Providers can survive more reimbursement cuts on the horizon
by Bradley Smith
July 12, 2016

Every marketplace experiences an inevitable turbulence that causes providers and customers to speculate about the future. Most markets, such as HME, emerge from startup to fragmentation to marketing where the focus of disruption and innovation drives products and services to increased affordability and accessibility. In some cases, the disruption can be fueled by government intervention, as in the case of Medicare competitive bidding and rural bid implementation. Entrepreneurs who can manage and execute during these times always find opportunity. But is the world really coming to an end with rural bid implementation?

Barring passage of the Patient Access to Durable Medical Equipment Act, on July 1 rural bid implementation will become a reality. It will impact virtually all HME operations and will have a major ripple effect on everyone associated with our industry. Some providers see this as the end of their business “world,” while others see it as the beginning of a new existence with different opportunities. In any case, it is likely to be “the tipping point,” much like “the moment of critical mass, the threshold, the boiling point,” described by Malcolm Gladwell in his best seller of the same name.

Rural bid implementation differs somewhat from Gladwell’s original thoughts because it is not small or mysterious; it has the potential to dramatically alter an HME landscape that has already been significantly impacted by competitive bidding. Most HME providers are located within a competitive bidding area (CBA). Providers have dealt with competitive bidding for awhile and, in many cases, have been able to mitigate lost urban revenue by integrating a significant volume of rural patients, with higher reimbursement for these same patients. But a new chapter in this story begins July 1, and no one knows with certainty what the future holds.

With the rural bid starting July 1, there will no longer be an unaffected portion of the HME marketplace in this country, and all mitigating factors will be removed. Anticipation of these changes is already resulting in some HMEs sending letters to referral sources and beneficiaries, notifying them they will no longer accept Medicare patients. It is clear that rural bid implementation is the largest disruptive action facing the HME industry since competitive bidding.

Reimbursement cuts are, of course, nothing new to experienced HME executives. But what is different this time is a loss of access to the beneficiary. Hospitals and other acute care providers in some markets are finding they cannot discharge patients because they can’t find a contracted HME provider to furnish patients with the in-home equipment they need, in the time frame in which they are required to deliver. Out-of-state providers have won many bids, but they can’t respond as quickly to a discharge planner as local providers. Thus, the patient stays in the hospital longer until a hospital bed, oxygen or other equipment can be delivered by a provider who may be many miles away. Even those out-of-state providers that have subcontracted with local HMEs during previous bid rounds are finding it harder to secure local providers and re-up their subcontracts.

This change has the possibility to devastate providers and beneficiaries in many areas—the difference is it will now also disrupt acute care providers.

We are already seeing several instances of this disruption in some markets, including a significant one on the Hawaiian island of Maui. Maui currently has only one Medicare HME provider, Gammie Medical. Owner Paul Gammie recently notified his referral sources that the company will no longer accept Medicare patients because the rural bid rate reductions are lower than the cost of goods sold (COGS) in Hawaii. On average, Maui COGS are 30 percent higher than the mainland U.S. due to Hawaii’s isolation. Currently Gammie Medical and Maui’s hospitals are attempting to work out a solution, but if equipment reimbursement is lower than the provider’s COGS, those conversations are likely futile. Meanwhile, the daily inpatient care cost to Medicare is higher than the cost of the equipment plus the full Medicare reimbursement for that equipment combined.

Digital Excusive: Paul Gammie explains the the effects of the rural bid in this video.

When the rural bid does take effect, I believe we are going to see a steep increase in the loss of access—and we are going to hear about it from many different stakeholders. The usual voices will cry out—beneficiaries and HMEs—but more importantly, the acute care providers—who collectively seem to have a much louder and more pointed influence on Congress—will speak up. It is quite apparent that the acute care provider will now feel the pain the HME industry has been burdened with for several years. It’s likely that the lack of access to homecare products will ultimately result in greater hospital admissions and will ultimately cost Medicare more money. Whether or not Congress will respond positively (or at all) is not known at this time, but we will certainly hear more about this issue as the clamor rises.

Taking a Step Back

Most of us have heard of fabled character Chicken Little, who mistakenly interpreted an event as, “the sky is falling,” and then evangelized this belief throughout the animal kingdom. It took little time for the message to spread and take on a life of its own. We know that the rural bid is not a simple reimbursement adjustment; it’s a service shift in the business model we have employed for decades, and it requires a different approach. Few HME operators will survive if they adopt a business model that depends on staff reductions or cheaper office supplies, and certainly no one will thrive with the perspective that the sky is falling. What I believe is required is a thoughtful look at the larger health care market and the HME companies that have been successful despite competitive bidding.

Here are some attributes of the new generation of success stories that I have seen in my practice:

  • The courage to undertake a ruthlessly honest and detailed review of the larger health care marketplace—Health care is now being shaped by economics, managed care, rapid innovation, strongly stated customer preferences, digital marketing and new, direct access to HME products. These factors are seen as challenges by traditional HME operations, while successful HME entrepreneurs see more opportunities than ever before.
  • Partnering with investors and capital—The “go it alone” strategy is being quickly replaced by the new affiliation model, where competitors may actively partner with one another in select areas and where new investors are brought in, especially private equity groups (PEGs) who have abundant “dry powder” and sense the opportunity.
  • A millennial-type perspective—This do-more-with-less mindset contrasts with the sometimes lethargic strategy of many baby boomers who are HME operators. You have to act with a sense of urgency and agility and with the willingness to capitalize on new opportunities.
  • Razor-sharp strategic clarity—While most HME companies have a general sense of strategic goals, this is no longer sufficient. Setting aside their historic biases, effective HME operators today systematically assess their risks and benefits, identify necessary resources to succeed and create alignment internally before acting.
  • Effective execution—Many HMEs have good, general plans for the future, but few are able or willing to execute their plans with precision. Thriving HMEs act with conviction, evaluate results and make course corrections so they can keep growing and diversifying.
  • Targeted offerings—A traditional HME may complacently offer a full line of products; today’s progressive HME drills down to core offerings with attention to cross-selling opportunities, and eliminates underperforming products.
  • Learning quickly—Embedded in the above is a trait of most successful HME companies in our new economy—learning quickly from mistakes and successes, and then incorporating the learning into new execution and offerings.

Of course, each HME organization has its own culture and character, but integrating the above attributes is a great foundation for evolving in the rural bid implementation era.

Recognizing the New Value Proposition—and Then Acting

When newer, successful HME entrepreneurs look at the marketplace, they comprehend what most are just beginning to recognize: the shift to value-based, outcome-measured health care. Funding entities and payers (whether public institutions, managed care organizations, commercial insurance or even consumers who pay cash) want to know about observable outcomes and value in terms of their health care. If not delivered, it is increasingly probable that they will seek competitor alternatives.

This dynamic is also fundamental to the disruptive innovation that is sweeping through the HME market, and health care generally: the demand for increased accessibility to products and services, and increased affordability. The traditional fee-for-service model that is prevalent in HME is under assault while providing a new opportunity—providers can distinguish themselves not just on price and availability, but also on providing superior service and clinical expertise. In addition, there are a variety of strategic options that creative HME executives are already exploring:

  • Partnering with a hospital—Rural hospitals are likely to find themselves in a homecare and HME predicament: Do we establish our own HME or do we partner with an existing company? This provides an opportunity for an entrepreneurial HME to partner with one or more rural hospital/clinics and mitigate some of their losses via rural bid implementation.
  • Partnering with insurance providers—As in the case of a rural hospital, insurance providers in rural communities often face a shortage of qualified partners.
  • Shifting reimbursement models—While challenging at the onset, HMEs that can convert part of their operations to daily/monthly per diem for some patient equipment needs will have a competitive advantage as the reimbursement model continues to shift. Also, HME providers willing to experiment with outcome-based reimbursement (e.g. payment based on keeping the patient at home and out of the hospital) stand to learn about the future more quickly than those who refuse the inevitability of change. There is a clear advantage for leaders of the future versus victims of the future.
  • Considering parallel markets—HME operations often intersect with related markets when there are opportunities to expand, and possibly acquire, vertically compatible markets: in-home care, hospice, retail/specialty pharmacy, behavioral health treatment, cognitive disabilities services and urgent care centers, to name a few.
  • Exploring relationships with Accountable Care Organizations (ACOs)—Most ACOs seek out HME operations to affiliate with in providing a full continuum of services and products that they are generally required to provide as part of larger reimbursement contracts.

Specific changes such as rural bid implementation have intended consequences, such as cost savings, that are evident to all—and feared by many. The unintended consequences also deserve attention. In this case, what may be unintended is a great opportunity for HME leaders to shape a prosperous future while participating in the most significant health care revolution of our time.