Oxygen Rates Put Providers in a ‘Lose-Lose’ Situation

ATLANTA — Home oxygen providers 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 Medicare’s new reimbursement rates, industry providers said.

“You’ve got to be ridiculously efficient, an astute buyer and a heck of a marketer,” said 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.”

The average cut across all Round 1 competitive bidding product categories was 32 percent; oxygen supplies and equipment averaged 31 percent less than the current Medicare allowable.

The size of the reduction stunned providers, who noted that the deep dip comes on top of the 9.5 percent reimbursement cut providers took to pay for the delay of the initial Round 1 (2008), As well, they have suffered a significant decline in income because of the 36-month oxygen rental cap, which was also implemented in 2009. (See PAMS’ Shirvinsky: Oxygen Rates are Foul Business, July 12.)

“I was very surprised when the rates came out that low,” said Patrick Clevidence of Medical Service Co. in Cleveland, where the oxygen 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?’”

‘They Devalued Our Industry’

“It’s sad, it’s disheartening, it’s disappointing,” said Tammy Zelenko of AdvaCare Home Services in Bridgeville, Pa. The Pittsburgh area charted the lowest rate — $102.84 — a 37 percent decrease. “Why did they do that? I looked at those rates when they came out and I knew I didn’t get [a contract] because I knew I didn’t bid that low.

“Overnight, they devalued our whole industry. We have been working so hard to [prove] the value that we bring.”

The question hovering over the entire sector is whether oxygen providers can even stay in business at the new Medicare payments.

While Rice believes it is possible — he pointed out that many companies already have managed care contracts that are 70 percent of the current Medicare rate — he admitted that it would be tough.

“Providers need to start now thinking about the new margins and where they can expand to improve them,” he said. “Even though the most frequent items have been cut significantly, there are other complementary product lines that are not part of the program. In addition, we need to look at technologies that truly reduce cost and are not just ‘fluff’ or ‘me-too’ products.”

For providers to succeed under the new rates, Rice said, they must be running an efficient operation already. “It also depends on what other contracts you’ve won,” he said. “If you’ve only been awarded one or two and your current product line includes many more, you’re in trouble.”

Clevidence’s company was also offered an oxygen contract. The meager reimbursement rate 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 said — 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 said.

The overarching goal is for Medical Service to continue to provide its patients with superior service, he said.  “At my company we’re talking about how to [be more in touch] with the patient,” Clevidence said. “We are going to be working really hard to maintain that service.”

His hope is that the company, with its economy of scale in Cleveland and its years of preparation, can make it work. Medical Service has armed its drivers with netbooks so dispatchers can connect with them to make deliveries more swiftly; its significant hospice business has forced the company to become more efficient in all areas, he said.

“I hope our preparation is enough,” Clevidence said. “We’re just as scared as the next guy.”

Zelenko, whose company was offered a contract for walkers (which she refused) but wasn’t offered an oxygen contract, said she believes the bids to be unsustainable. “We’ve been running numbers, running numbers. I don’t see it,” she said, adding that the rates still affect AdvaCare because CMS allows those who don’t get oxygen contracts to continue to service their established Medicare patients under a grandfather clause.

“If you have a Medicare patient for 36 months and then have to take care of them for [two more years], I don’t see who is going to want to have these patients grandfathered in,” Zelenko said. “If you have a contract, you have to take them. You have to. You have to take people that others don’t want to grandfather in.”

So providers who “win” contracts lose out as much as those who were not offered contracts, according to Zelenko. “We’re in a lose-lose situation,” she said.

Beyond the damage the dismal reimbursement rates will do to their bottom lines, providers said they had other concerns.

Clevidence said he expected that patients around the country would 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 said. “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 said, “that the government forgot that all these dollars [they are saving] are attached to patients and their lives.”

Payers Follow the Leader

Zelenko said she worried that the margins, if there are any, will be so slim that providers won’t be able to get credit. “I don’t know how they are going to get equipment,” she said.

She also doubts that there will be enough providers to handle the demand. “It’s just economics 101,” she said. But her biggest concern “is the other payers following 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 the 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 said.

“As it is now, we’re not doing a great job of surviving on the O2 rates,” he said. With the 9.5 percent cut and the 36-month cap, he said, 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.

“Seventy-three dollars — you give some patients that much in supplies in a month,” he said. “I’d go out of business — there’s no way.”

Like many providers, Ingram is in a rural area, with a population of 35,600 people in 321 square miles. There are few economies of scale to be had in that environment.

“Small providers like us, it’s going to be really tough for us to stay afloat,” he said.

Rice agreed. “I think this industry is turning into a place for mid- to large-sized providers and the independent is getting squeezed out,” he said. “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 said. “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 said. “I’m concerned that may happen again.”

H.R. 3790, the bill that would eliminate competitive bidding, has garnered 252 cosponsors and efforts are afoot to get a companion bill in the Senate.

“One potential track for H.R. 3790 would have it coincide with the doc fix bill, which comes up right around the time the new contracts would begin,” Rice said.

Ingram thinks that’s where the industry’s only hope lies. “It’s going to take an act of Congress to stop competitive bidding,” he reminded.

For the moment, though, it’s a new business world for providers.

“It’s business as usual; we’ll just find a different business. But it’s not Medicare,” said Zelenko.

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