Diversification
by Paul O'Toole
November 29, 2016

Today’s HME providers are faced with many challenges regarding reimbursement, consolidation, competitive bidding, soaring costs and constant changes to CMS and payer requirements. I know that many providers are nodding their heads and asking themselves the familiar question, “Is it really worth it to continue, or should I exit the market altogether?” The reality is that because margins continue to shrink, action needs to be taken now to plan where your business is headed. There are many options you can leverage to grow your bottom line and expand your patient services.

Focus on Profitable Ventures
Get started by looking closely at your current service lines. In many cases, due to limited capital, small HME providers struggle with purchasing large volumes of inventory at one time compared to larger HMEs that buy in bulk at lower price points. This makes it hard for small providers to compete, so it may be best to stop trying and cease providing the services that ultimately end up draining your revenue. Then, consider adding other items such as compression products and walkers that you can sell more of with less upfront capital costs.

In addition, retail point-of-sale is a great upsell opportunity if you provide the items and options for those clients who are willing to pay more to get what they want. You can also expand your retail services by selling online, which will also help to offset low margins from Medicare fee-for-service. Taking a closer look into your true costs and sales for specific items and services can give you a broad perspective on what you should try to sell more of, as well as what may be negatively impacting your bottom line.

Exploring Parallel Markets
Another alternative is to evaluate other companies that you can possibly purchase or merge with. Taking this route could reduce your risk and is much more cost-effective than building a new business from the ground up. The good news is that there is a lot of overlap in the post-acute health care space, so moving into a new health care vertical presents less risk, and you may have current customers who will benefit from your expanded services at the same time. A few parallel markets to consider:

  1. Home Health: With increasing demand and demographic need, the skilled and unskilled home health market is a great opportunity to grow. According to The National Association for Home Care & Hospice (NAHC), approximately 12 million patients receive homecare services each year, with more than 428 million patient visits annually. As more demand shifts to the home, the job outlook for home health aides is great, with annual growth rates anticipated to be 38 percent until 2024. Beware, however, that with so much fraud uncovered by the Medicare Fraud Strike Force, this market is under close scrutiny.
  2. Hospice: According to data from the National Hospice and Palliative Care Organization (NHPCO), the number of patients receiving hospice care has increased steadily in the last five years. In 2014, the number of patients served by hospice was estimated to be nearly 1.7 million. If you are considering adding home health services, hospice is a close parallel market that can be very similar to services you may already provide.
  3. Pharmacy: Traditional retail pharmacies have seen a significant tightening of margins, but there is still room for potential cash reimbursement with niche options such as sterile or non-sterile compounding or unique medications. Home infusion therapy, which is also experiencing high demand, faces tight margins, so every dollar counts toward the bottom line. These slim reimbursements are encouraging many providers to look into newer models of pharmacy that are seeing high demand and high revenue potential; for example, specialty pharmacy. The specialty pharmacy industry is taking off like wildfire with uncapped revenue potential. As the number of specialty drugs on the market continues to rise, this field will continue to expand, with more providers entering the space. As a result, many have questioned whether there is room for one more pharmacy to take their piece of the pie. The answer is an unequivocal yes. In fact, now is the time to give this market a chance. Double-digit growth is expected for years to come as more patients require this type of treatment and new drugs enter the market. Obviously, as more pharmacies enter this space, the competition increases and only the top pharmacies will be selected for limited-distribution drug contracts. So, entering this market can be lucrative but is not without challenges, including costs to obtain accreditation and compete for drug access.
  4. Behavioral Health: This is a promising market with growing demand. However, due to the large majority of services being paid by Medicaid, as well as other payers whose reimbursement regulations constantly change, the margins can be slim on an individual patient basis. A recent report by Duff and Phelps mentions that there are “approximately 14,000 for-profit behavioral health and substance abuse facilities in the United States, with an estimated average revenue per facility of approximately $1 million.”

Which Path to Take?
There are many options for HME providers who are willing to try some creative strategies, such as growing the point-of-sale operations, web presence and different service lines within your business, as well as looking outside your organization into M+A alternatives. The reality is that, although revenue can be tight, the need for post-acute care is growing.

When deciding which markets to pursue, consider the technology tools you will need as your business diversifies. There are single systems that can run your entire business, whatever your service lines, and investing in these types of products can help you easily transition into new markets.