Retail, Medicare or Both

Traditional durable medical equipment companies have averaged 80 to 90 percent Medicare and Medicaid, 10 to 20 percent third-party pay and maybe 5 percent retail. Today, retail HME businesses are almost reversed: 50 to 70 percent retail, 10 to 30 percent third-party, and 20 to 40 percent Medicare and Medicaid.

But given the onset of competitive bidding, this mix might change again, increasing retail and third-party percentages and decreasing — or completely eliminating — Medicare/Medicaid reimbursement. Retail pharmacies with HME front-end departments already generate approximately 65 to 75 percent retail, while retail-only HMEs are, of course, 100 percent cash!

The benefit of being an accredited Part B HME provider is that you can service all Medicare patients. The flip side of being accredited and billing Medicare is the added expense of doing business. Many HME companies now have a compliance officer to ensure their policies and procedures are up to par to pass accreditation surveys. Their intake and billing staff must have the proper documentation in every Medicare patient’s file and be prepared for audits at any time. And the list goes on and on.

However, the pricing of Medicare allowable products is probably the most significant drawback for these providers. Medicare requires that the posted price on reimbursable products be at minimum their allowable price. Otherwise, Medicare can audit you and then charge you back the difference for what you sell the product at and their allowable price. This ruling restricts Part B providers from being competitive in their local markets, as they cannot lower retail prices to match their competitor’s sale prices.

CMS has noted it is aware the extra steps in billing costs more than accepting cash for any given product, so Part B providers are allowed to deduct 17 percent from the Medicare allowable price for all cash sales. Most retail HMEs deduct 20 percent for cash sales on a regular basis without any issues.

If you conduct an activity-based cost study and document your cost differential in selling for cash vs. billing Medicare, then this deduction for cash sales can be as high as 30 percent. Part B providers post signs around their showrooms stating, “Ask us for our retail pricing,” “Ask us for our cash prices” or “Ask us about our sale pricing.” In this way, their customers are informed they do offer retail cash prices that are lower than the posted Medicare allowable prices.

In contrast, retail-only HME businesses that are not accredited and do not bill Medicare have NO restrictions on the retail prices they post on their products. Most retail HME showrooms list two prices — MSRP and “our price” — and then when they promote a sale they also list a third “sale” price. This retail pricing system shows customers that they being offered a lower price than what the manufacturer recommends that is on par with, if not below, the local competition.

These retail-only HMEs do not have the added costs that most Part B providers absorb: accreditation, compliance, audits, warehousing rental equipment, delivery and pick-up of rental equipment, billing staff and software. But their rent is much more expensive as they must be located in a visible and accessible retail location. One benefit of the recession has been that retail rental rates have dropped in half over the past two years. Most retail HMEs locate in strip malls or busy retail frontage areas, and rentals have been averaging $2/ft./mo., or $24/ft./yr.

Many veteran Part B providers have expanded into retail HME using a hub-and-spoke system. Their older “hub” locations are still accredited Part B Medicare providers. But their newer locations are retail-only operations. When a Medicare patient inquires at one of their “spoke” retail locations for a reimbursable item, they are simply redirected to one of the hub locations for billing intake.

The retail locations sell retail products at retail pricing, while the Medicare locations provide, deliver and bill for Medicare reimbursable products. In this way, the retail locations do not lose Medicare patients to their competition and benefit from both modes of HME operation.

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Jack Evans is president of Malibu, Calif.-based Global Media Marketing, an HME consulting firm specializing in retail sales, layout and operations. You can reach him at [email protected] or 310/457-7333.