SOMETIMES THE MEMORY plays tricks on us and nostalgia bathes the past in a deceptive glow. We often remember “good old days” that didn't feel all that good when we were actually living through them. But in the history of the home medical equipment business, there really was a Golden Age of sorts, back when the living was easy and Medicare paid, within reason, pretty much what you wanted.

An exaggeration? Maybe. But no one who has done business in HME or any other branch of health care can deny that the rules of the Medicare reimbursement game have changed dramatically over the past two decades — and usually not in favor of the providers.

What's more, industry observers see no change in this trend toward tighter HME margins and tougher bureaucracy. They expect the economic, demographic and political forces that have squeezed reimbursement to continue. And the spread of competitive bidding could make payments significantly leaner. With other third-party payers following Medicare's lead, there may be no safe havens for the weaker dealers.

In short, the next 20 years could well be a repeat of the past 20. Since reimbursement affects every aspect of the HME business, from product mix and order intake systems to service and the bottom line, it's worth taking some time to look at the industry's experience with the Medicare program, to get some idea of what to expect and, perhaps, what can be changed.

As to what should be changed, HME providers and other experts have come to focus more on the process than on the payments themselves. Reviews are mixed on the fee schedules — some say they're generally adequate; others say they could be a lot better. But hardly anyone has a good word for Medicare's procedures, which are widely criticized as too complex and stacked against providers.

The Way We Were

THE HOME MEDICAL equipment industry may not feel very brotherly toward the Medicare program, but in a very real way the two have grown up together. In 1965, when the bill setting up the Medicare program was signed into law, the HME industry was little more than a minor offshoot of the pharmacy business.

“About the only equipment available in the home was canes, crutches, walkers and beds,” says Tom Antone, a Washington lawyer who served in the Department of Health and Human Services in the 1970s and ‘80s and later led the National Association for Medical Equipment Services, the precursor to today's American Association for Homecare. It was not until 1973, he says, that Medicare started covering home oxygen. Much of today's HME technology, such as concentrators, was unheard of.

But from the very start, Medicare gave HME a forward push simply by noticing it. Antone says the architects of the program figured, accurately, that the aging of the Baby Boomers would create a need for more chronic-disease care. So they included benefits for short-term rehabilitation, home health care and HME.

For its method of reimbursement, Medicare adopted the private-sector insurance practice of paying so-called “reasonable and customary” charges to hospitals, doctors and other providers, including equipment dealers.

Compared to what came later, the system was friendly indeed. Sue Thomas, who sold custom wheelchairs in California during the 1970s, recalls that Medicare in those days “worked well with the small dealer.” Reimbursement rates were set by Medicare carriers (34 in all) based on the two-year record of charges by providers in a particular region. The charges were arrayed from high to low, and the top and bottom 25 percent were knocked out to determine the new reimbursement range.

The result was a cost-plus standard that didn't demand enormous efficiency and saw payers and providers work as partners more than adversaries. Thomas says of the system, “Because [payers] would work with providers, providers felt that [the fee schedules] had relation to their business cost.”

Antone says the reimbursement scheme also reflected the Blue Cross/Blue Shield tradition of “high-option indemnity insurance” designed to be attractive to providers as well as patients. “A great deal of deference was built into the historical patterns of providing insurance and building in medical incentives. It was pretty liberal.” In HME, he says, the system was “unlimited rental for everything … which meant the government was paying thousands of dollars for a wheelchair for a long-term patient.”

Charges were far from uniform or predictable. With so many carriers setting rates based on local practices, they couldn't be. “You could have something reimbursed for $100 in Alaska and in Alabama for $25,” says Terri Maggio, a business consultant based in Millville, N.J., who was in the HME business from 1978 through the 1980s. But the highly fragmented HME business of the time had no need for consistent rules or hard-and-fast rates.

“There was a lot of slop in the way home medical equipment reimbursement was handled,” says Sue Thomas' daughter, HME consultant Lisa Thomas-Payne of Albuquerque-based Medical Reimbursement Systems. “There were lots of independent, usually family-owned HME companies that had learned to live in that loose, constantly changing environment, and they were very comfortable with it.”

The Era of Limits Begins

JIMMY CARTER'S White House had plenty of trouble on its plate in 1979. In that year, among other things, the Russians invaded Afghanistan, OPEC jacked up the price of oil to all-time highs, inflation roared into double digits and a mob of Iranians took Americans hostage at the U.S. Embassy in Teheran. There was a problem with Medicare, too, though it didn't show up as much in the headlines. It began to dawn on the federal government that the system would have to rein in its spending, or else risk busting the budget or the economy.

Antone, who was with HHS at the time, says Carter's proposed 1980 budget, was the first “retrenchment budget” for Medicare. It was only a modest pullback from the all-out growth mode, but it was a turning point. “Prior to that time, whenever a budget came through, everybody was looking for opportunities to expand Medicare,” Antone says. “Carter started talking about how paying doctors and hospitals what they wanted to get every year was inherently inflationary.”

At the same time, however, Medicare was expanding its range of beneficiaries and menu of services, thereby putting bigger demands on its overall budget and forcing it to tighten the reimbursement on services it already was providing. It broadened its home health benefit in 1980, for instance, by getting rid of the prior hospitalization requirement. Before that, early in the 1970s, it had added oxygen coverage and broadened eligibility to people under age 65 with long-term disabilities and end-stage renal disease.

This expansion of benefits, leading to new budget pressures and tougher payment policies, has been a recurring Medicare theme. Sometimes the push comes from the demands by the public or politicians for wider coverage — as is the case with the current pressure for a prescription drug benefit. Sometimes it comes from the belief that covering a new, cheaper form of care will reduce Medicare's overall costs — an argument HME industry players have long used for coverage of home care.

Sometimes it's a combination of both public demand and cost cutting. Home care grew in large part because more and more people wanted to avoid going to hospitals if they could, and because hospitals, under pressure to cut their own costs by reducing the length of stay, began sending patients home earlier.

The appeal of home care in the 1980s was a boon for the HME industry, but only up to a point. The industry, especially its Medicare-paid portion, grew much faster in the '80s than either hospitals or physician services (see sidebar).

But as Maggio notes, “There's always a ripple effect” in reimbursement. As a cheaper alternative catches on, its growth draws attention and alarms federal officials, who then tighten the rules. Thus, as the move to a prospective payment system based on diagnosis-related groups “put people out of hospitals quicker, home-care costs rose, so we got CMNs (certificates of medical necessity),” Maggio says.

As the 1980s began, HME was still a tiny part of the Medicare budget and mostly under the policymakers' radar. Hospital care, the biggest Medicare spending category, initially bore the brunt of the new Reagan administration's aggressive cost-control efforts.

The Health Care Financing Administration (now called the Centers for Medicare or Medicaid Services), the agency paying the bills for Medicare and other federal health programs, put hospitals on a DRG diet starting in 1983. It set fees not according to the “reasonable and customary” cost of services billed, but by a predicted overall cost of treating patients with a given diagnosis. The basic idea was to discourage hospitals from billing for treatments more than was needed to treat the disease.

In another ongoing Medicare pattern, the medicine forced on the big provider groups eventually works its way down to the smaller ones. By the end of the decade, the HME industry also had to wave goodbye to “reasonable and customary” Medicare payment (though, as we'll see, the industry had a big role in drafting the plan to replace it).

On the Radar Screen

BUT THE INDUSTRY'S growth didn't go wholly unnoticed. During the early 1980s, a series of reports from the General Accounting Office, the investigative arm of Congress, kicked up a wave of criticism about loose Medicare HME payment practices.

In 1982, for instance, the GAO said Medicare was wasting money by reimbursing for rentals when it would be cheaper for beneficiaries to buy the items outright. In a 1983 report on claims at Kansas City Blue Shield, the GAO said the taxpayers would have saved money on 16 of the 20 items it analyzed if the products had been routinely purchased rather than rented.

The money involved in these cases wasn't much by federal standards. The GAO said Medicare spent some $125 million on durable medical equipment in 1979, only about 4 percent of the overall Medicare budget. It also estimated about $2 million in excess rental payments that year.

But it did turn up a real loophole that, if left unplugged, could start costing the public serious money. The ability of HME providers to rent a cheap, reusable item and keep billing Medicare for it indefinitely was a problem begging for a solution. It also made great political rhetoric. The “golden commode” entered Washington lore as a symbol of waste (in all its forms).

HCFA responded by trying to put limits on rentals. Under rules issued in 1985, Medicare carriers had to make a rent-or-buy call once equipment had been rented for four months. It was up to them to decide, given the patient's medical condition, whether it would cost less to continue renting or buy the product outright. For what HCFA called “inexpensive DME,” items costing less than $120, carriers were to pay for the product in a lump sum or, if it was being rented, make rental payments only up to the purchase price.

Trying to implement such a policy among 34 local carriers not known for their consistency was hard enough. The new economic power it put in the hands of third-party payers — a foretaste of managed care — made it that much worse. It “was a disaster from the supplier standpoint,” Thomas-Payne recalls, and spurred the industry to start developing an alternative of its own.

The mid-'80s also saw new restrictions on the oxygen business, with patients for the first time having to meet a benchmark test for coverage. Before, Thomas-Payne says, “literally a pad prescription could get you oxygen under Medicare.”

The trend toward tighter rules and stingier payments was becoming clear. Antone says the HME industry came to realize that, if it could sell politicians on its own idea of a reimbursement reform plan, a tougher one would be imposed on them. As the DRG system took hold elsewhere in Medicare, he says, HME leaders “had a vision … that the handwriting's on the wall: If they can do it to hospitals and they can do it to doctors, it's only a matter of time before they do it to us.”

The stage was set for the industry's most ambitious foray into politics, and arguably, its one undoubted success.

The Reimbursement Reform Plan

THIS WAS THE “Six-Point Plan,” which the HME industry crafted as a way of avoiding more painful steps, such as across-the-board cuts. This broke an unwritten political rule, says Antone, who was president of NAMES at the time. “It's unheard of for an industry to write its own rules for reimbursement reform, but we tried it.” In this case, they succeeded.

The new reimbursement scheme was passed late in 1987 as part of a budget bill, and it took effect beginning in 1989. For purposes of making reimbursement decisions, it divided HME products into six categories: low-cost goods, items needing frequent and substantial servicing, customized items, prosthetic and orthotic devices, oxygen and oxygen equipment, and capped rental items.

Each category had its own rent-or-buy policy. Low-cost HME was to be bought outright. Unlimited rental would continue for oxygen. For the capped rental items, such as beds and wheelchairs, Medicare would pay rent for a maximum of 15 months with a purchase option after 10 months. This system is still in place today, though it has seen some tweaking over the years.

The new decade saw one major structural change, which brought more uniformity to HME billing. This was the 1993 establishment of Durable Medical Equipment Regional Carriers to take over HME reimbursement from the 34 local Medicare contractors. For the first time, HME billing was handled by specialized contractors working over broad regions — just four of them.

The government also continued to rework reimbursement rates, as well as skip annual cost-of-living increases. The biggest across-the-board reduction was a 30 percent cut for oxygen imposed over two years by the 1997 Balanced Budget Act. And the continual growth in HME product lines also made the list of reimbursement codes much longer. Maggio estimates that the number of codes may have grown about 10 times in the past 20 years.

At least one HME veteran, Shelly Prial, thinks there are still too few codes, with the result that providers get paid too little because a product can be lumped with cheaper ones for coding purposes.

“The reimbursements have never been adequate, because the codes are based on the lowest common denominator,” says Prial, director of government relations for buying groups VGM and Homecare Providers Co-op. “If you have six specific cushions that fit into the E0192 code, you should have six different codes describing what [providers] bill for,” he says.

Imprecise coding gives Medicare too much leeway to make arbitrary decisions, Prial says. And it's the decision-makers, he suggests, who are the real issue today. “Medicare reimbursement has not changed,” he says. “The personnel who are responsible for Medicare have.”

The Process Becomes the Problem

WHETHER IT'S THE personnel or the paperwork, most HME experts tend to see some aspect of the reimbursement process as the problem these days. It's not so much what Medicare says it will pay for a particular product — as it is the effort involved both in getting paid and defending disputed bills.

Joey Ryan, the senior vice president of reimbursement for Pennsylvania-based American Home Care Supply Co., has been in the HME business since 1987. “Medicare reimbursement has changed dramatically over that time,” she says, noting that documentation requirements and other paperwork have added to the provider's burden. A consultant to HME businesses for seven years during the 1990s, Ryan says her clients' biggest beef was over procedures. “A lot of it was documentation and process issues, [such as] the amount of time a bill had to be paid.” She suspects these problems are getting worse.

Antone, who left NAMES in 1990 and is now an attorney specializing in health care, says the process is especially stacked against the HME industry when bills are disputed and a DMERC demands repayment. “The law is hideously out of balance” in this respect, he says.

Antone and others say a business can wait years (after being forced to pay back the billed amount) before getting a hearing on the issue before an administrative law judge.

Joe Groden, a retired Rochester, N.Y., pharmacist who recently left the HME business after 18 years, agrees. “The hearings and reviews have gotten no better and in some cases have gotten worse,” he says. “You could sell a $20,000 wheelchair and wait two years” for payment. While he says the fee schedules are mostly fair, the big problem is “the cost of paperwork and the cost of … going through things like reviews and hearings that tie up your money for so long.”

This paperwork jungle, in which HME providers see DMERCs lurking like tigers to pounce on the unwary, grew through the years because of cost-cutting pressures and, in the 1990s especially, concerns about fraud. As that decade began, the inspector general of HHS went on an aggressive campaign to root out overbilling in Medicare and other federal health programs.

Well-publicized fraud cases were one result of this process. Another was the anti-fraud part of the 1996 Health Insurance Portability and Accountability Act, which gave the federal government new enforcement tools and funding for what the government calls “program integrity activities.”

Also, “more people are getting busted with audits,” says Jackson, Miss.-based HME consultant Jeanie Lane. Lane says the enforcement climate has changed — becoming tougher — in the past two years as electronic billing has taken hold. Payments are faster, she said, but “the rules have gotten a lot stricter, more detailed.” There are more ways a sloppy HME provider can be tripped up by past mistakes, and Lane says the feds can go back as far as seven years looking for them.

But unlike some others in the HME industry, Lane doesn't think the government is being unfair. “People just weren't paying attention. We got sloppy with our paperwork and it's come back to haunt us,” she says. “[HME] can still be a good business and a profitable business, but it has to be done right.”

The Changing Medicare Mix

AS MEDICARE and the HME industry have grown and evolved, the latter has come to depend on the federal health program for a growing share of its business. HME has also been one of the fastest-growing parts of the Medicare budget — in percentage terms, not in size.

According to historical estimates and projections compiled by the Health Care Financing Administration (now the Centers for Medicare and Medicaid Services), Medicare spent $400 million in 1980 in the category “Other Medical Products,” which is mainly durable medical equipment. By 1999, the latest year for which figures were available, Medicare was spending about 13.5 times more — $5.4 billion — in that category. Other Medicare spending had risen less. Hospital care was up about 4.6 times and physician services were up about 6.7 times.

In another report, issued in 2000, HCFA estimated that nationwide spending on “Medical Durables” went from $2 billion in 1970 to $15 billion in 1998. Medicare paid for just 2 percent of the 1970 amount, or about $40 million. It paid 38 percent, or about $5.7 billion, in 1998.
— T.G.

Be Careful What You Wish For

THE NEW CENTURY sees the industry depending heavily on Medicare and at a loss for serious alternatives. Home medical equipment retailing has struggled to attract consumers and managed care has turned out to be a bigger disappointment than Medicare ever was. At the same time, the constant drive by politicians to expand coverage means that Medicare will continue to promise more benefits (which means more business for HME providers) and be ever more prudent (providers would say stingy) in actually paying for them.

For those who complain that Medicare doesn't pay enough for some products, or doesn't cover related services, some old hands have a warning: Be careful what you wish for, because you may get it.

Medicare does have an alternative in the works for its current fee schedules — competitive bidding. So far, only a few providers in Florida and Texas have been directly affected by bidding programs. But the government is gaining knowledge that could have a wide impact a few years from now, industry observers say. As the pilot projects go forward, Medicare will learn how little an HME provider can charge and still make money. The most efficient providers will set the scale, in other words, and it could then be imposed on everyone else.

“We probably have another two to three years before we see those pricing data sets they've collected come back to haunt us,” says Albuquerque-based HME consultant Lisa Thomas-Payne. And, says Washington health care attorney Thomas Antone, as tight as Medicare may seem now, “government-set reimbursement will always be higher than the reimbursement that comes about from competitive bidding.”

In short, whether the old days were golden or just pleasantly green, there's no serious prospect of bringing them back — at least, not through any action from Washington.
— T.G.