I will never forget my freshman year of college when I walked into the first day of a political science class, took my seat and waited eagerly for my professor. As I inched forward in anticipation, he smugly told each of us to turn to our right and then to our left. He went on to declare that two of the three of us would fail his class. I felt like the wind had been knocked out of me. The odds of passing what I had expected to be an exciting class were slim — 33 percent, to be exact.
Providers today must feel a lot like I felt that spring. Between the looming second round of competitive bidding and a raft of ferocious audits, providers are clamoring for anything to stay alive. Round 1 providers are starting to feel the crunch of squeezed profit margins on top of the need for dedicated resources to man the onslaught of audit requests.
It is almost daily that you hear of someone who has thrown in the towel, unable to make payroll or contend with the financial strain. With previous regulatory changes, modifications could be made to cope with the cuts, but this time the new rules are too severe to allow every business to continue. Although large HME providers are suffering, too, it is predominantly small companies that are closing their doors.
Simply put, this time it is for real: You will not survive unless you change the way you are doing business.
Round 1 ‘Winners’
After speaking with a number of Round 1 “winners,” it is clear that the 30-plus percent decrease in many allowables has definitely forced these companies to think twice about the products they purchase (albeit a CMS requirement to provide what the doctor orders within the product category). Moreover, many have had to lay off staff members, some long-standing and tenured employees. Some of the providers made their staffing cuts in anticipation of the reimbursement reductions, before implementation of competitive bidding on Jan. 1, 2011.
Words of wisdom offered by one bid winner were to stash as much cash as possible now because you would certainly need it later if you had to purchase additional vehicles, lease more space and add inventory.
Although some anticipated the drop in revenue, the timing couldn't have been worse. With the almost one-third drop in reimbursement and recoupments from audits of all kinds at the very same time as deductibles hit, cash has been extremely tight. As another provider told me, the first monthly financials after competitive bid implementation were “ugly.”
Regardless, providers are doing everything in their power to survive this tumultuous time by focusing on operations and making sweeping internal modifications. Perseverance and determination are playing big roles; senior management is much more involved in day-to-day functions than they have been in years.
Competitive Bidding Round 2
In thinking about Round 2, too many HME providers seem to think it will simply go away once the government takes a long, hard look at Round 1. In the meantime, Round 1 forges ahead and the bidding for Round 2 is coming up. Even if it gets delayed — and for that matter, even if the program is abandoned — this is no time to wait and see what happens.
Rather, you must prepare your company for what you will do if you are in a competitive bidding area impacted by Round 2. Remember there are going to be 91 more CBAs added to the list for a total of 100 cities in the program.
Begin by looking at your current revenue by payer and product, and your outstanding receivables by payer. Reduce your accounts receivable by creating collection projects, get rid of nonprofitable business and look for ways to automate your operation for maximum productivity. Diversify your payer mix and decide whether you want to bid. One provider I know has expanded geographically in hopes that he will win the bid in one or more CBAs.
Now is the time to look inward at your company to determine your next move. The last thing you want is for competitive bidding to leave you paralyzed.
Diversify, Diversify
Start with your product mix. Determine where you make money and where you are providing products for little to no return. Shed these products in favor of items that earn more profit and for which you are an expert. In order to cope with the ambush of audits, you need to be an expert in each product category anyway. This skill is further justification for exiting product categories that are not profitable or for which you really don't have enough presence.
Consider products that have a diversified payer mix. One example is the CPAP business, because sleep apnea is prevalent in people under Medicare age. In fact, many providers have gone from businesses with 75 percent Medicare revenue to 25 to 30 percent Medicare revenue in the last few years.
More and more, items that were previously reserved for the newcomers in the industry are back in good graces because they are consistent and represent a steady stream of business. This is true of supply sales such as adult diapers, ostomy, incontinence and urological supplies. Based on a replenishment sale concept, this type of business is one you can rely on month after month. It requires lower overhead, and products can sometimes be drop-shipped or outsourced for fulfillment.
Although this model is not for everyone, relying on a diverse payer mix for a monthly revenue stream you can count on works for some providers. In fact, many of these quiet businesses have call centers with hundreds of employees, proving that once you are expert at something, you can flourish.
One thing that is certain in all of this uncertainty: Business cannot remain the same. Get your staff together for a brainstorming session on new ways of thinking and products that have been requested but that you might not have considered in the past. After all, it is your employees who confront the daily nuances of running the company. They field the requests and turn prospects away for orders you can't accept.
Whether you track your customers' unmet needs or conduct a market assessment to learn what referral sources are looking for, think about something that might help you diversify your product and/or payer mix.
For some providers, diversifying might be opening a package and shipping/mailing center inside their company or contracting for online diagnostic testing. If you have a retail showroom, consider alternative therapies for cash or specialty tubs and lifts. If you provide products to correctional facilities, school systems and other state and local government accounts, you will garner additional revenue that should produce extra cash.
Seeking to minimize your exposure, continually examine your percentage of revenue by payer and keep it balanced. Putting all your eggs in one payer's basket is risky, at best. Do not allow your business to fail like my pompous professor in college predicted. Defy the odds by expanding your horizon, eliminating nonprofitable business and staying ahead of debilitating regulations like competitive bidding.
Plan now for your future by stashing the cash required to build your business later. Look to your right and look to your left, and know that you will be the last person standing.
Miriam Lieber is president of Lieber Consulting, Sherman Oaks, Calif., specializing in operations management and reimbursement for the HME industry. You can reach her at 818/789-0670 or by email at miriam@lieberconsulting.com.
