can have a huge effect on operational expense.” Lambrese started with patients who required more than one delivery a month, including patients who called often because they were concerned about running out of oxygen. “In many cases, we would go out to alleviate the concern and find out they had plenty of oxygen but were just paranoid about a provider being unable to reach them,” he says.
• Look at geography. When considering high-cost patients, look not only at the number of deliveries they consume but also at whether it’s efficient to deliver to their area. If they are in a high-traffic metro center or live in mountainous terrain, Easley says, “non-delivery for those types of geographies, no matter what the cost-intensity of the patient is, may be a better solution. You may want to simply say, ‘For that part of town I don’t deliver or invest resources on therapists or marketing to those patients.’” Another positive associated with this strategy, says Respironics’ Snyder, “is providers who may be constrained within a certain area may be able to start expanding their service area with non-delivery technology.” AirSep’s Priest adds that OGPE “gives providers a wonderful opportunity to build business in a new area without anywhere near the investment in infrastructure that you need for cylinder delivery — trucks and drivers and a tremendous volume of portable cylinders — all that is eliminated. “You can literally go into an area with one person almost,” he says. “One person can market, do the set-ups initially and get you into the business with very little infrastructure investment to start with.”
• Immediate switch. Lewarski refers to it as the “OGPE bomb approach” when a provider buys all new equipment and puts it on all patients. This approach is difficult, however, because it takes a significant amount of upfront capital.
• Gradual phase-in. Many providers use a combination of these strategies, Fursman says. For example, some providers may decide they are only going to use new equipment for patients who are located 50 miles from their location and receive more than two deliveries a month. “That’s a very measured approach and a very cautious approach. It’s also grounded in the fact that providers can only determine to buy so many units,” she says. One suggestion is to set a specific goal, Easley adds, such as getting half of a provider’s ambulatory patients onto a non-delivery system within the next two years. At that point, the company should be well positioned to expand its margins, he explains. Tyson says his company is still using stationary concentrators with five-year warranties, so he will keep those for the life of the equipment and eventually begin phasing them out. He is giving all of his patients with POCs a stationary concentrator as well, and asking them to use that at night to extend the life of the new equipment.
• At least get your feet wet. “One of the things that any provider should be looking at today at a minimum is putting their toe in the OGPE market and getting some experience with it,” says Priest. Even if you want to wait a bit on OGPE, he says, “target a few of your high-use patients … and set them up on OGPE so that you begin to get some experience. Then as your business transitions, you can make your own judgment as to whether you want to make it broader or keep it narrow.”

Avoid Pitfalls

When thinking about a switch in oxygen equipment, says Inspired Technologies’ Easley, “the worst thing you can do is try to use cost as your only focus and put the wrong modality with the wrong patient. You could get into a system that doesn’t keep the patient saturated, and therefore they can’t ambulate. At that point, your whole value equation begins to collapse.”

Another mistake providers make is not setting up new procedures when implementing OGPE, which often results in expensive inventory sitting on the shelves unused, says Fursman.

“I have seen providers that will invest in 30 units, and six months down the road, they still have 25 of them on the shelf,” she says. “That generally happens because the organization has not embraced the business model. They conceptually understood the value, but they do not have the internal processes in place to implement the model and make it successful.

“In order for it to work, you have to make sure you have created the right new process in your organization,” Fursman says.

With a new oxygen model in place, the entire company team should be trained on any new procedures, including clinicians, respiratory technicians, delivery drivers, salespeople and warehouse staff, she explains. They should know which patients are going to get the new technology and which are not. They also need to know who is going to make these decisions.

“It’s very important for everyone to understand what this particular unit is about, how it changes the way they do business and how it changes the way they set up patients,” she says.

Sell Lifestyle

Active patients tend to embrace OGPE because it allows them to leave home more easily than with traditional cylinders. Providers should use that lifestyle advantage as a selling point both to customers and referral sources, manufacturers say.

“A lot of people look at [OGPE] as a better economic model, but providers should not discount those advantages to the patients and how much it can mean to their business as a marketing tool that can drive growth,” says Inogen’s Wilkinson.

“Patients as a trend are getting diagnosed sooner with COPD,” adds SeQual’s Richard. “Since they’re younger and more active, they’re more demanding. They’re traveling, going on vacation, and they want oxygen systems to meet their demands and challenges.”

And because OGPE promotes ambulation, the patients who move more receive greater clinical benefits, he says.

“Show referral sources you’re keeping up with the times and using the best technology for the patient,” Richard advises. “Doctors are very interested in learning what’s out there, and it’s a competitive advantage to offer those types of options to physicians and referral sources.”

Educating patients on the new technology and how it can improve their lives is another key to a successful OGPE transition, Lewarski says.

“There are always going to be patients who are intimidated by change or very loyal to a technology that has served them well,” he notes, but “when a patient has an opportunity to see the new technologies and experience them … it can be pretty empowering.” Many Internet-savvy patients are asking for the new equipment, he says.

Change is also something providers must get used to, according to Richard. At Medtrade Spring, he says the providers he talked to about new oxygen technology were “obviously the ones who want to be the best prepared for the changes that are in front of us related to competitive bidding and reimbursement cuts in oxygen. They also care about patient care and want to establish themselves as the leaders in their marketplace.”

As with any change in the industry’s unsettled circumstances, there are risks and rewards, and every person interviewed for this article pointed out those considerations. But, Richard sums up, there are also consequences to making no changes at all.

With the incorporation of OGPE, in most cases providers are not only improving their business but also filling a real market need, he says: “A number of patients are purchasing OGPE devices out-of-pocket because [the provider] is still not willing to take this on.”

About Moving to OGPE

“It’s a change in business model and a change in philosophy. It’s a change in how you spend your money and how you balance your money, and it’s going to change the way your business looks on paper as well.”
— Joe Lewarski, Invacare

“The biggest advantage for providers is that these systems can significantly reduce their operating costs because they specifically eliminate recurrent delivery costs … and delivery costs are going nowhere but up right now.”
— Kim Snyder, Respironics

“By purchasing this type of equipment and implementing it into our program, we were actually able to know what our costs were.”
— Todd Tyson, HiTech Healthcare

“In a perfect world there would be one product that serves all the patients, but there isn’t one. It is important to match the product to the patient. If you put the wrong product with a patient, the whole thing blows up.”
— Scott Wilkinson, Inogen

“You’re not going to wake up one day and all of a sudden [decide] you’re not going to do delivery and start obsoleting all your basic equipment. You’ve got assets that are working for you.”
— Dan Easley, Inspired Technologies

“Every time a delivery is made, a piece of paper needs to be filed. The more patients you have on service, the more inventory you need to order and warehouse and lot numbers you need to keep track of.”
— Bernie Lambrese, Healthcare Strategies

“These are tough decisions, but providers are fighting for survival. Salaries and expenses are going up and Medicare reimbursements just took a hit.”
— Tom Williams, Strategic Dynamics

“There is a lot of work [in implementing these new technologies]. It is an investment in time and resources, and it should not be underestimated.”
— Irina Fursman, DeVilbiss Healthcare

“Show referral sources you’re keeping up with the times and using the best technology for the patient.”
— Ron Richard, SeQual

“Over the next three to five years, we believe that OGPE will do for ambulation what the stationary concentrator did for in-home use. It will eventually become the dominant mode for ambulation.”
— Joe Priest, AirSep

Think About Downsizing

Transitioning to OGPE isn’t enough by itself. You’ll need to make some decisions to pare down operational expenses to make the move effective, says Tom Williams, managing director of consulting firm Strategic Dynamics, Scottsdale, Ariz.

“Hoping and praying is not a strategy. You’ve got to put a pencil to it and look at the metrics and see what the numbers are telling you. If I buy new equipment and don’t take out a truck or driver or someone else, all I do is increase my cost of goods being sold,” he explains.

Some basic questions to ask:

• If you invest in OGPE, can you decrease the number of trucks, drivers and amount of equipment? Would you still need a location as big as the one you’ve got now?
• Can you downsize some of your vehicles? Could you use a minivan instead of a full-size truck?
• What can you do with existing assets? Can you sell cylinders to another provider or another business, such as a welding company? Would those proceeds help with the purchase of OGPE?
• Can you reduce the number of employees or the hours that they work? And what are the human capital concerns? If you’ve had a driver who has been with the company for years, do you really want to lay him off? Is there another place in the company where you could use his knowledge of your business and your patients?

“These are tough decisions, but providers are fighting for survival,” Williams says. “Salaries and expenses are going up and Medicare reimbursements just took a hit.”