Countdown to Change

The countdown to change has begun. In a matter of months, competitive bidding for durable medical equipment products will get underway in 10 of the nation's largest metropolitan statistical areas. And that, in addition to supplier quality standards and assorted other changes instituted by the Centers for Medicare and Medicaid Services, will in all likelihood turn the home medical equipment market on its ear.

By January 2007, it will be a brave new HME world out there, industry seers say, and it will take courage, flexibility and business savvy to survive in it. The question is, are you ready?

If you're like most providers, the answer is no. It's hard to know how to prepare for such major changes, especially when CMS has yet (at least, as of press time for this issue) to release specific details about them.

“We do not know where competitive bidding will start, what products will be included, how it will be administered and all the other unresolved issues … It's difficult to prepare for something when we know so little about its operational details, the products that will be included and the geographic areas that will be included first,” notes Cara Bachenheimer, vice president, government relations, for Elyria, Ohio-based Invacare Corp.

The uncertainty of it all is enough to prompt a provider to make like an ostrich and hide its head in the sand. This, however, is not a recommended move, says Neil Caesar, president of the Health Law Center, a national health law practice based in Greenville, S.C. “When an ostrich does this, it exposes another sensitive portion of its anatomy,” he points out.

Bruce Brothis, president of Allegient Billing & Consulting in Elizabeth, Colo., is even more direct. “Do not ignore competitive bidding,” he stresses. “It will not go away.”

Don Clayback, senior vice president of networks for The Med Group, Lubbock, Texas, cautions against considering this year prior to competitive bidding as a waiting period. “The wait-and-see attitude is a trap,” he says. “There's a limit to what you can be doing, but there are significant things you can be doing.”

Indeed, adds Caesar, “Inventory depth, solvency, the ability to deliver sufficient quantity of product competently — these things can be shored up now by providers.”

In other words, seize the moment to make a better business.

“Competitive bidding makes it a more challenging environment,” says Clayback, so “companies in the industry need to be well-managed and well-run to be successful … you need to adopt good management practices.”

And the advent of competitive bidding could help you do that, advisers say.

“Competitive bidding may be one of the best things that has happened,” says Louis Feuer, president of Pembroke Pines, Fla.-based Dynamic Seminars & Consulting Inc. “It's going to make you take a look at your entire operation. It may make owners take a look at exactly how much it costs to run their businesses.”

And even though time is ticking away, there's still time to do that and to make needed changes. You just need to get started now.

How? Industry consultants pinpoint several actions that can help you get prepared for the future.

Accreditation

Time frame: Six to 18 months

If your business is not already accredited, get those wheels in motion now, consultants advise. Providers who wish to serve Medicare beneficiaries will at some point no longer have a choice of whether or not to be accredited. CMS is requiring supplier quality standards (although they have not yet been finalized) in order to participate in competitive bidding. And while mandatory accreditation will be phased in as competitive bidding expands to various areas, a significant number of HME providers will need to be accredited very soon.

“If you are in one of the 10 MSAs [where competitive bidding will begin], you are going to have to be accredited come 2007,” emphasizes Clayback. “You need to get that going now.”

John Gallagher, vice president of government relations for The VGM Group of Waterloo, Iowa, champions accreditation “as long as it is not an undue burden to the providers.

“Accreditation is a good thing,” he says. “It helps better your business practices, gets your financials set up the way they should be, establishes procedures. We think [providers] need to do that regardless of what happens with competitive bidding.”

Accreditation can take anywhere from six to 18 months, so time is of the essence. Brothis points out that there are more than 100,000 active DMEPOS supplier numbers; of those, only about 6,000 are accredited. With only a few DME accrediting bodies, he says, “the math is overwhelming … if a provider does not begin this process by the first quarter of 2006, it is likely they will not get under the accreditation wire by Dec. 31, 2006.”

Even if you are not in one of those initial 10 cities, mandatory accreditation looms large.

Wallace Weeks, president of the Weeks Group of Melbourne, Fla., notes that even if your company does not operate in those first 10 MSAs, you could be affected. Indeed, he estimates, “one-third of providers will be impacted by the first round of competitive bidding, and about 65 percent of all [DME providers] will be covered under competitive bidding by 2009.”

Every one of them will need to be accredited in order to participate.

But what about the fact that CMS has not yet said which accrediting bodies it will recognize? That has been a stumbling block for many providers, who have hesitated to embark on the accreditation process because there is no guarantee from CMS that it will recognize the accreditor they choose.

But experts suggest providers have nothing to lose by going with one of the current accrediting bodies. They point out that CMS has indicated it will grandfather in those providers who are already accredited, so long as that accreditor's standards meet the government's.

In any case, says Clayback, there is an upside to the situation: “There are a lot of business improvements that come out of the accreditation process. Some good benefits come out of that.”

And that could place you on solid ground for the future.

Activity-Based Costing

Time frame: One month or more

In this new and changing environment, it is imperative that you know what each product line, each service, each activity costs you. How much, for example, does it cost in employee time, in vehicle costs, in equipment costs and even in paper to receive, process, deliver and bill a manual wheelchair?

Figuring that out is called “activity-based costing,” and you need to do it for every product, service and activity involved in your business. Using an outside firm that can concentrate on it will probably take at least a month, says Weeks. If you tackle the task in-house, he says, expect it to take much longer.

However you do it, it is important — even vital — experts say, because it lays the groundwork for a solid business.

“You need to know the true cost of doing business,” states Miriam Lieber of Sherman Oaks, Calif.-based Lieber Consulting. “Even though we don't have specifics [about CMS' impending actions], we know we are going to have to do more with less.”

Knowing exactly how much less you can get by on is going to be crucial to succeeding in the future.

“Activity-based costing is a structured approach,” says Clayback. “That's what you need to do. You need to be familiar with all the ins and outs of your business [even] more than you were before.”

The reason is that with the advent of competitive bidding, providers will need to be very aware of their profit margins.

“You need to make room for profit [when you make a bid],” says Lieber. “You have to make a profit or you won't be in business. I would advocate taking a look at all the products you dispense. Are you making any money?”

And, if so, how much on each product line? “The reality is that there are going to be some price reductions on product lines,” says Alison Cherney of Cherney & Associates, Brentwood, Tenn. Providers should have contingency plans in place should those reimbursement levels drop below their profit margin, she advises.

Some providers have already begun this approach. “Providers are looking at their businesses much more closely,” according to Dexter Braff, president of The Braff Group in Pittsburgh. “They are asking, ‘Why are we doing this?’ and ‘Can we do it better?’ They are taking seriously the notion that they are going to be fighting lowered reimbursement. They are looking at competitive bidding and saying, ‘I am going to lose 10 to 15 percent of my reimbursement sometime, some way, and I've got to find a way to be more efficient.’”

Discovering how much a specific product category costs will likely lead to asking more questions that will, in the end, result in doing business better, consultants contend.

Such questions might include:

• Is the profit worth the effort you need to go through to get paid?

• How do you deliver products and services? Can you do it more efficiently?

• What products do you want to target? Are there any product lines you want to drop? Any you want to add?

• Are there any services you want to add or drop?

• Are you doing any unnecessary things?

• If your business is not automated at all levels, should it be?

• Can you be more cost-effective in the way you purchase products?

That latter consideration is one key to reducing costs, says Brothis, who advocates negotiating the “absolute best pricing and dating” you can. “Having preferred pricing, either by self-negotiated contracts or belonging to a buying group, will go a long way [toward] making it onto the bid list while still maintaining some trace of a margin.”

And there are the bigger-picture questions: What's your vision for the future of your company? How big do you want it to be?

Lieber notes you may find that you only want to handle certain products — or that you don't want to be in the business at all. “Look at your operations, at what you do well; do a business analysis and plan ahead for where you want to be a year from now,” she advises.

Then take action.

Diversification

Time frame: Ongoing

As you get involved in activity-based costing, look for ways to spread out your financial risk, experts instruct. In other words, diversify. If most of your business is Medicare or Medicaid, now is the time to find other payers, get into retail or, at the least, deal in lower-profile products.

“Immediately start diversifying,” recommends Jack Evans of Malibu, Calif.-based Global Media Marketing. “Who else can you sell to? Who else can pay? You must diversify your revenue sources if you are going to survive.

“If you can reduce your [dependency on] Medicare to a third or a half [of your revenue], it's not going to hurt as much. It's just not going to be as profitable.”

Brothis agrees. “The higher percentage Medicare is of the payer mix, the more a provider will be affected by competitive bidding,” he says. Both he and Lieber suggest considering private insurance sources such as managed care (health maintenance organizations and preferred provider organizations).

“Granted, you will probably have to bid for this business as well, but margins with these payers can sometimes be greater than those offered by Medicare,” Brothis points out.

Lieber also advises looking into retail as a possible avenue for strengthening business.

Evans echoes that idea. Ideally, a diversified provider will be “one-third Medicare-Medicaid, one-third private pay and one-third retail/cash,” he says, adding, “I think that is a very healthy diversification of revenue.”

Adding retail, however, can sometimes be problematic, he cautions.

“Unfortunately, many HMEs are in industrial areas, and if they are not visible and not accessible, they cannot go into the retail business,” Evans says. “They either need to move or find a second satellite site where they can build a retail showroom.”

Success in retail depends on that showroom, where you can display the merchandise and demonstrate products. Evans says it also depends on trained salespeople — “not reimbursement people you have thrown onto the floor,” he stresses — who know all the plusses of the products you carry.

If you do all of those things well, you can pump a lot of extra revenue into your business, he says. Evans estimates that in the first month, a retail business will generate $10,000 in revenue. In the first four to six months, it can bring in $30,000 to $40,000 a month and, after the first year, $80,000 a month. It can continue to grow from there.

Regardless of whether you go for retail, there are other ways to lessen the impact of CMS' actions.

“Whether or not a provider will enter the competitive bidding environment, they need to stock and promote items that will most likely not be on the competitive bid list,” says Brothis.

Previous competitive bidding demonstrations have included such high-profile items as oxygen, hospital beds and manual wheelchairs, he notes, so he suggests building up your supply of such things as bedside commodes, walkers and seat-lift chairs and promoting them to bring in extra revenue.

In the short time left this year before competitive bidding is scheduled to begin, it is quite likely that you will have to focus attention on accreditation, activity-based costing and diversification all at once, says Weeks. “Most companies will have to hire contractors to get things done. It will take diligence, and they will have to be dedicated — but providers can get caught up and they can be prepared.”

How you navigate your way through the current choppy waters is key, Health Law Center's Caesar sums up. “You can either sail into the current or with the current. One way you capsize — and the other way you go faster than ever.”

How Much Do You Know?

Knowledge is power. How educated you are about the industry's changes — both current and pending — could mean the difference between success and failure for your HME.

“You need to be as up to date as you can be on what is currently going on so you can incorporate that into some preliminary thinking,” says The Med Group's Don Clayback, senior vice president of networks.

“Keep track of what CMS is doing on competitive bidding,” urges Cara Bachenheimer, vice president of government relations for Invacare Corp.

At press time, the agency was expected to issue the proposed regulation on competitive bidding very soon, and provider input will be critical, she notes. “Providers need to read the proposed rule and submit comments during the 60-day comment period.”

Support for and keeping track of the Hobson-Tanner bill (H.R. 3559) is also crucial, Bachenheimer and Clayback say. Introduced last July by Reps. David Hobson, R-Ohio, and John Tanner, D-Tenn., the legislation seeks to take the edge off some of the effects of the competitive bidding provision in the Medicare Modernization Act.

For example, the bill calls for not implementing competitive bidding until quality standards are in place and for exempting MSAs with populations under 500,000 from the bid program. It also would exempt those items and services that would not achieve at least a 10 percent savings for Medicare based on the fee schedule currently in effect.

As well, the legislation would allow all qualified providers including small businesses that submitted a bid below the current allowable to participate at the slected award price.

“Supporting the Hobson-Tanner legislation is really No. 1,” Clayback emphasizes. While it won't stop competitive bidding, he points out, the bill would provide “a lot of relief. [Providers] need to get their [legislators] to sign on to that.”

Call your state HME association, your buying group or the American Association for Homecare (703/836-6263) for pointers on contacting federal representatives about the bill, or visit AAHomecare on the Web at www.aahomecare.org.

A Line in the Sand

Competitive bidding may appear certain, but The VGM Group doesn't plan to go down without a fight. The Waterloo, Iowa-based buying group launched a campaign at Medtrade in October to halt competitive bidding, beginning with the formation of a non-profit organization called Last Chance for Patients Choice as a legal action/public information campaign, explains VGM's John Gallagher, vice president of government relations.

Funded initially with $50,000 from VGM, the group is actively soliciting financial support from providers.

“If there was ever a time to draw a line in the sand, it's now,” states Gallagher. “Is your business worth $250?”

The group aims to launch an aggressive public information campaign directed “at educating the electorate in key areas,” he says, such as districts represented by members of Congress who have actively supported competitive bidding. Key legislators will also be a focus of the group.

In addition to marshalling support from HME providers and manufacturers, the group is also in talks with other organizations. “We've already begun the process of partnering with other like-minded folks — nurses and the diabetic association [for example],” Gallagher says. “We're looking for common ground with various entities that we can form alliances with.”

The organization fully anticipates filing a class-action lawsuit against CMS on behalf of beneficiaries once the agency announces the 10 MSAs where it intends to start competitive bidding, Gallagher says.

For more information about Last Chance for Patients Choice, contact VGM at 800/642-6065.

Checklist Ϭ for the Future

According to industry consultant Wallace Weeks, HME providers will more than likely be making strategy and operational adjustments until 2010 to deal with provisions of the Medicare Modernization Act. He offers the following checklist to determine the actions your company must take to be successful post-MMA. Weeks also advises that for each action listed, if you haven't already, set a plan for when it should be completed and for which internal and external resources (employees, vendors, consultants, etc.) should attend to the action to produce the right result.

• Calculate your company's Market Growth Rate (MGR).

• Calculate your company's Sustainable Growth Rate (SGR).

• Multiply MGR times 1.5. If the product is greater than SGR, develop a plan to improve SGR.

• If SGR cannot be sufficiently improved before growth occurs, develop a plan to determine how much capital will be required, when it will be required, why it is required and sources of capital.

• Calculate payer mix.

• Calculate product mix.

• Calculate gross profit margin by payer mix.

• Calculate gross profit margin by product mix.

• Develop a financial model to ascertain the precise financial impact of MMA on your company, the timing of the impact and the causes of the impact.

• Calculate productivity for the company. Calculate required productivity improvement to achieve the company's profit target.

• Identify processes and their activities.

• Perform activity-based costing.

• Apply activity costs to gross profit by payer and product to determine your company's best profit opportunities.

• Analyze best marketing results as a basis for defining your company's “best customers.”

• Define the “best customer” characteristics, and use them for precision targeting.

• Develop or collect forecast DMEPOS spending, population and demographics by zip code in each market you serve to identify target zip codes.

• Survey referral sources, customers and patients to learn what is most important in provider selection and the basis on which a provider is qualified. This is your basis for differentiation.

• Adjust marketing materials and business processes to differentiate your company.

• Survey your referral sources, customers and patients to learn how to be easier to do business with (ETDBW). This is your basis for customer/referral satisfaction and loyalty.

• Adjust marketing materials and business processes to be ETDBW.

• Determine customer acquisition cost by product line and payer type.

• Develop a plan to reduce your company's customer acquisition costs.

• Assess your sales/marketing management information system.

• Develop throughput and quality metrics for each job in the company to use as performance measures.

• Develop and install a performance management system as a core control.

• Determine core business metrics and frequency of reporting.

• Assess billing and accounting systems for their ability to produce automated management reports.

• Develop a plan to make management information available in real time.

• Assess your company's technology needs/resources to determine opportunities to automate and digitize processes.

• Perform a SWOT analysis. (This is an effective way of identifying your company's Strengths and Weaknesses, of identifying the Opportunities you have and the Threats you face.)

• Identify the implications of your SWOT analysis.

• Anticipate the response of competitive forces and their effects on your company.

• Develop detailed analyses of both internal and external business environments.

• Identify obstacles to achieving a sustainable, strong position in the market within this year.

• Review the vision for your company, its values, skills, resources, controls and market to determine basic business strategy.

• Align marketing and operating plans with basic business strategy and target market.

• If Medicare beneficiaries are a target market and your company is in a competition area, develop a contingency plan if you are not selected as a competition area supplier.

• Prepare a market opportunity analysis (market gap analysis).

• Develop a productivity improvement plan for your company.

• Assess the suitability of every company employee for the processes they perform.

• Install a system for continuous process improvement.

For more information on many of these actions, visit HomeCare's archives at www.homecaremag.com for Weeks' business advice in his monthly “Better Business” column, or visit www.weeksgroup.com.