What They Think About The State of the Industry

In spite of a year that has rattled the industry to its core, HME has more visibility, more solidarity and even a better relationship with Congress and regulatory agencies than ever in its history. Now, say industry players, is not the time to give up.

“Don’t hit the panic button,” cautions Tim Pontius, chairman of the American Association for Homecare and president of Young Medical Services in Toledo, Ohio.

Pontius does not speak cavalierly. He’s very familiar with the blows the industry has sustained over the past year: the crackdown on power wheelchair reimbursement, the price freeze on Part B respiratory drugs and threatened 89 percent reimbursement cut, impending stricter supplier standards including mandatory accreditation, and the onset of nationwide competitive bidding in 2007.

He is also keenly aware of the everyday challenges that abound, such as confusion over the sufficiency of CMNs for Medicare payment, delayed reimbursement and a persistent image problem that many believe prompts Congress and CMS to target the industry.

And he’s just as outraged as any other above-board provider at the massive wheelchair fraud schemes uncovered in Texas. He chafes at the idea that they might have set back the industry, which has worked for so long to erase from legislative and regulatory minds images of similar abuses stemming from the 1980s.

But Pontius and others also see the industry’s gains.

“What has been different over the last months versus previous years is the building of coalitions and the forging of alliances to encourage responsible action regarding coverage, coding and pricing issues,” says Michael Hammes, chairman and CEO of Longmont, Colo.-based Sunrise Medical. “The industry, clinicians and advocates are working together to seek reasonable solutions that minimize the impact of legislative and regulatory change on consumers.”

Dan Meuser, president of Pride Mobility Products, Exeter, Pa., says it has been a challenging year for providers. “I think it was certainly harder to be successful in the past year as a provider,” he says. “But the industry as a whole needed more strategic planning, providers needed more financial planning and a much higher level of diligence regarding inventory management and costs. [Now] they are watching costs much more closely than ever before … There is a lot of good that’s going to come out of that.”

Mal Mixon, chairman and CEO of Elyria, Ohio-based Invacare, believes the best might be yet to come. “There will be tremendously successful HME companies that adapt to these changes,” he predicts, adding that their success will not necessarily be based on company size but instead on smart business practices.

For their part, providers are cautiously optimistic about the future.

“I think when we look back on it five years from now, all these regulations that are coming down will have been good for the industry,” says Darren Friedman, owner of Newbury Park, Calif.-based Unicare Health Services. “It’s the people who can hang in there and run lean for awhile [who will survive].”

Rethinking Business

Forget business as usual, say the experts. It won’t work aymore.

“People are having to rethink, retool and regear how they are doing business,” says David Miller, chairman and CEO of The MED Group in Lubbock, Texas. “Diversification or consolidation, depending on your market, is something every provider should be looking at.”

Randy Freeman, owner of Mediwell in Fort Worth, Texas, agrees. “I don’t know exactly how this is going to fall out, but I do know we had better be getting ready, trimming costs wherever we can.”

Freeman is already doing that. He has, for example, reduced his inventory to one basic wheelchair rather than a multitude. He’s cut back on the number and type of cannulas, pump sets and enteral food he carries. He’s changed the way he handles oxygen so he visits a patient’s home only every 90 days to service a unit rather than every 30 days. And he’s drop-shipping some items so he doesn’t have to keep them in stock.

“We’ve also compressed our vendors so we have better purchasing power,” Freeman says. He recognizes the benefit of looking at the long term rather than the short term. “Sometimes the cheaper product is not cheaper in the long run,” he says. “We have to know where our costs are.”

It’s definitely a time for fine-tuning your business operations, says Unicare’s Friedman. “You’re going to have to run your company more efficiently. We’re trimming the fat. We might not be getting new vehicles every two years. We are finding that we are not able to go out in the field as much because of the cost. The service side is dwindling.”

Unicare is also building its retail identity. “We get so much Medicare business from people walking into the store,” Friedman says. “It brings in so much more than just selling bandages and high-blood pressure monitors.”

American Home Care in Riverside, Calif., as well is focusing on retail, says James Kempthorne, president. “I do believe there is a sunny side to all this, and the sunny side is retail. I think the industry has to focus on retail and get into marketing and sales. It is the only thing that is going to save the little guy. There are still regulations, legislation and documentation that he is going to have to comply with. But if he focuses on retail, it serves him or her better, the customer better and the industry better.”

Kempthorne believes in working to educate the public about HME. He advertises regularly on cable television, inviting viewers to come in and see what his business is all about. “They don’t come to us until they finally need us,” he says. “That’s what retailers have to try and overcome. We have to try to become a bigger outlet for the mass population.

“This is not business as usual,” he adds. “We need to make changes, we need to become retailers, we need to become marketers. If you don’t change, you die.”

Lake Forest, Calif.-based Apria Healthcare is also exploring the retail route. Earlier this year, the national provider reached an agreement with Wal-Mart to open retail areas within the superstore at four locations. The company is also exploring expanding its line of diabetic supplies and getting into the home dialysis market.

“These are incremental things that allow us to add product lines to our portfolio,” says Larry Mastrovich, president and COO. “It’s really how do we leverage our business right now? It’s better to leverage it with our own patient base. These are added opportunities for more service. There’s a continuum of care we are looking to expand upon, and these pathways allow us to do that.”

Knueppel HealthCare Services is also continually seeking ways to increase productivity and reduce operating costs, says Cindy Ciardo, CEO. The Milwaukee, Wis., company is developing more niche markets that target a younger population base, relying more on drop-shipping and has implemented a new software package to improve its billing and collections procedures and monitor accounts receivable more effectively.

It all boils down to efficiency. “The efficient will flourish, and the inefficient are not going to do well,” says Mixon.

Preparing for Change

Will all these provider moves guarantee a smooth road ahead? They will surely help, say most, but hazards aplenty remain. “The last five years have been very challenging. But this next year will be the most challenging,” predicts Ron Allen, vice president, home care, for Deerfield, Ill.-based Walgreens Health Initiatives.

Part B Drug Cuts

Take the proposed 89-percent cut in reimbursement for the respiratory drugs albuterol sulfate and ipratropium bromide. Already, that threat has prompted respiratory giants like Apria to announce they will exit the business if the cuts go into effect without a dispensing fee to compensate businesses that provide such drugs.

“The reduction to respiratory medications … is the most draconian change ever imposed on the industry,” says Lisa Getson, Apria’s executive vice president of business development and clinical services. “We are encouraged that CMS has acknowledged the clinical, billing and administrative services we offer … We hope this will lead to a reasonable fee.”

If it doesn’t, says Unicare’s Friedman, whose HME business includes a pharmacy that has grown 40 percent this year, “I don’t know how pharmacies are going to take that kind of hit. I think it’s going to eliminate 50 percent of them … but it will increase the volume of those that are left,” he continues. And volume will determine who ultimately survives, he believes.

Few dispute that the drastic cuts will change the shape of the respiratory market, and not just by a reduction in the number of players. “If the cuts continue, my fear is that the patient is going to suffer,” says Ron Richard, vice president, marketing of the Americas, for Poway, Calif.-based ResMed. “It will affect the quality of service you can deliver and the quality of products you deliver.”

Apria’s Mastrovich agrees. “Twenty-four hour service and clinical support become questionable,” he says. “We will have to evaluate what product lines we are in and whether we will stay in those lines.”

Competitive Bidding

If the respiratory medication cuts aren’t enough to chip away at your bottom line, consider the idea of competitive bidding. It is set to go in the nation’s top 10 metro areas in 2007, but providers must position themselves starting now if they are to have a fighting chance of winning a bid. It’s a scary prospect for most.

“Competitive bidding could be the catalyst that changes the face of the DME industry,” says Sunrise CEO Hammes. “If CMS is not very careful in its implementation of this program, it could irreversibly change the service and delivery paradigm.”

Knueppel’s Ciardo agrees. “I think the implementation of national competitive bidding will result in fewer providers, restricted patient choices and access to care and a reduced level of service,” she says. “I also see a consolidation of small and mid-sized businesses, especially family and privately owned companies, either by liquidation or acquisition. Many people may be out of jobs.”

Walgreens’ Allen says he thinks competition is healthy and competitive bidding is “another example where competition can drive superior performance. But I have some concern that what the rates end up being won’t support the care [of the patient]. If it starts causing a lack of quality, it’s not the right thing to do for the patients.”

Some think it is a government ploy to lower reimbursement without going through the regular channels. “It’s just a case of how low will you go,” says Terry Luft, CEO of Dynamic Healthcare Services and president of Central Medical Equipment of Harrisburg and Camp Hill, Pa. Like Ciardo, he is concerned that competitive bidding could result in disaster. “Competitive bidding is competitive just one time,” he points out. “In three or four years, there are not going to be a lot of people that are going to be competitive.”

Mediwell’s Freeman doesn’t think competitive bidding will be implemented by the target date. Neither does Van G. Miller, founder and CEO of The VGM Group, Waterloo, Iowa.

“I don’t think it’s actually going to get implemented,” he says. “It’s a huge, [massive] undertaking. The demonstrations [in Polk County, Fla., and San Antonio in 2002] were just a gnat on a dog. With competitive bidding, you can only get the product from the people who get the bid. Those beneficiaries out there are going to raise holy hell. They’re voters, and politicians pay attention. When that happens, I think [the government] is going to pull the cord back.”

Mandatory Accreditation

One sure bet that will affect the industry, everyone agrees, will be new supplier standards. While most providers applaud the standards, one of them is definitely a hot-button issue: mandatory accreditation.

Both the government and many of those involved in the industry look upon the measure as enhancing its credibility and serving as a barrier to fraudulent providers such as those involved in the Texas power wheelchair scams.

“Accreditation gives us credibility,” says Pride’s Meuser. “The time has come. Accreditation itself would have kept those bandits in Texas from ripping off the industry last year.”

Mixon says while mandatory accreditation will cause “some frustration and it will cost, in the long run, I would like our industry to be considered professional. This is a positive thing in the long run.

“If we ever get credibility, we’ll get the government off our back, I hope,” he adds. “We seem to be the whipping boys. Perhaps if these false providers [in Texas] had had to get certification, they never would have existed. It never would have happened.”

The MED Group’s Miller believes mandatory accreditation is the right way to go. “I am a proponent both of accreditation for companies and certification for individuals,” he says. “I do believe 2005 will be a ramp-up for that. And as a result, both businesses and the customers they service should benefit from that.”

He adds that while the process of accreditation can be costly, especially for smaller providers, it can make a dramatic difference in business. “You can really transform your business,” he says. “I’ve not talked to anyone who has not enjoyed the benefits of that operation. It’s another barrier of entry to the business, and it keeps out some of the schlock operators. I don’t think accreditation stops fraud and abuse, but I do think it’s one more thing the criminals have to think about if they want to get their supplier number.”

Mediwell’s Freeman, whose company is in the process of working toward accreditation, says “[government needs] to ensure that there are standards providers have to adhere to. If any person can open up a DME, which is the way the benefit is now, why shouldn’t that person adhere to the same standard I have to adhere to? There has to be a level of accountability to something.” But he doesn’t believe standards are enough.

“I don’t think [CMS] has done a good job of controlling fraud,” he says. “The biggest problem with CMS is that they don’t enforce the rules that they have. If they enforced their own rules, they wouldn’t have a problem.”

Kempthorne is adamant on that point. “I think the 21 supplier standards are fine, but enforce [them],” he says with some passion. “Clean up the industry. Don’t just give me a list of stuff that has no value. They don’t shut the people down.”

Making Progress

While numerous challenges loom, industry executives advise against being myopic. Home care, while it remains a tiny player in the behemoth health care industry, is not in the same position it was six years ago when it was a fragmented health care niche battling a 30-percent reduction in oxygen reimbursement and a persistent image as a bunch of equipment jockeys, industry players say. They caution against losing sight of the gains the HME industry has made.

“We are doing a better job of educating Congress,” says Young Medical’s Pontius, adding that HME is also enjoying significant support from the physician community. There is more dialog going on between those in the industry and regulatory and legislative entities, he says. And not only that, the governmental entities are beginning to listen.

That education is paying off, agrees Meuser. “We have been able to educate key legislators to back us up,” he says. “We have shown them this year that our industry is more about patients than profit … There is still a lot of work to do, but we have created a climate where CMS is now receiving accurate information so they are able to understand [issues] before they judge.”

Providers and manufacturers alike point to CMS’ proposed new power wheelchair codes as evidence that the industry is making progress in its long drive for clarification of Medicare codes. “We could potentially come out of this in better shape than prior to the Houston fraud,” says Mixon.

“We’ve made some progress,” agrees ResMed’s Richard. “[Government] is starting to get a better appreciation of what the role of a home care provider is and what benefits they produce to society.”

But don’t get complacent. “We have a tough road to go, but there have been some notable results,” says Apria’s Getson. She notes the caucuses on chronic obstructive pulmonary disease (COPD) and diabetes and the General Accountability Office’s willingness to study the business as it tries to determine the adequacy of reimbursement.

And then there are the demographics. “The demographics couldn’t be any better for us — the graying of America, people staying alive longer, technology allowing people to stay in their homes,” says Miller of The MED Group.

“We’re blessed to be in a growth industry,” notes Mixon, who sees a day not so far off when just about everyone knows what HME is. “I think in a few years this market will know the products as well as they know TV sets,” he says.

Certainly providers and manufacturers will have to make some adjustments.

“We are going to have to get used to less reimbursement. It is definitely going to be less,” says Freeman. “But no matter what anyone says, there is always going to be money in this business and there will always be payers in this industry.”

Those are reasons enough not to bail out, both providers and manufacturers say. “Do I believe I have a future in this business? Absolutely,” says Pontius.

“I think there is reason to be optimistic, a reason to be positive,” says Meuser. “We’ve done some good work, we’ve weathered some storms, we’ve got the interest of some top people and we’ve got a logical story. I like where our industry is right now.”

Provider Shakeout?

With HME’s coming changes and uncertain times ahead, most in the industry expect some providers to bail out.

“There’s going to be a shakeout,” predicts Tim Pontius, chairman of the American Association for Homecare and president of Young Medical Services. “There are companies that have been hanging on and have been hoping that [government] would leave us alone for awhile. But the second week in January, when reimbursement goes below cost for medication and they start looking at the cash that is going out faster than it’s coming in, then we are really going to hear some screaming about what’s going on.”

It’s the smaller providers — the mom-and-pop operations — that coming changes could most affect, say those involved.

“I’m afraid we won’t be able to compete with the larger local and national companies who have better buying power and deeper pockets,” says Cindy Ciardo, CEO of Knueppel HealthCare Services. “I believe there will be consolidation and business closures among the small to mid-size companies who are dependent on Medicare/Medicaid revenue.”

Others agree.

“There has to be a shakeout among providers,” says James Kempthorne, president of American Home Care. “If you don’t change, you’re going to lose.”

“Some of the independent providers who may have been sitting on the fence about whether to stay in the business or sell it are going to get off the fence,” says Larry Mastrovich, Apria president and COO. Long-term providers are selling, he says, because “they’ve weathered every storm, but now [with] the things that are looming, they are ready to move on. I think this is a huge change. People will continue to evaluate if they can stay in business based on the business pressures. You have to be forward-thinking to stay in front of it.”

But it’s not all gloom and doom.

“I’ve been in the business 34 years. I’ve seen acquisition cycles, and the independent always comes back,” says David Miller, CEO of The MED Group. “There will always be room for the independent to compete with the nationals because home care is so local.”