How Bad Is It, Really?

Is the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 better or worse than we expected? How will it affect your company? Our lawyer friends would answer, “It depends.”

There are some effects that we can quantify and that prove the lawyers’ answer right. For example, 13 million seniors not previously covered will get prescription drug coverage. Retail pharmacies will register a net increase in sales of about $12 billion in 2004 — a 6 percent jump that will grow at 13 percent per year.

So, is it all bad if your company is a pharmacy or a combination pharmacy and durable medical equipment provider?

Out-of-pocket spending for drugs by seniors is currently about $11 billion per year. Seniors will reallocate some of that cash to purchase other items they need and want, and DME providers will have as good a chance of capturing that money as the car dealer, travel agent, mortgage company and grocer.

So, is it all bad if your company files fewer indigent-patient waivers and makes more discretionary DME sales?

Half-Full, Half-Empty

After a peek at the half-full glass, let’s peek at the half-empty glass.

Over the next five years, Medicare will cut 19.3 percent from its spending for DME through the Consumer Price Index freeze and the adjustment to average Federal Employees Health Benefits Program (FEHBP) reimbursement. The effect on the DME provider could even be worse if inflation rises above 2.5 percent per year. And this is before we even get to competitive bidding.

In 2002, we fought fiercely to stop competitive bidding that could have made our companies subject to 17 percent reductions in Medicare reimbursement rates all at once. The Centers for Medicare and Medicaid Services (CMS) cannot let a contract under competitive bidding unless the contract reduces spending, so we should expect reductions. However, it seems reasonable that competitive bidding will not yield 17 percent reductions because the margin already will have evaporated. The reductions in 2008 and 2009 will be much more modest, in the low-to-medium single digits.

Although Medicare reform will probably remove more dollars from our industry than competitive bidding would alone, it will do so over a number of years.

So, is it all bad that we now have one to two years to tune up our businesses?

Business valuations will temporarily contract by about 30 percent because of the anticipation of lower margins. The ranks of DME providers could contract by 3,500 to 4,000 over the next 10 years, and employment in the industry could decline by 27,000 to 30,000. This should not be interpreted as 3,500 business failures. Some providers will sell or merge, some will make an orderly liquidation and some will fail.

So, is it all bad if it reduces rivalry and poor business practices?

What Now? Adjust.

Concerning this legislation there is one thing that matters now: Adjust. Three actions will send you on your way:

1. Determine exactly what the good and bad effects are for your company.
2. Decide on good opportunities to pursue, such as adjusting product and payer mixes.
3. Design ways to deal with the lower reimbursement rates you are expecting. Lower reimbursements don’t have to mean lower profits — except for companies that do nothing or wait too long to reduce their cost of doing business. Some actions that can change the cost of doing business include modifying product and service offerings, redesigning processes for greater output and improving quality (reducing failures).

Finally, this recent legislation is slated to be implemented over the next several years, so a one-time tune-up of the business won’t work for the long haul. This legislation will require a cultural change for many providers.

So, is it all bad if it makes us become better businesspeople?

Wallace Weeks is founder and president of The Weeks Group, Melbourne, Fla., a consulting firm that specializes in total business improvement for small businesses, specifically in the area of post-acute health care. He may be reached by phone at 321/752-4514 or by e-mail at [email protected].