HME Industry Outlook

The 2013 outlook for HME providers largely depends on whether they serve a metropolitan statistical area (MSA) impacted by Round 2 of competitive bidding. As the year begins, uncertainty is the rule among many providers, anxious about how the next round will play out. Winners and losers will emerge, obviously, but industry consultant Alison Cherney of Cherney and Associates says providers should also keep an eye on the larger market.

Emerging trends such as concierge health care, Accountable Care Organizations (ACOs) and implementation of the Patient Protection and Affordable Care Act (Obamacare) have the potential to broadly impact the HME market in 2013 and beyond. “Things are brewing and you have to understand what’s going on,” Cherney says. She says HME providers should also watch what is happening among doctors, who could face a cut in Medicare reimbursement unless the “doc fix” continues to be implemented. If a large number of doctors decide to no longer serve Medicare patients, the disruption to referral patterns will impact HME providers.

Cherney says the HME market’s overall 26 percent price cut, as reflected in Round 1 of competitive bidding, points to a need for the industry to match its level of service to the associated price, such as offering high-end, mid-range and low-end pricing, each tied to a corresponding level of service. “The reality is that we are paid at different levels, but we just haven’t adjusted our service to those three levels.” An apt comparison is to the hospitality industry, says Cherney, where there are luxury hotels, business hotels and economy hotels, each with its own level of service expectation.

Cherney observes that providers looking at the year ahead typically fall into two camps, either the “deer in the headlights” camp of those who see competitive bidding as an insurmountable obstacle, or the opposite extreme of optimism and an eagerness to grab the opportunities of a changing industry. She says few providers fall in the middle ground between the extremes. “Companies that truly understand are doing very well.” There has been a weeding out of weaker players, with most of the remaining companies more well-positioned. “There are a lot of opportunities to build better customer relationships and to look at the cost side of the business.” Cherney sees managing an HME’s product selection as akin to tending a garden, with a continuous need to prune.

For a ground-level view of the business outlook into 2013 and beyond, HomeCare magazine interviewed providers located throughout the country in each of the Medicare Jurisdictions. Read about their experiences—representative of the overall state of the market—on the following pages.

Looming Impact

Landauer Metropolitan has about 38 locations mostly in the Northeast, from Maine to northern Virginia, operating under such names as Denmarks, Genox, Young’s, Miller Medical and American Homecare Supply. In all, the company has about 850 employees. More than half the business is respiratory, with the balance DME, and the Medicare share is about 22 percent.

All the HME locations operated by Landauer Metropolitan have worked to increase efficiency, embrace technology, market new products and eliminate any unprofitable lines. Some locations have been consolidated, either because of an acquisition or because they are located within 40 miles of each other, according to Alan Landauer, chairman of the Great Neck, N.Y.-based company.

“We’ve had a pretty good 2012, but with some cutbacks because of managed care,” Landauer says. “It’s beginning to be a much more difficult business than it was.” Landauer Metropolitan was not affected by Round 1 of competitive bidding.
“2013 will be a constant battle for growth and bottom-line profitability.” The expected impact includes all business lines and reflects a business in which the revenue rates are set by the Federal government, says Landauer. He sees audits as even more of a detriment to the industry than competitive bidding. “It’s a bounty system for companies running the audits.”

Pressures on smaller players have provided acquisition opportunities for the company, and Landauer expects the second round of competitive bidding to accelerate the process of consolidation. Round 2 will affect 37 different MSAs served by Landauer Metropolitan, including New York State, Boston and Springfield, Mass. and several areas in Pennsylvania.

Landauer says the industry will be very different in five to 10 years, with fewer distributors and more regional players who are financially strong enough to survive. He hopes Landauer will be one of them.

“There will be tremendous cost-cutting required by everyone in the industry and also a complete reevaluation of how we do business,” he explains. “Medicare thinks of us as a supplier, not a provider, so we will need to act like suppliers. There are modes of business in which we used to do things for a competitive advantage that we may not be able to do. It hurts the beneficiary.”

Survival Strategies

Business in 2012 was above the previous year’s sales, but not what Cindy Ciardo, BOC orthotist and CEO of Knueppel HealthCare Services, had hoped for. She expects a “wild ride” in 2013, with Round 2 competitive bidding in July precipitating either an increase in business or a substantial loss. “Our plan is to survive no matter what,” she says. Ciardo sees her biggest challenge as the documentation requirements imposed by Medicare. To boost efficiency the company is analyzing and streamlining procedures, as is almost everyone else in the industry.

Knueppel HealthCare Services, Inc. (KHS), is a family-owned and operated business that traces its roots to the founding of Knueppel Pharmacy in 1955. The pharmacy is long gone, but KHS has expanded to include high-tech assistive rehab equipment as well as custom fabrication and home modifications for people with disabilities or those wishing to age in place. KHS also has the largest women’s health and compression therapy business in Wisconsin. Products range from bariatric equipment to bathroom safety, daily living aids, diabetic shoes, lift chairs, wheelchairs and power mobility. KHS now has three locations in southeastern Wisconsin: in West Allis, Racine and Mequon. Two of the three—including the main location in West Allis with a 5,000 square-foot showroom—are included in Round 2 bid areas.

The showroom in West Allis was remodeled to demonstrate the latest in home modification technology using simulated bedroom and bathroom settings. “We have always done retail, even before it was the ‘in thing,’ but we continue to watch out for new products and innovations to keep the selection fresh and changing,” Ciardo says. Examples include women’s health products, cervical and lumbar cushions, upscale bath safety, hot and cold therapy, LaserTouchOne pain relief using cold laser and micro-current technology and lift chairs.

Ciardo sees a big change on the payer side in the move from straight Medicare to Medicare Advantage programs. Reimbursement rates are lower than the current Medicare fee schedule, but the upside is that they are not subject to the competitive bidding program and allow beneficiaries the freedom to choose KHS, which helps the company maintain its senior client base. KHS is embracing the Internet to promote its business, including the website, a newsletter, YouTube videos, Facebook and a blog, all with the goal of driving traffic to the website and showroom.

Competitive bidding has provided a civics lesson for Ciardo and her staff. “All of my staff have made calls and sent letters and e-mails ad nauseum in support of H.R. 6490, and we all know who our congressional delegate is now. I don’t think we even used the words political advocacy 20 years ago,” she says. The activism has taken considerable time, as did preparing the bid for Round 2. “Since submitting the bid, it’s been hurry up and wait.”

The ongoing and onerous audits are “frivolous and mostly unsubstantiated,” she says. “They take an incredible amount of time to prepare for, and while billers are preparing the documentation for the audit, they can’t submit claims.” The result is extra work for audit rebuttal required to bill the same amount of business, which negatively impacts profitability.

With the uncertainty of competitive bidding KHS is preparing for either contingency, win or lose. In case of a win it will keep looking for cost-competitive products and improving and streamlining internal processes to maintain profitability. In case of a loss, KHS will look for market growth areas and to increase the retail sector. “We train employees not just in fitting and customer care, but in sales techniques, a somewhat foreign approach when patient education has been our main means of gaining sales and new referral sources,” Ciardo explains. “Most of us have been indoctrinated to sell via knowledge and care for the client. That’s still there, of course, but now we have to include another approach to gain the add-on cash sales to increase revenue and maintain profitability.”

Texas-Sized Challenges

During the last year, XMED Oxygen & Medical Equipment’s business has increased about 25 percent, led by growth in retail and orthotics and soft goods, although business in core DME items has been flat. XMED won three contracts in Dallas-Fort Worth in Round 1 of competitive bidding: standard power mobility, oxygen and walkers. John Skoro, managing partner, says the growth in business from getting the contracts has not offset the lower pricing, so the company has had to look for growth in other categories. He notes that the full impact of lower competitive bid pricing doesn’t kick in until the third quarter after the new prices take effect. Until then the impact is mitigated by existing cap rentals that are grandfathered in. A full 30-percent decline becomes apparent in the last part of the first year and in the second year after the contract.

XMED Oxygen & Medical Equipment traces its roots back to 1997 and it entered the DME business in the early 2000s. XMED operates five locations in Texas, three in the Dallas-Fort Worth Metropolitan Area and one location each in Houston and Austin. Each of the facilities operates a retail storefront and two of the locations are almost exclusively retail. In addition to the XMED branding for the DME operations, the company chose additional retail branding to position it with a nontraditional DME community. Depending on the direction of the particular store, you might find these locations operating as Scrubs Xpress, Medical Superstores or specifically a Medical Supply store like the Arlington location. Skoro has found that while there are similarities between DME and retail products, the offerings can be very different and even different between stores. “You have to understand your particular market and what opportunities you have to serve that market and then find your niche and develop around that. What you may start with in a market may be very different than what you thought it would be.” The company’s 65 employees include some part-timers at retail stores.

While winning three bids in Round 1 competitive bidding was a significant accomplishment, Skoro says it still put XMED at a disadvantage competing with companies awarded more bid categories because many referral sources look to simplify their work by finding a “one-stop” source. Keeping up relationships with referral sources can offset the tendency, he says, as does offering a hard-to-find, specialty category. “There are false assumptions about extra business that didn’t materialize,” he says. “If you only got a few contracts, as we did, you have to work for the business.” Skoro estimates it will take one to two years to recover to pre-competitive bid revenue levels for those categories. “While there is growth in these categories, the rate of growth has been less than the revenue discounted for these categories. Like any economy of scale situation, you have to do more to generate the same amount of underlying margin. Providers should expect a big margin squeeze, particularly in year two of the bid process.”

Round 2 competitive bidding will affect XMED’s DME business in Austin and Houston, and Skoro says lessons learned in Dallas-Fort Worth will boost their competitiveness in Round 2. “We are in a much better margin position to tackle competitive bidding in those two markets because of retooling we did related to the Dallas competitive bid,” he says. Tracking orders in the field and improving internal customer service processing time have helped to cut costs. Drivers use GPS and communicate using a smart phone, and a tablet or computer and printer on the truck are linked to the mobile phone’s “hot spot.”

Retail business helps to offset DME challenges, but Skoro warns that retail means merchandising, which is very different and requires a substantial investment that can take two to three years to recoup. In retail for going on five years now, XMED is seeing results, but “it’s not an easy business either,” Skoro says.

For competitive bidding, the large geographic area of the Dallas-Fort Worth market—essentially two MSAs put together—is a challenge for XMED’s business. Deliveries can be 90 or 100 miles in any direction and can require a four-hour turnaround. For XMED, networking and subcontracting were not viable solutions, so they rent storage building units in strategic areas around the metro area to keep large and bulky items available in the field to minimize driving.

Another challenge for XMED is that Texas is one of seven states dealing with required preauthorization on power mobility. In the early days, they were seeing up to 80 percent denials, many based on “very technical” details in situations that could easily have been defended in an audit from a clinical review perspective. An example is a requirement to define exact measurements of upper-body strength and range of motion. Physicians believe they have documented the disability completely and their assessment with the underlying conditions should be enough. Not in CMS’ view.

“It’s a learning curve, and we have to go back and educate the physicians,” Skoro explains. “The only good news is the physicians and the patients get the denial letters from CMS as we do and you gain credibility—and sometimes empathy—with the physician for the needed documentation. However, this doesn’t help your delay in revenue during this learning process.

“We have proven we are adaptable and sustainable,” Skoro says. “You have to be agile and manage through uncertainty, and there’s a lot of uncertainty in the future. We invested a lot in our business several years ago to get us to this point.” Looking ahead, XMED will be pursuing even greater efficiencies from its labor force to create faster turnarounds and more interactivity to solve problems in the field. Combining traditional labor roles in marketing, customer service and delivery into a single cross-functioning “DME coordinator” position could save costs.

“I believe that what we do today may not be the same thing that we are doing five years from now,” Skoro predicts. “The market will be very different, and we’ll need to adapt.”

Beyond Oxygen and Sleep

Norco is a privately owned distributor/manufacturer in a range of businesses such as welding, safety and gas supplies. The company began in 1948 with two branches and 16 employees, and now has 68 branches and 900 employees spanning the various businesses. In the HME area Norco has about 30 locations in Washington, Oregon, Idaho, Montana, Utah and Nevada, and about 450 employees.

Ned Pontious, president of Norco, estimates the company’s HME business grew by about 8 percent in 2012. Looking to next year, Norco faces competitive bidding in the Boise/Idaho area. “We have a good model on expense control and how we manage our stores,” he says. “It’s a sustainable model moving forward. We have to continue to control expenses working with vendors.”

Norco’s economies of scale, buying strength and leaner approach to business help it compete effectively against smaller players. An aggressive sales force goes after core business in oxygen and sleep and also pursues high-end rehab and home modifications, where there is new growth. Overall Pontious expects single-digit growth next year, which is a little slower than the 12 percent range the company has achieved historically.

Pontious says Norco has been plagued by recent audits that “target every new piece of business” and had to deal with several hundred audits in the last six months. Additional staff has been needed to respond to audits.

Looking ahead, Pontious sees threats to his oxygen and sleep business from mail-order providers who send equipment by FedEx. “People still want to get service, and they come in the store but it’s not our equipment.” Typically, Norco locations provide the needed service, although they can’t bill Medicare and therefore don’t get paid and have to chalk it up to a cost of doing business. “It goes back to our model of ‘serving you better,’ something we have always done,” he says.

Already a lean operation, Norco may have no other way to save money in the wake of competitive bidding than to curtail service levels. “We have stretched to the point that it could impact our service level, which bothers me because we have always had top-level service at Norco.”

Retail has been a positive area and has helped differentiate Norco from major providers. Norco’s full-line focus includes everything from athletic braces to ramps for disabled people to home modifications. Expanding beyond sleep and oxygen helps build awareness of Norco as a full-line provider and offers opportunities with more margin than Medicare reimbursements allow.

Technology improvements at Norco include paperless billing and bar coding of rental assets, from equipment to oxygen cylinders, and it has started using bar coding in its other business categories. Norco is also upgrading its ERP system to provide a better patient referral tracking form. The existing Computers Unlimited system will be updated in 2013.

Another efficiency improvement is streamlining of billing from the previously decentralized system. Billing has been consolidated into fewer, larger locations similar to a satellite concept, enabling more efficient utilization of experienced personnel at lower cost.

Norco is bucking the industry trend toward greater use of portable oxygen concentrators and away from the delivery model for oxygen, which has been the standard means for many years. The diversified company has its own air-separation plants (related to the welding business) and therefore a supply of inexpensive liquid oxygen. Norco combines the advantage with an efficient delivery model that can serve 25 to 30 patients a day in the large metropolitan area. “It’s a very high-touch, high-service business, but we can do it efficiently and will keep doing it as long as we can,” Pontious says.

Dealing with Medicaid Changes

Peaks & Plains Medical, which is based in Spokane Valley, Wash., has a mission to be the highest quality, lowest cost provider of medical supplies to the long-term care industry. The company’s footprint includes Washington, Idaho, Oregon and some of Montana. About 80 percent of its sales are to long-term care facilities, with the other 20 percent home care. A 12,000 square-foot warehouse and a retail location sell everything except oxygen, drugs or complex rehab—mostly durable medical equipment and supplies. The provider is in the process of opening a second retail location.

Business for 2012 has been ahead of sales numbers, maybe by 10 percent overall, but some of the growth has been because competitors have been exiting the business. “Three competitors contacted me to either buy their customer list and equipment or to give me a customer list,” according to Leigh McNellis, president. The smaller competitors had gotten tired of accreditation requirements or didn’t have the resources to adapt to changes in Medicare/Medicaid rules, she says. She sees new competition creeping in from her own suppliers, some of which now sell directly to skilled nursing facilities. “We will continue to look for cash items to sell and try to control the amount of government dollar income we have.” She estimates the business is roughly 50 percent private pay, 45 percent Medicaid and 5 percent Medicare. She will be looking at additional opportunities in cash sales such as stair lifts and car lifts.

McNellis sees problems in the Medicaid transition from fee-for-service to a managed care model. In Oregon, for example, each coordinated care organization has its own rules; some pay sales taxes and some don’t, some require preauthorization and some don’t. Washington allows Medicaid clients to change managed care companies monthly, which opens the door to fraud. For example, a client could place an order at the end of the month and then change suppliers before the provider gets paid.

McNellis has lowered costs by contracting with a different delivery company to save about 40 percent on shipping costs. Even with gas prices going up, Peaks & Plains has saved on shipping—formerly 25 percent of overall expense, now down by 8 or 9 percent. “We ship directly to clients in their homes, as well as to other facilities,” she says. Peaks & Plains has also implemented an e-mail notification system to alert customers when items have shipped, including a tracking number. A benefit has been fewer phone calls in the office. To improve billing denial rates, McNellis has been working with her software supplier, TeamDME!, to develop reports on denials, reasons for denials and programming changes to keep the problems from recurring.
Seeking diversification, McNellis launched a tattoo supply business last fall since they use many of the same supplies, such as wound care products, gloves, sharps containers and skin repair ointment. “It’s a nice complement to what we do,” she explains. Peaks & Plains has also taken on new products including the Presto e-mail printer, which allows elderly persons to print e-mails without interfacing with a computer; and The Helper Lift, an inflatable patient lift mattress that can avoid workman’s comp injuries related to patient lifting.

“We’re trying to look at every opportunity that comes along,” McNellis says, “and try to make sense of whether it’s a good and practical business decision.”