Half-Full or Half-Empty?

Air continues to flow out of oxygen’s reimbursement balloon, and the phenomenon has sparked fundamental changes in the way home care providers run their businesses. Still others have thrown in the towel and decided to stop running the business altogether.

The upheaval stems from the need to do more with less, a process that has exacted a harsh penalty on weaker providers who failed to make the right decisions. The result, says Scott Wilkinson, executive vice president of sales and marketing for Inogen, is more patients taken care of by major national entities. Wilkinson adds that when weaker companies sell to stronger players, it means fewer independent providers.

Consultant Tom Williams, RRT, agrees that requirements such as surety bonds, accreditation, competitive bidding and the 9.5 percent DME reimbursement cut are all driving many providers to sell their businesses. National suitors want to expand their geographical range, and some overburdened independents are eager to make a deal.

Ambitious independents can also get in on the action to boost their economies of scale, pick up patients from other providers and extend their range. “Good business owners are asking: How can we leverage our business and what are we really good at?” says Williams, managing director of Strategic Dynamics. “Some businesses are good at acquiring patients while others have great service, the best truck routing or the best non-delivery model. It’s about economies of scale.”

The problem, laments Williams, is that savvy providers are still dealing with the effects of bank turmoil. The difficulties make it tough to maintain and obtain quality credit in what are still tough economic times. “Small businesses are still having difficulty obtaining loans to buy new equipment and new technology,” says Williams. “And there is just so much that you can fund through cash flow. So what we have seen in general is a slowdown in equipment purchases.”

For many, market conditions all but demand the familiar wait-and-see approach. Providers are wondering whether to invest in new technology now or wait to see how reimbursement, competitive bidding and the effects of health care reform shake out. One thing they can count on, Williams says, is that demand for oxygen will continue to increase.

“The future of the market is still good, and the number of patients being diagnosed with lung disease is not changing,” he says. “We are still seeing aging baby boomers who have smoked throughout their lifetime. Many of these patients want portability, and they want the ability to live as normal a life as they can so they are looking for new technology.”

The challenge, says Williams, is to transform into a low-cost provider through a relentless focus on margins and trimming fat. After that, emphasize what you do best (call it a core competency) and leverage it across more patients. “In the retail stores, we always talk about sales per square foot,” says Williams. “Whether it is sales per employee or another measure, you are going to need tight financial measures that show you are taking costs out and driving your profit. And unless you have branches eight to 10 miles apart, I still think the model of choice is non-delivery.”

According to Williams, the non-delivery model typically falls into four categories: 1) stationary concentrator at night and a POC for daily activities and travel. As a result, manufacturers now have POC and standard stationary concentrator combinations that are profitable and work well for patients; 2) a lightweight POC all the time (if the patient does not desaturate at rest) during exercise and sleep; 3) a “transportable” POC that weighs more than 10 pounds and provides both continuous flow (up to 3 liters per minute) and pulse dose features; and 4) a concentrator/cylinder transfilling system that allows patients to fill their own portable cylinders while using the stationary concentrator when resting or during sleep.

Since reimbursement rarely goes up, consolidation will likely continue along with a business model that emphasizes lower service costs. “Businesses realize they can’t continue to survive by hammering out 3 percent annual cost reductions when reimbursement falls 10 percent,” says Inogen’s Wilkinson. “Conversions to non-delivery service models such as home transfilling systems and portable oxygen concentrators are examples of business model changes that began eight years ago and are accelerating each year.”

Calling it “alternate revenue development,” Wilkinson says many providers have expanded their business practices to include cash sales of premium portable oxygen concentrators. Thanks to solid net patient growth, there is still strong demand for these devices. “New technology enables providers to still make a fair profit and offer improved patient services even in the face of probable reimbursement reduction in the future,” he says.

Experts stress that it’s important to keep the market in perspective and understand the growth rates and segmentation of patients. Joe Lewarski, RRT, FAARC, vice president, clinical affairs, for Invacare, points out that Medicare claims data shows close to 40 percent of home oxygen patients have only a stationary concentrator without the portable add-on.

“I just did a look back over five years, and the average annual increase is about 6 percent in stationary O2 patients and less for those with the portable add-on,” says Lewarski. “Despite the appearance of a relatively mature area of medicine, hospitals are still looking for ways to get people out sooner and the population of chronically hypoxemic COPD patients continues to grow, as does the number of newly diagnosed patients.

“In the two decades that I have been in home care, we have transitioned from patients who were basically end-stage and homebound to active and highly ambulatory patients traveling on an airplane to their summer home,” Lewarski adds. “Although the annual rate of growth may be slower than other areas of medicine, the demands for new and improved technology are growing rapidly.”

Ron Richard, RRT, president and CEO of SeQual Technologies, estimates that growth for long term oxygen therapy will hover around 5 to 7 percent annually for the foreseeable future. As a result, portable oxygen technology will play an increasing role in promoting mobility and meeting the lifestyle demands of COPD patients.

Richard predicts that ever-lighter portables with extended battery life will continue to attract attention. “The other areas of long term oxygen therapy interest will be in telecommunication and managing data regarding patient adherence with their therapy,” he says. “As monitoring LTOT devices becomes more affordable, payers will demand more information on COPD patients to improve outcomes.”

Weak and Strong

Continuous flow portable systems and transfill devices seem to have experienced the fastest growth over the last two years, and Richard believes this trend will continue as gas prices go up and the cost of delivering oxygen increases.

Over the past 18 months, he notes that a number of providers have gotten out of the oxygen business or are shifting their mix of products and services to other areas that are more profitable. Some providers may attempt to spread their risk by opening or focusing on retail sales.

“In doing so, providers reduce their dependence on contracts,” explains Richard. “And if they are not part of the competitive bidding process, they will be forced to look at other options to generate revenue.”

Operating the business from a position of strength and solvency is sometimes easier said than done, but Bob Ellis, vice president, sales and marketing, Inova Labs (which distributes IBC’s LifeChoice POC), contends that new technology can help providers compete in today’s market.

“Fewer direct patient service calls, fewer patient deliveries and lower long-term costs will allow providers to grow rapidly,” says Ellis. “By understanding new product opportunities which can generate new patient billings and doctor referrals, forward-thinking providers have a great opportunity to grow their company and get the new patients that the ‘business as usual’ providers will no longer get.”

The current market still relies heavily on tanks and deliveries for the majority of patients, but Ellis believes the shift to POCs will continue. “POCs will become 60 to 75 percent of the overall market,” he predicts. “What is driving the market to this shift are better clinical outcomes. Patients will no longer settle for obsolete technology like tanks.”

Joe Priest, president of AirSep, says POCs have a long way to go, but he agrees with Ellis that they will ultimately dominate the oxygen market. “Today, stationary concentrators have greater than a 90 percent market share,” says Priest. “Over the next five to seven years, POCs will gain over 60 percent market share for ambulatory oxygen.

“POCs will do for the ambulatory market what the stationary concentrator did for in-home use in the late 1980s.”

The Half-Full Glass

Even after nearly a decade of instability, optimism is still on full display for determined providers who are committed to evolving their oxygen business. Pondering the industry, Lewarski contends that at its base, oxygen is still a good business.

Call it cautious optimism, but he believes there are still plenty of chances for success despite the myriad variables. “I talk to providers who look at the glass as half-full,” muses Lewarski. “They believe there is incredible opportunity, and they are just going to continue to grow the business and capitalize on it. They say this despite the unstable reimbursement market and the continued downward reimbursement pressure — although last year the cut was a modest couple of percentage points. And of course, competitive bidding is particularly scary.”

Lewarski contends that success or failure in today’s market depends on the answers to two important questions: How is your business structured today? And, if competitive bidding is implemented, can your business structure withstand a fairly significant cut in reimbursement? In other words, will you be able to operate to the standard of care and still be able to deliver oxygen and other bid items profitably?

Adjusting to the 36-month cap is still problematic for many providers, particularly when it comes to the leftover cash-flow sting of losing many patients at once. “In addition to the initial cap population and the immediate loss of cash flow, going forward there is a constant and somewhat predictable population of patients that will continue to cap each month, creating additional future cost without supporting revenue,” he explains.

“In essence, your monthly cash flow [and patient] attrition rate went up drastically as part of the cap process. So not only was there the initial cap sting associated with the lump sum drop in cash flow without a reduction in expense, there is the ongoing, additional monthly revenue reduction.”

The 36-month oxygen cap is yet another example of what AirSep’s Priest calls the government’s tendency to over-regulate and over-manage the market. “If [legislators] left the benefit as long as the patient’s need exists, they wouldn’t need to spend all the money and time trying to figure out how to manage after 36 months, and then after 60 months,” Priest says. “This not only creates a regulatory cost but also a tremendous opportunity for error and abuse. Just adjust the monthly rate to be fair, and stop all of the micro-managing. Once again, wasteful government intervention.”

Competitive Bidding Juggernaut

While the cap is tough, “the biggest challenge in the oxygen therapy market is the uncertainty regarding competitive bidding outcomes,” adds Wilkinson. “It’s difficult for providers to plan for the future, make necessary investments in new technology and commit to business model change when they don’t know for sure if they will even be in the game. This uncertainty will remain until competitive bidding is either repealed or implemented, but as long as it’s in front of us, it will stall change.”

Lewarski believes legislators will ultimately view the “forced attrition of providers” due to bidding as an undesirable state of affairs. When lawmakers get beyond the “mom and apple pie”-sounding nature of the program, he is hopeful that could spark a new realization.

“Competitive bidding seems like the all-American thing — put two guys in the ring and let them fight it out,” says Lewarski. “But if one guy gets a knife and the other guy gets pillows, it is really not competitive. About 90 percent of the companies in a given market are probably going to be losers in that bid and will be blocked out of servicing Medicare clients … It then creates an antitrust situation because you are taking away the competition.”

FAA-Approved POCs

Adding to seven units approved earlier, the FAA announced in January that four more portable oxygen concentrators have gotten the thumbs up for air travel. The newly authorized devices include:

• DeVilbiss Healthcare’s iGo (1)
• Inogen’s Inogen One G2
• International Biophysics Corp.’s LifeChoice
• Oxlife’s Independence Oxygen Concentrator

Previously approved POCs include:

• AirSep’s LifeStyle and FreeStyle (2)
• Delphi Medical Systems’ RS-00400
• Inogen’s Inogen One (3)
• Invacare’s XPO2 (4)
• Philips Respironics’ EverGo (5)
• SeQual Technologies’ Eclipse (6)

Experts Interviewed

• Bob Ellis, vice president, sales and marketing, Inova Labs, Austin, Texas
• Joe Lewarski, RRT, FAARC, vice president, clinical affairs, Invacare, Elyria, Ohio
• Joe Priest, president, AirSep Corp., Buffalo, N.Y.
• Ron Richard, RRT, president and CEO, SeQual Technologies, San Diego
• Scott Wilkinson, executive vice president of sales and marketing, Inogen, Goleta, Calif.
• Tom Williams, RRT, managing director, Strategic Dynamics, Scottsdale, Ariz.