A Ton of Prevention

The Medicare Reform Act, otherwise known as the Medicare Prescription Drug Improvement, and Modernization Act (MMA), became effective Jan. 1, 2004. Although the reimbursement reductions that affect the home medical equipment industry will become more severe over time, you should not sit idly and wait for the larger cuts to become effective. Rather, it is imperative to begin evaluating your company’s practices to prepare for the bigger changes that are forthcoming. Knowing what to expect will help you make an educated decision about your company’s future direction.

Refine Operations

Know the facts. Before planning for change, explain Medicare reform to your staff. Identify those changes that are effective immediately and those whose implementation is scheduled for later. For example, we know that fees are frozen for 2004 and that inhalation drugs are now paid at 85 percent (80 percent for many drugs including albuterol and ipratropium) of Average Wholesale Price. So, you need to determine how much of your business is driven by inhalation drugs to make decisions about your business going forward.

Even more basic, according to Gary Morse, vice president of reimbursement for Rockville, Md.-based Roberts Home Medical, “know your revenue breakdown by payer — exactly what percentage of revenue Medicare represents. You should also break this down by branch.” Morse also recommends that you break down revenue by product to more accurately know the impact of the reform legislation on your company.

Once you define the basics, evaluate your company’s strengths and weaknesses. By department, ask your staff to generate a list of what they do well and where there is room for improvement. Compare their findings to management’s. Observe job functions to see how daily tasks are performed. Watch to see if staff members rely on your software to perform their tasks or if they use manual logs to get their job done. Manual processes waste time and should be automated as soon as possible.

Further, when a group of employees engages in conversation about a specific case, the cause is usually that someone neglected to enter notes in the system, which means you have to retrace conversations and actions to determine what exactly happened with the case. Again, by simply entering notes in the system, you will establish a chronology and a diary for the next person who handles the patient.

Know Exact Costs

Whether you are bracing for the cuts in inhalation therapy drugs, the Federal Employee Health Benefit Program (FEHBP) cuts or competitive bidding, be certain you know the costs associated with each activity in your operation. Because the cuts will be different for various product categories, you will need to calculate all costs associated with a given product — the cost of goods as well as overhead expenses.

One way to measure these costs is through Activity Based Costing (ABC). ABC is a process by which you identify the activities within your business and their related costs. Activity Based Management (ABM) uses this information to identify areas for improvement.

According to Don Clayback, CPA and vice president of networks for The MED Group, Lubbock, Texas, “this type of exercise will prove invaluable regardless of the current and impending cuts.

“ABC and ABM give you a more effective way of looking at your business and an opportunity to flush out your true costs and to identify potential areas for improvement. Most companies discover surprising details that they hadn’t been aware of in their traditional reporting structure.”

Another area that can add considerable cost to your bottom line is the level of service traditionally offered to HME patients. Perhaps now is the time to change your customers’ service level expectations.

Specifically, you can redefine service similar to what happened after enactment of the Balanced Budget Act of 1997, which reduced oxygen prices by 30 percent. Since that legislation, many oxygen companies have switched from monthly concentrator checks/visits to three-to-six month visits (unless monthly visits are individually necessary).

It should be noted, however, that the reduced number of required visits is made possible, in part, because of manufacturers’ ability to produce equipment durable enough to withstand less frequent maintenance. Watch for the same type of trend to emerge as reimbursement is cut for other product lines.

As you look for vendors to create equipment that requires minimal maintenance checks, you should also begin surveying manufacturers for pricing changes. The entire purchasing process may need to be overhauled in your operation, especially if you have been buying in a fragmented and inefficient manner.

Consider consolidating vendors, seeking deeper manufacturer discounts or additional services that are not readily available now. If you are independent and not currently using a buying group, you may find better pricing by joining one of the many industry buying groups or purchasing organizations. Regardless of your ultimate decision, be sure to negotiate the very best deal available.

Don’t forget that electronic ordering and utilization reports facilitate the purchasing process. Be sure you know order quantities, costs, margins and reimbursement amounts by product and/or brand. This will show you where obvious cuts can be made.

Although only a few of the many ways to reduce costs have been mentioned, you should continue analyzing your operation to look for additional ways to cut costs. These types of cuts often can be found among your employees, your single biggest expense after your cost of goods. Proper staffing will save your company money, morale and reputation.

Get Ready Now

As you can see, to compete in the new HME environment, you will need to identify areas of weakness and look for ways to improve them. Additionally, you will need to know your costs of doing business. This will help you prepare for competitive bidding as well as show you which items and activities cost too much.

As you learn where you need to re-engineer your staff and systems, you will reduce costs and potentially enable your company to submit a lower bid. That is why it is imperative to begin working on cost reductions now, not in 2006 or 2007 when the bids are due.

Miriam Lieber is president of Lieber Consulting, specializing in operations management and reimbursement for the HME industry. She can be reached by e-mail at [email protected] or by phone at 818/789-0670.