THE MEDICARE CUTS to oxygen therapy that many providers feared would devastate the home medical equipment market have truly been a nail-biter. But devastating? Hardly.

Home oxygen suppliers say that in the wake of the cuts-25 percent in 1998, 5 percent this year-they have responded not by pulling back but by expanding into new oxygen-based product lines and services.

Providers appear to be working smarter and investing heavily in high-demand services such as sleep therapy and disease management to offset the Medicare hits. They are also using their marketing strengths in urban or rural areas to build up lucrative managed care contracts.

And for some, the new ventures, coupled with careful cost-cutting, are showing signs of calming nerves.

Focusing on Diversity TO BE SURE, the hits, which were sparked by the government's desire to shave $2 billion off the annual $4 billion (and growing) spent on oxygen services, have driven some providers out of the oxygen business and led to mergers and acquisitions for others. But it appears that even more have stayed the course.

While the long-term effects have yet to be fully felt, companies believe they can blunt the Medicare cuts and ultimately increase revenue by diversifying, says Peter J. Dunne, R.R.T., who chairs the reimbursement and finance committee for the American Association of Respiratory Care in Dallas.

For respiratory therapists, however, the oxygen environment has been a different story. Medicare has not carved out a separate payment for them and isn't likely to do so. As a result, the reductions have squeezed home care companies hard when it comes to covering their direct therapy costs. "The reimbursement is falling like a lead balloon, and therapists are feeling it," says Dunne.

Having cut costs to the bone, providers say they are waiting to see what happens next-and that could be contingent on what both small and large firms have done to breathe new life into their oxygen service businesses. To get an idea of what the future may bring, consider the following five snapshots of what different providers, large and small, are doing in this key market niche.

WASSEROTT'S Luzerne, Pa. AN EYE TO THE COSTS A STRONG RURAL market presence and a track record in sleep therapy have helped to keep regional provider Wasserott's above the Medicare fray. The company is trying to reduce its dependence on Medicare and is banking on its 75-year history in the region to help it thrive despite the recent payment cuts.

The provider, which has 10 branches in eastern Pennsylvania, has been in the sleep study market for some time and is increasing its role in response to "explosive demand," says Joseph Lukesh, marketing director. But that doesn't mean the company is pursuing any and all opportunities.

"We are expanding, but we're doing it carefully in areas that are beneficial to us. In the process, we're being selective about what we say to yes to,including our managed care contracts," Lukesh says. "The temptation for most companies is to accept whatever is offered just to support revenue. But I think that's a mistake."

The centerpiece of the oxygen strategy has been an intensive cost-cutting effort stemming from the company's adoption two years ago of activity-based costing, he says. The term refers to an accounting technique borrowed from manufacturing that has generated legions of health care adherents due to its imputed ability to accurately assess the cost of every aspect of service.

Tracking costs this way has helped trim expenses in a range of areas, from the way bulk tanks are mounted on delivery trucks to the types of transfill lines used to minimize vent loss and speed up the transfill process, company officials say.

The effort has also aided in identifying some 30 different costs associated with a single home visit and has resulted in redesigns of delivery routes that curb the average number of miles trucks travel daily. Meanwhile, technicians are maximizing what they do on each visit while minimizing duplication and nonproductive time spent at each stop, Lukesh says.

He won't reveal new cost figures, but as a result of the strategy, Wasserott's dependence on Medicare has fallen below 33 percent of total revenue compared with last year, he says. Meanwhile, managed care dollars have gone in the other direction. The provider's respiratory business has inched up too, thanks to the company's new efficiencies, Lukesh says.

NORCO Boise, Idaho AN RT REINVESTMENT NORCO OFFICIALS HAVE watched the steady downturn in their health care market spread from hospitals and nursing homes to home care, where it is now triggering mergers, downsizings and personnel cutbacks.

The company's total revenue has risen in the past year, says Kevin Joplin, R.R.T., Norco's vice president of medical service, but has remained mostly flat from five years ago, in part due to the Medicare cuts. Currently, the company gets 55 percent of total revenue from Medicare.

But despite the regional sea change in Medicare, the provider has held firm in its determination not to release any of its 30-member respiratory therapy staff. Instead, the company, which gets 55 percent of its revenue from respiratory therapy and the balance from HME, rehab and supplies, hopes to use its RTs to generate more profits.

Norco, which at last count operated 38 branch offices in five surrounding states, recently opened a new site and has added therapists as a sign it is serious about supporting its oxygen business. The centerpiece of the plan has been to give RTs a bigger say in generating new patient referrals and determining long-term treatment plans, says Joplin.

"We're asking them to do a lot more in terms of directly determining our bottom-line revenue," Joplin says. The strategy involves working with local hospitals on case management and discharge planning as well as building strong relationships with other referral sources.

It may be Marketing 101, but in the past, the company didn't have to worry about managing referrals because business poured in. Today, every referral counts, and a therapist has to be involved in some way to ensure proper outcomes, Joplin says.

Whether the strategy works will depend on Norco's success in reaching additional rural patients, who account for 60 percent of its business.

HOMETECH MEDICAL SERVICES Stockton, Calif. MANAGING THROUGH CHANGE FOR HOMETECH EXECUTIVES, working smarter has been a mandate as the company tries to shore up profit margins squeezed by reimbursement cuts. In 1997, the provider was born out of the merger of six small independent home care concerns that banded together to attract managed care business.

To get maximum value from its statewide staff of 23 therapists and to keep each one working at peak levels, the company has turned to patient-focused care. Rather than blanketing the market with routine calls, the staff uses each patient's condition to gauge when to schedule a home visit.

"We've put restrictions on the types of patients receiving supplemental clinical services. We carefully ID each patient during triage to identify early who is at risk for serious setbacks," says Peter J. Dunne, a company founder. "This helps ensure that we provide extra attention to patients who need it-and that we aren't wasting resources on needless visits and valuable therapist time."

Patients get a heavy dose of education and training on equipment usage and compliance, which helps keep costs down by preventing unscheduled visits, says Dunne. The RTs devote time to doing follow-up assessments, disease management work and checking medication compliance.

HomeTech's goal has been to diversify its payer portfolio to reduce risk exposure. California's tough capitation environment has put enormous pressure on companies such as HomeTech to operate efficiently and focus on value and utilization controls, says Dunne-or risk eroding its per-member-per-month income.

The system sets clear benchmarks for the company to meet, he continues. Currently, some 40 percent of HomeTech's revenue comes from oxygen therapy, yet oxygen accounts for 70 percent of its capitation income.

APRIA HEALTHCARE GROUP Costa Mesa, Calif. MAKING THE CUTS WHILE MOST HOME care companies spent 1998 and 1999 reeling from the Medicare oxygen cuts, Apria Healthcare was trying to keep its business afloat amid steep losses, boardroom turnover, employee layoffs and federal billing inquiries.

In July, Apria's troubled stock price surged 11 percent and losses narrowed, signaling that the 332-branch provider might be on the rebound under current Chief Executive Officer Philip Carter. Executives are tight-lipped about their turnaround plans, but a variety of cost-cuts-including some in the oxygen business-are bringing the company back, according to Arnold McMann, R.R.T., an industry analyst with The Corridor Group, a consulting firm in Overland Park, Kan.

Apria started downsizing its cost structure for oxygen years ago to offset the heavy discounting it assumed under managed care, reports McMann. "It got heavily into case-managing patients," he says, "and started pulling out services to meet margins on deeply discounted contracts."

By all indications, it is still on that course, McMann says. Among the services pulled, the work provided by therapists stood near the top. The company has used an increasing number of trained technicians to replace RTs on home visits. The techs do more than replace tanks or nebulizers. They check on patients and do some follow-up assessments, McMann says. The strategy has resulted in dozens of layoffs but has yielded lower costs and higher productivity-and has started an industry trend, he adds.

In the past, Medicare could help subsidize the deep discounts and the cost of using professional therapists on home visits. And Apria is still heavily dependent on federal programs such as Medicare-to the tune of 39 percent of total revenue, according to comments made last year by Apria senior vice president Robert Holcomb. But to judge by the company's cost-cutting measures, the days of relying on reimbursement may be gone.

Oxy+Plus Duluth, Ga. FOCUSING INWARD ELEVEN-YEAR-OLD Oxy+Plus is following the trend toward developing new business and, at the same time, is managing its costs by bringing its supply and maintenance work in-house. The provider has ended relationships with outside vendors and opened up a centrally located plant to replenish its oxygen tanks. The plant is housed in new facilities with the corporate offices.

Despite the Medicare cuts, the family-owned business that specializes in home oxygen has resisted the tug to diversify, reports General Manager Mike Elrod. But owners remain open to new opportunities, especially if they capitalize on current company strengths. At press time, for example, the Elrod family was weighing plans to enter the diabetes-management market via mail order. The business would focus on delivering glucose strips by mail to thousands of homebound diabetics already receiving oxygen services.

The company has also decided to stay in mostly rural areas, avoiding the temptation of the competitive Atlanta market. Since 1998, the family has opened two new retail sites in smaller communities, bringing the network to seven.

"For a company like ours, which carries only one product, the key lies in finding synergies," says Elrod. "We have no plans to leave our rural markets but rather plan to open new lines of businesses there-such as the diabetes service-that complement each other."

To efficiently serve these outlying areas and still cut costs, Oxy+Plus has revamped its home visits and deliveries by zoning its market area, and notifying its patients of visits in advance. A few technicians are also assigned the task of handling emergency runs to other zones.

The company has not laid off any of its of 22 RTs, who are charged with caring for the sickest patients, Elrod says. In fact, the company is testing a program geared to allocating its RTs based on patient need. Low-income clients with no family support or low compliance with equipment use are given top priority and are seen longer and more often by therapists. "The system, which uses a series of scores, helps guide us in using our RTs most effectively," Elrod says.

The company isn't sure these tactics will work, but with 42 percent of revenue dependent on Medicare, Elrod says owners aren't being passive. "We have no intention of letting reimbursement cuts scare us," he says. HC

HOW MANY seasoned respiratory therapists does it take to run a successful home care program? According to some providers, the answer seems to be none.

The 1998 and 1999 Medicare cuts in oxygen reimbursement may have exacted a toll on the home care industry. But to working RTs, the effects have been devastating.

Many providers have cut back so far on the use of professional therapists that RTs seldom go on routine home visits except for emergencies or on special calls. Trained technicians and delivery drivers are used to fill the gap.

Providers won't cite figures, but a cross section of companies contacted indicated they have pulled therapists from routine visits and continue struggling to keep most employed.

Neither Medicare nor other insurers carve out a portion of the payment for therapy. So therapists have found themselves in the difficult position of finding new uses for their talents, and many have ended up in sales and marketing.

"The emphasis today is on quantity, or how much money you can make, not quality," says Joanne Darrow, CRT, an RT with 15 years of experience who left an office owned by Apria Healthcare in 1996 and now works for a busy Lincare Holdings branch near Kansas City, Mo.

There are still some opportunities for RTs in home care. But most of those jobs are vanishing, Darrow says.

Patrick Dunne, RRT, agrees. "Everyone is doing more with less. The reimbursement is falling like a lead balloon," says Dunne, a veteran RT who is now regional president of HomeTech Medical Services in Fullerton, Calif., a company he helped found in 1997.

"The rules of engagement have changed," Dunne says. "The future for therapists will depend on the value they bring to the payment equation." That value, he says, may lie in growing opportunities in administration, patient education and diagnostic testing. -H.K.