Just More to Overcome, Not a Call to Exit

OK. Among the many things home medical equipment providers were grateful for on Thanksgiving, Congress probably did not make the list. But come Monday morning, after a couple of “why me’s?,” and perhaps a dose of Prozac with a Starbucks chaser, HME owners across the country got around to what they do best — adapting and thriving. Here are a few reasons why the new Medicare Prescription Drug, Improvement, and Modernization Act (MMA) won’t send providers screaming into the night.

As Bad as the Bill Is — and It’s Bad — It’s Not That Bad

Other than the dramatic change in nebulizer reimbursement from discounts off Average Wholesale Price to a new model of Average Sale Price plus a paltry 6 percent (which clearly took the industry by surprise), the combination of price freezes, near-term reimbursement reductions and competitive bidding is much of what the industry was hoping to avoid.

The good news? Other than the modest reduction in neb meds from 95 percent to 85 percent of AWP in 2004 — which is certainly workable — no other provisions take place until 2005. This gives the industry substantial time to modify or eliminate the most ridiculous of them — cuts tied to the extraordinarily un-comparable Federal Employee Health Benefits Program, as well as the ASP model — in a widely anticipated “corrections” bill. Particularly with respect to ASP, logic suggests (and we recognize the leap we take putting the government and logic together in the same sentence) that sanity will prevail, and the government will indirectly or directly include a service component that allows for reasonable profits.

At worst, this year will give providers plenty of time to adjust their operating models to adapt to the provisions. Furthermore, with competitive bidding scheduled to begin in 2007, it is highly unlikely that the Centers for Medicare and Medicaid Services and the durable medical equipment regional carriers will use their Inherent Reasonableness authority to institute immediate and across-the-board cuts, a far more frightening prospect for the industry.

Darwin, Apes and HMEs

When Darwin theorized the whole survival-of-the-fittest thing, he may well have been describing HME owners through the ’80s and ’90s. Perhaps no other health care sector has better adapted to reimbursement upheaval than the home medical equipment industry. This is likely a result of a “can-do” culture that is (a) cultivated by entrepreneurs, (b) in a fee-for-service industry, and (c) honed by experience and confidence, having successfully adapted to a near never-ending series of “fatal” cuts including Rent-Purchase, Oxygen Guidelines, OBRA 90, the Six-Point Plan and the Balanced Budget Act (BBA) of 1997.

This culture is somewhat unique. Consider what happened to the home health sector, which prior to BBA was unaccustomed to massive changes in reimbursement. When “cost-based” reimbursement was eliminated that year, nearly 4,000 agencies found it necessary to close their doors. Under considerable threats to reimbursement since then, however, home health is evolving rapidly and will be better equipped to deal with subsequent reimbursement challenges in the future.

While it may seem impossible at first, the industry can adapt to the worst of what this new Medicare legislation portends. Kill reimbursement for neb meds? Those providers who have developed an infrastructure to distribute pharmacy medications and supplies to patients with chronic health needs may look to leverage their expertise and offer other specialty products including disposables, diabetic supplies and specialty drugs.

Cut reimbursement for oxygen or other product lines? The most forward-thinking providers have already begun, and will continue, investing in technology to reduce their variable costs with oxygen conserving devices, concentrator trans-filling systems, global positioning systems (GPS) to route deliveries more efficiently and document imaging to reduce processing expense, to name a few. If necessary — and only if necessary — services can be streamlined as referral sources continue to recognize the reimbursement challenges all providers face, and accept unavoidable service constraints.

The M&A Effect

Although we often hear speculation that HME companies will flood the market after a cut in reimbursement, this is rarely the case. Typically, those firms most affected by changes in legislation take time to re-engineer their businesses to recapture any lost value, actually delaying their entry into the market (see Darwin above).

Sure, some decide to bail. But they tend to be in the minority and are sometimes troubled to begin with, making them less attractive acquisition candidates. So from a merger and acquisition perspective, for many sellers it may or may not be a great time to sell. But those decisions, while certainly impacted by the recent Medicare act, will not be driven by it. Rather, selling decisions will likely continue to be driven by a combination of business opportunities, personal and professional objectives and financial goals.

In a reimbursement climate that HME owners know will always be, to some degree, hostile, the new Medicare law is just another challenge to overcome, not a call to exit.

Dexter W. Braff is president of The Braff Group (www.thebraffgroup.com), a health care merger and acquisition firm with seven offices nationwide. He can be reached at 888/922-5169, or by e-mail at [email protected].