Making the Right Moves Pays Off for HME Providers RETAILING MIGHT PLAY an important role in the home medical equipment industry, but rentals are more the lifeblood-not to mention the oxygen-of the market. With exceptions, such as high-end wheelchairs and aids to daily living, the industry is mainly a business of renting. Beds and support surfaces, standard wheelchairs, oxygen and other respiratory equipment-all are usually rented. Indeed, renting has been one of the most stable profit centers for HME providers as they struggle with the last few years of reimbursement cuts.

This is not to say the rental game is standing still. Like everything else in health care, it's evolving, and providers who don't keep up with the changes may find themselves operating in the red. You can still make money in rentals, say providers and consultants, but public and private payers are keeping a sharp eye on rented products to ensure that profits don't roll in too easily. That makes it more crucial than ever to contract carefully, to understand the how and why of payment rules, and to make sure you get paid on time, experts say.

BEFORE YOU SIGN ROGER MILLER, president of Broadview, Ill.-based DependiCare, sums up his advice to HME providers by saying: "Learn the reimbursement policies of all the payer sources, then market your service so that you get the patients from a payer you want to serve. ... You've got to do a really good job of screening whom you're getting business from and what those business terms are."

In other words, you must know your payers and don't sign just any contract.

Of course, it should go without saying that you ought to know your own business, especially its costs. As with other aspects of HME, pressure to hold down health care spending is leading to leaner rental reimbursements. Providers who do the best job of controlling their expenses stand to profit the most-or lose the least.

Key factors that have a particular impact on the success or failure of rental business include:

* The Medicare classification of some products as "capped" rentals;

* The advance of managed care, which is giving providers new choices-and risks-in contracting;

* A trend among institutional caregivers, such as nursing homes, to buy rather than rent, along with a growing retail market driven by consumer advertising-although no pure-retail model has proven itself just yet.

Here's what experts say about these rental facts of life:

CAPS AND YOU THE HEALTH Care Financing Administration sets limits on its Medicare rental reimbursement in two ways. First, for lower-cost items such as aids to daily living, it pays only for outright purchases by the end-user. The current ceiling is $150. Second, for more costly items that require relatively infrequent maintenance, it imposes a maximum rental period of 15 months and gives the user an option to own the product-at no further cost-after 13 months. If the user continues to rent after 15 months, the HME provider can charge only one month's rent twice a year to cover service costs.

Although Medicare started capping rentals only late in the 1990s, the list of such items now includes about 100 product codes and covers most rental items outside oxygen. Marcia Nusgart, executive director of the Bethesda, Md.-based Coalition of Respiratory Manufacturers, a trade group, says HCFA has recently been trying, over industry protests, to cap rentals on bi-level positive-airway-pressure devices that have backup timing. BiPAP devices without backup are already in the capped category. HCFA is expected to reopen the BiPAP classification issue next year.

So are there more rental caps in HME's future? Predictions differ. Bob Wulfing, president of the HME consulting firm Creative Medical Management in Oceanside, Calif., says he doesn't expect HCFA to bear down much on major rental products until "the middle of the next presidency." Then, he says, look for more capped items and restrictions on reimbursement.

Miller, who is also president of the Illinois Association of Medical Equipment Services, says he doesn't see an imminent threat of more capped rentals, "though I think it's safe to say that ... HCFA will do whatever it can."

Bruce Brothis, a former HME provider who is now a consultant to HME firms through his company, Centralized Billing & Intake in Parker, Colo., says the move to cap BiPAP products means "they aren't the gravy train they once were," but he doesn't expect oxygen products, with their high service requirement, to be capped.

A MATTER OF TIME WHATEVER THE future brings, says Miller, the present capped rentals can be a problem in their own right. "Now that we've been into capped rentals for a few years," he says, "the percentage of capped rental equipment that people have out in the field is scary." He estimates that more than 30 percent of the equipment at some HME firms is being used past the 15-month full-rental period. Once an HME firm rents equipment to a patient, Miller points out, it must let the patient use the item as long as needed, even if the rental income dries up.

But capped rentals can be quite profitable for the provider as long as they're rented-and re-rented-for short periods. Wulfing cites support surfaces as an example. Electronic pressure-reducing mattresses, priced from $1,500 to $2,800, bring in about $650 a month in rent, with Medicare paying 80 percent and private insurance paying the full amount. And the rental cap usually isn't a factor. "Even though that mattress is a capped rental,we get patients healed and off those systems before 15 months," he says, "so the reality is that it always comes back to us to be used on another patient." Over time, he adds, an HME provider can make up to $50,000 from one of those products.

Does it ever pay when patients get title to capped equipment-meaning that it won't be available for re-rental? Brothis says it does for two products: nebulizers, which he says "tend to break down a lot" and so lead to service costs that are too high to justify the Medicare reimbursement; and continuous-positive-airway-pressure equipment, "because the technology changes so much" and patients will want the newest models.

Patients are free to choose whether to take title or keep renting, of course, and HME providers must send them a letter at the 10th month informing them of their options. Brothis advises clients to make a buy-or-rent sales pitch at that point, depending on the product. For products that he wants to continue to rent to the patient, he notes that repairs and maintenance could be their responsibility. For those that he thinks should be purchased, Brothis points out the value of ownership-including the fact that patients can do whatever they want with the equipment.

MANAGING MANAGED CARE STEVE ELROD, president of the HME firm Oxy+Plus Inc. in Duluth, Ga., says rental is "a vital part of my business." About 80 percent of the company's revenue comes from oxygen. But with managed care on the rise, Elrod notes, rental isn't quite what it used to be. Managed care contracts nearly double administrative costs, he says, "because they have all those tactics and gimmicks they find not to pay you."

Miller, for his part, says he prefers dealing with Medicare because, whatever its faults, it's predictable. "They're by far the most stable [payer]," he says. "It's hard to collect money in an unstable environment."

Administrative headaches aside, Miller, Elrod and other HME experts say managed care rental contracts roughly follow the Medicare model of capping and rent-to-own provisions. They can offer an advantage, though, if they're written to allow billing specifically for service such as respiratory therapy in addition to the use of equipment. Medicare, conversely, pays a single rental rate that must also cover a provider's service costs.

Elrod, who does about 20 percent of his business through managed care, works under "capped rental" contracts, in which the health plan pays monthly rent until a predetermined "purchase" price-usually much lower than retail-is covered. At that point, the rent payments stop, even if the patient is still using the equipment. Oxy+Plus keeps title to the product and continues to service it. (Most respiratory contracts are not capped, he notes.)

This may sound like a losing deal for the HME provider, but Elrod says it can work for two reasons: First, the rentals don't usually "term out." And when the capped item is returned to the provider before the rental payments end, it can then be rented out to a new patient-and the cap period starts over. (This applies to Medicare rentals as well.) Second, the provider can bill the managed care plan separately for services after the rental is capped. Elrod says some contracts have a provision for billing every six months, as with Medicare. But he prefers simply to bill for work only when it's needed, thus cutting administrative costs. "We say, 'If it doesn't need maintenance and repair, you don't pay for it,'" he says. "To me, that's the key to making capped rental and managed care work."

In California, where managed care plans now dominate the market for non-government health coverage, HME provider Falih Audish has learned to be selective about contracts-and to resist the lure of being the lowest bidder around. His Woodland Hills-based firm, ApGuard Medical, which does an all-rental business in wound care, respiratory, ostomy and enteral services, gets about 40 percent of its business from managed care, with Medicare and traditional private-pay making up the rest.

In the environment of cost-cutting and hard bargaining by HMOs, he says, ApGuard has stayed on track by setting limits. "We've always maintained a certain level below which we will not go," Audish says. "We don't have every contract under the moon, but we've been awarded contracts that are very successful."

RENTAL REFRESHER ALTHOUGH THE payment climate keeps changing, certain rules about running a rental business don't change. In fact, following them becomes all the more important as reimbursement gets tighter and businesses are forced to operate more efficiently.

Consultant Lisa Thomas-Payne, president of Medical Reimbursement Systems of Albuquerque, N.M., says managing accounts receivable is the main challenge in the rental business. As in every other aspect of HME, the quicker you get paid, the better off you'll be. When entering into rental contracts, Thomas-Payne says, be sure you're signing up patients of a reliable third-party payer. Audish insists on language in his contracts that makes claims payable from the date he submits them, not from the time they're deemed valid by the payer.

Managing inventory is a secondary concern in rentals, Thomas-Payne says. Compared to retailing, "there are fewer fundamentals that you need to pay attention to." But she says that, in deciding your product mix, you need to take into account the costs of products, distribution and service. If you buy cheap, she says, you can figure on replacing equipment more often. But more expensive products require a strong preventive maintenance program, she says.

Wulfing says a rental business can also get into trouble by "overestimating the marketplace" and buying more equipment than can be rented out. "In retail, you can just cut the price and sell it," he says. "It's hard to return a rental unit for much of a price."

BUY HIGH, PAY LOW THE EXPENSE of getting equipment to the end-users also enters this equation. If the distribution cost is high, Thomas-Payne notes, cheap products that need frequent replacement may not be a bargain.

Cost calculations such as these may be leading more HME firms to buy more expensive rental equipment than they once did. At least that's the trend identified by Abbey Daniels, vice president for sales and marketing with SenTech Medical Systems of Fort Lauderdale, Fla. SenTech is both a manufacturer-of support surfaces-and an HME provider with a large rental business in Florida.

Daniels says HME providers "used to find the cheapest items that met the Medicare code." Now, she says, HME providers have found that "you can be penny-wise and pound-foolish." The more expensive products require fewer service calls and tend to last much longer, allowing re-rentals for as long as eight or nine years. And with renting, she says, the cost difference between the high- and low-end products is only a dollar or two a day.

Daniels sees another trend that might cut into the rental HME market. Nursing homes and assisted living centers often purchase their own equipment, rather than rent it from an HME provider. A shift in reimbursement gives them a fixed payment for a patient based on a medical diagnosis, rather than the former cost-plus system in which expenses such as equipment rentals were passed on to the payer. Now, the facility must pay for rentals out of its reimbursement.

THE SERVICE COMPONENT BUT SERVICE, especially by technicians trained to keep complex equipment running properly, is harder to buy. HME providers and consultants sound a common theme: Service is the crux of the rental business, and it's both a challenge and an opportunity.

According to Miller, "rentals provide a relatively predictable cash stream," and they create opportunities for good will with customers. But he adds that "they also give rise to many of the service requirements that companies are forced to maintain." Even businesses that are mainly in retail sales may need to know the rental business to give their customers what they need.

Wendell Matas, president of Bellevue, Wash.-based Wheelchairs Northwest, says his clientele is mostly buyers, chronically disabled patients who need wheelchairs for the long term. But he also works with customers who are newly injured or in rehabilitation and need to rent a chair for a short time before buying one. In these cases, he says, "we do rentals when they support our sales."

Some observers such as Miller believe rentals are declining as a share of the HME business, with consumer demand for such retail items as three-wheel scooters gradually gaining ground. "You're seeing more scooters and those kinds of sale items that are the result of a more active population," he says. But he sees no "pure retail" stand-alone HME business in the short term. As he notes, the core rental market of patients who use costly or complex equipment at home is not going away.