A Hard Look Ahead

Respiratory care providers and manufacturers are no strangers to the government’s curve balls. Providers who participate in the Medicare program have made numerous changes to their business practices over the past two decades and, even with effects of such disastrous legislation as the Balanced Budget Act of 1997, have managed to remain solvent while keeping a focus on patient care and superior service.

However, some industry leaders say provisions in the new Medicare Modernization Act (MMA) could have the greatest impact thus far. Aside from provisions mandating competitive bidding and provider accreditation, additional components of the MMA hit the home respiratory care market head-on. These include a freeze on price increases; a reduction in payment for respiratory medication; a change in the payment model for respiratory meds under Part B benefits to the average sales price (ASP) plus 6 percent; and cuts in oxygen reimbursement to be implemented in 2005.

Although respiratory care providers have always found a way to accommodate patients’ needs while meeting payer and physician demands, this time, say the experts, there is little room to absorb the cost — and still remain profitable.

As one provider put it, “It’s like squeezing blood from a turnip. You squeeze it so much, and then there’s nothing else left.”

SOLID PROFIT CENTER

An aging population that needs supplementary oxygen, health conditions and diseases that require continuing treatment and improved diagnostic practices have made the home respiratory market a solid profit center that continues to increase. But to serve the nation’s growing respiratory care needs, providers must take a hard look at operations to adjust to the changes that will govern their business in the new legislative environment.

“You need to think about how you’re going to change in order to survive those cuts,” states John Ledek, vice president and category manager for respiratory products, Invacare Corp., Elyria, Ohio.

“These pending cuts could be the tipping point that will push the service out of a lot of the product categories and could potentially eliminate access to [respiratory medications] completely,” says Joseph Lewarski, president of Hytech Homecare, Pharmacy & Medical Supply, Omnicare Companies, Mentor, Ohio.

“Ultimately, what will happen is that a lot of home care providers will go out of business because they simply cannot afford to provide the level of service they would like to with the quality they feel is important for patients,” says Vernon R. Pertelle, corporate director of respiratory/HME services for Apria Healthcare, Lake Forest, Calif. “The question becomes, do you become a commodity or do you limit yourself to a bare bones-type of service in which you really don’t provide much value to the patients?”

In considering any business-altering decisions, experts recommend knowing your actual costs, using technology that helps improve processes and eliminating or reducing policies and practices that no longer make economic sense.

“In health care, we often do things out of habit, so what I’ve been telling my staff is to work with a clean slate,” says Hytech’s Lewarski.

“There are no policies that are necessarily written in stone other than the basic ones, which are to take care of the patients and abide by the law. But the internal things — the things we control — need to be evaluated.”

Ron Richard, vice president of marketing for the Americas for ResMed, Poway, Calif., says some providers underestimate their business costs. He uses the example of a repair for a product that is under warranty.

According to Richard, many providers might say there is no cost involved because the product is covered by the warranty; yet, in reality, the provider’s true cost includes getting the product back from the patient and returning it to the manufacturer for repair.

Providers must also maintain and enhance their clinical focus to demonstrate clinical and financial outcomes that are a direct result of disease management programs and interventions.

“Respiratory care providers need to gather data and be able to report on the outcome of the therapy they provide in the home,” says Bob Fary, vice president of sales for Inogen, based in Santa Barbara, Calif.

Paul Miller, director of respiratory services for American Respiratory Associates, a provider headquartered in Bethesda, Md., is looking to new technologies manufacturers are bringing to market, particularly in products that are both patient- and provider-friendly. The company provides equipment and services to oxygen patients in 21 states, and Miller says he is anticipating new products that will help streamline operations while the business continues to grow.

TECHNOLOGY MARCHES ON

Some products, such as Invacare’s HomeFill II and Chatsworth, Calif.-based Chad Therapeutics’ Total O₂ Delivery System, are already meeting that need.

Invacare’s Ledek says home oxygen systems can directly reduce providers’ operational costs, particularly considering that cylinder delivery represents 75 to 80 percent of the cost of serving an ambulatory oxygen patient.

“We believe that transfilling systems are the most economical way to service ambulatory oxygen patients and will play an ever-increasing role in the home oxygen market going forward,” adds Earl Yager, Chad’s president and CEO.

“In addition, these systems have the added advantage of giving home oxygen patients total control of their portable oxygen supply, which allows them the utmost in ambulatory capability.”

At a time when the industry is looking to technology to create solutions, will decreasing reimbursement affect research and development?

According to Rich Kocinski, senior vice president and general manager, Sunrise Medical/DeVilbiss Respiratory Group, Longmont, Colo., “Reimbursement affects product innovation a great deal, but perhaps not in the same way as we have historically been accustomed to. If you think about products like bi-level CPAP and the decrease in market prices that have been accompanied by better, smaller, quieter products with more features, I would suggest that there has been significant innovation.”

The challenge to research and development groups to design better products that are less costly to manufacture is intense, he explains, pointing to oxygen concentrators. “When you think about the reliability of concentrators today versus just five years ago, it is clear that we have better products and lower costs, both of which were driven by reimbursement decreases,” Kocinski says.

Yager emphasizes that manufacturers must continue to support innovation.

“In the home oxygen area where the majority of the patients are Medicare patients, reductions in reimbursement certainly have an effect,” he says. “With profit margins being squeezed, only those companies that are truly committed to product innovation and have the capability to do it effectively will be able to continue that innovation.”

Ledek agrees. “There’s a tremendous source of innovation, certainly on the manufacturers’ side, because we want to provide products that are state-of-the-art. The challenge is how we can do that within the cost constraints of what the payers have set out for providers.”

But shrinking reimbursement for respiratory products could potentially slow new product development, says Joe Priest, president and COO of AirSep, Buffalo, N.Y. “If the government does with oxygen what they are trying to do to respiratory meds, it would totally stifle innovation in the oxygen market because providers could not afford to pay for that type of equipment on the ambulation side of the business,” he explains. “Reductions in reimbursement can have an immediate and negative effect on manufacturers.”

“I don’t think there is any question [reimbursement reductions] will stifle product development and new technology,” says Fary of Inogen, whose anticipated Inogen One serves as both a stationary and portable oxygen device, eliminating the need to exchange and refill tanks. (The product is presently awaiting clearance for the U.S. market.)

“Manufacturers of home care equipment will go find other areas of health care to work in and invest their time and energy, which will be to the detriment of the home care industry. We just won’t see the innovation and the new product development that would be beneficial to the users of that technology.”

Providers certainly have a reason to scrutinize new products to determine their value to patients and profitability.

“Sometimes new technology brings us more tools to do a better job with less resources, and although it may cost more on the front end, it may actually reduce the cost of doing business and improve the ability to service clients with a reduced overall operating expense,” explains Hytech’s Lewarski. “At the same time, there are a lot of products that are introduced that feature benefit ‘improvements’ that really don’t offer any improvements in outcomes or in the way we deliver service.”

ADDED VALUE

As home respiratory players wait to see what final ramifications of the MMA will be, both manufacturers and providers working in the market say it is a good idea to remind Congress, referral sources and consumers of the value of home care.

“I don’t think there is any question that care for patients in the home is less expensive,” says Fary, adding that “patients want to be in the home, and their ability to cope with the illnesses they have is quite a bit higher when they’re at home.”

According to ResMed’s Richard, home care costs have grown only about 2.5 percent a year for the past several years, while hospital and pharmaceutical costs have grown in double digits, “which shows there are a number of areas where expense control has gotten out of whack compared to home care.”

What the industry must do, these leaders believe, is repackage itself in a way that demonstrates an ability to care for patients in a professional manner.

“CMS has not taken into consideration the value home care provides in reducing expenditures overall in the most expensive areas,” points out Apria’s Pertelle. “But there have been cases of fraud and misuse, and that raises the level of visibility with the legislature in Washington, D.C., and they assume that it is representative of the industry as a whole.

“We have to do a good job of re-establishing who we are, that we are valued in the scheme of care and it’s something that needs to be considered with cooler heads — not with an instant knee-jerk reaction because of the few bad apples,” he advises.

“The home care industry is really an industry the government should be cultivating and … really supporting,” says AirSep’s Priest. “The government should want to drive more innovation, more companies and more capital into the home care marketplace to bolster it and make it a stronger and significantly larger part of the health care continuum.

“Growth in home care should be applauded, and that is the main point that needs to be stressed on Capitol Hill.”

Of reimbursement cuts mandated under the MMA, 51 percent of providers responding to a recent HomeCare survey said cuts to oxygen will have the most impact on their business.

Reimbursement Cuts

Joe Priest, president and COO, AirSep, Buffalo, N.Y.

“Right now, I would say that the vast bulk of the providers out there probably make some money at respiratory, though not an inordinate amount because the level of service has been bid up by the competitors in their area to try to capture patients. When reimbursement is reduced, providers have no choice but to cut back on services — otherwise, they become unprofitable. If you look at it from an economic theory perspective, there’s no question that there’s going to be a reduction in the level of services provided.

“As far as product innovation is concerned … It’s like driving a car 65 miles an hour and throwing it in reverse. [Reductions in reimbursement] would not only have a huge impact on service, but the manufacturers in that market won’t be able to respond that quickly and will be in no position to create a product or to innovate in a marketplace that is in such disarray and poorly paid.”

Service That Counts

Paul W. Miller, directory of respiratory services, American Respiratory Associates,Bethesda, Md.

“We’ve been in business for 25 years, and … it’s been tough, but we have built our business on our service to our patients.

“Even after all the other cuts, we’ve been able to curtail other expenditures to continue that service. We continue to utilize the professional component of our business, which includes respiratory care practitioners and allied health professionals who go out and visit our patients each month. It is our business philosophy, and although a lot of companies are going to a 90-day visit, we have not. It also helps our marketing efforts to be able to present that to the patient. That’s what we hope to be able to continue.”

Making Technology Matter

Vernon R. Pertelle, corporate director of respiratory/HME services, Apria Healthcare, Lake Forest, Calif.

“One of the disadvantages of technology is that in some cases, it’s advancing a lot more quickly than we can really keep a handle on in terms of cost. So, a lot of the technologies today that are approved by the FDA tend to be cost-prohibitive and drive health care costs up. Conversely, an advantage is that there are some technologies that provide value and are fully needed.

“The bottom line is whether or not the evidence is compelling enough to prove that the new technology offers an added benefit and is better than what is currently being provided to patients today. In most cases, that’s not what’s happening.

“Some examples, such as portable oxygen systems and portable concentrators, which have recently been redeveloped, provide added value for patients in the home who require oxygen services. When these devices are available, they will add to our armamentarium of services that we provide to patients. [They will] also reduce some of the expenditures of labor and services that go into maintaining the equipment because they require less maintenance than some of the traditional products.

“So, there are advantages and disadvantages to technology. What manufacturers need to take into account when they launch a product is what value is it going to add to the patients in the home? Does it offer an advantage, or is it better than what is currently available? Or, is it simply a way of marketing a new product that gains more market share for the manufacturer and creates an added burden on the health care industry by driving pressure to provide these costly items to patients?”

The Need to Adapt

Earl Yager, president and CEO, Chad Therapeutics, Chatsworth,Calif.

“Home care providers will need to adapt to new technologies and find more cost-efficient ways to provide their services as pressure on reimbursement will continue, regardless of whether or not competitive bidding becomes a reality.

“The tools are out there for [providers] to do this; they just have to be proactive and take advantage of them.”

A United Stand

Joseph Lewarski, president, Hytech Homecare, Pharmacy & Medical Supply, Omnicare Companies, Mentor, Ohio

“[Home care providers have made a difference recently] due to the better relationships that have been developed over the last few years between industry personnel and the clinical community. We have started to see groups get together and combine scientifically supported arguments that some of these [government-mandated] changes aren’t appropriate, and that they are going to have a negative impact on care and outcomes.

“When you have groups like the American Association for Respiratory Care, the American Association for Homecare, the American College of Chest Physicians, the American Thoracic Society and the National Association for the Medical Directorship of Respiratory Care talking about respiratory-related concerns, stating their objections and concerns about the potential, and in some cases, the real impact these changes are going to have on access to care and quality of care, I do think it makes a difference.”

Access Issues

Robert Fary, vice president of sales, Inogen, Santa Barbara, Calif.

“Reimbursement for home respiratory care is not going to grow; it is going to decline. Those who provide home respiratory care will have to take a hard look at their business models and adjust their business models so that home respiratory care can still be provided. If that doesn’t happen, then we’re going to have an access problem and, obviously, an access problem would be the worst of all situations because there are so many patients entering the age group where they will need home respiratory care.

“If one of the large home care companies … ceased to exist tomorrow, there would be a crisis situation for a period of time because all of those patients [that the company cares] for could not be absorbed into the system that quickly. At the end of the day, the patient is the one who will miss out.”

Providers’ New Challenge

John Ledek, vice president and category manager for respiratory products, Invacare Corp., Elyria, Ohio.

“When it comes to adopting new technology, there’s a broad spectrum of providers in the industry. There’s the group of ‘early adopters’ who see the change in the business model, and they jump on those things fast.

They see the potential and the power — both from providing the patient superior care and also the benefits of that new business model — as well as the ability to grow their business dramatically. Their philosophy is that if [they] have a model that is more cost-effective and that is patient- and physician-preferred, then [they] can go out and market to those patients and pulmonologists with the message that [they] offer better patient care and better outcomes.

“At the other end of the spectrum, there are providers who are reluctant to embrace that new business model because they’ve been successful with what’s happened in the past. They are slow to grasp the potential of a new business model.

“One thing is clear: By doing what you’ve done in the past, you’ll be less profitable. Whether that puts you below zero or not, I don’t know, but you will be less profitable than you are today if reimbursement is cut.

“You can be sure there will be additional cuts that will come — they’re not going the other way — so the question is, when will you begin that new business model and how will you prepare for the future?”

Patients First

Jill Spellman, president, Oxygen One Inc., Waukesha, Wis.

“In the midst of the current turmoil, the one thing I can say is that I’m blessed because I come to a place of work that I actually love every day, and I work with people who are enthusiastic, professional, serving and compassionate.

“We get the opportunity to meet all kinds of people because lung disease does not discriminate. We meet people who live in 6,000-square foot homes, and we meet people who live in 600-square foot apartments. We have a lot of customers to please.

“When Medicare reduces reimbursement, then we have to learn how to work with that and run smarter operations. Do I have a crystal ball that I can look into that can tell me exactly what I need to do for my business to be able to survive all this? No, but I do have some ideas … We will continue to move forward and do the things we need to do in order to stay in this business, because we love it.”

The Value of Home Care

Ron Richard, vice president of marketing for the Americas, ResMed, Poway, Calif.

“Those who think home care is just buying equipment, delivering it and billing payers are pretty short-sighted, because there are 1.5 to 1.75 million people each day being taken care of in this country by home care providers. That means they’re delivering equipment to their homes, they’re taking phone calls, they’re taking care of these people in a way that if they were all in the hospital it would be a lot more expensive to the health care system.

“They are also filling a role in society that does not exist in a lot of countries. The distribution channels and the delivery mechanisms — the whole service aspect that’s being provided now by the home care industry — is a very sophisticated system compared to [that of] other countries that are supposedly in the same economic stratosphere as the United States.

“There is a white paper being created to show the value of home care. Those involved in preparing it have performed an extensive analysis of a number of different environments, comparing what it would cost to take care of those patients in the hospital versus in a home care environment.

“The goal of this paper is to have a draft [ready] in June to present to members of Congress to discuss the value of home care, what it is really doing in terms of service for the community and how can we change its perception and get the respect of Congress. There has been some fraud in the industry and that’s got to be cleaned up, [and over time, people have developed] a tarnished image of what home care is really all about.

“We want these people to take a more serious look at the value of what home care is offering and get rid of the ‘used-car salesman’ mentality.”

Note: The white paper Richard mentions is being created by a number of organizations and individuals in the home medical equipment industry. Its purpose is to demonstrate to Congress the value of home care through extensive analysis and real data, comparing the cost of caring for patients in a hospital versus a home. In addition to respiratory care, the paper also will present data on orthopedics and wound care. Check future issues of HomeCare magazine and HomeCare Monday, our weekly e-newsletter, for more on this important effort.

Serving Patients and Providers

Rich Kocinski, senior vice president and general manager, Sunrise Medical/DeVilbiss Respiratory Group, Longmont, Colo.

“Because advancing technologies are centered on reimbursement, our focus has been primarily on our customers’ costs. To us, this means operational costs that can be reduced by using our products. Our products and the technology that we are embedding in our products will facilitate our customers’ business needs.

“Obviously, we are aware of other manufacturers who are adding features and models with increasing prices, but have not brought the coverage with the product release. We believe this is a flawed approach and that the reimbursement environment right now is extremely difficult to move upward.”

Provider Profitability

Jim Walsh, president, VGM Management Ltd. and general counsel, The VGM Group, Waterloo, Iowa

“Service levels are always under pressure. That is true with in-patient facilities as well as home care-based businesses. It is especially true for respiratory home care companies.

“Payers, including Medicare, will pay for needed services one way or the other. Providers who know their costs and are willing to face problems head-on can continue to operate a profitable business. Those who don’t know what a given service or product costs or aren’t willing to adjust to available reimbursement, cut off service or negotiate for higher payments will have problems.

“If a provider can’t get paid an adequate amount for a service or product now being supplied, [their] choice is to cut the service, buy a less expensive product or stop providing that service or product. Providers need to find reliable sources of competitively priced products and re-examine their service costs regularly. Remember that a good mix of payers may make it possible to take Medicare business, even if it turns out to be less profitable than it has been in the past.

“Innovative and energetic entrepreneurs are reacting to the MMA by planning to adjust costs to available payments, exiting some lines of business and developing new products and services. They have their eye on demographics, disease state management programs and new pharmaceutical opportunities.”