The landscape of the home medical equipment industry (HME) forever changed on July 1, 2008, when the Centers for Medicare & Medicaid Services (CMS) rolled out, albeit temporarily, the Competitive Bidding Program for suppliers of Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS). Whether you are for or against the program, one thing we can agree on is that it forces providers to think and act differently about business. Two facts are certain about the future of the HME industry: 1) significant reductions in reimbursement are here to stay, and, 2) providers must employ unconventional methods to stay in and grow their businesses. How do we adjust to the significant changes that are taking place in this industry? Many HME providers ask Allied Management Solutions that question throughout our travels. We wish there was one easy answer, but there isn’t. There are, however, some approaches that you can incorporate into your overall business plan to lessen the blow. You may say, “I don’t have a business plan for my company.” In that case, it’s time to develop one. Not having a business plan is like pre-paying thousands of dollars for a vacation without knowing the destination. Expenditure without a plan is foolhardy. The same principle applies to business: not having a plan for the business you are building makes little sense and certainly renders the outcome questionable. Don’t leave the success of your business to chance. Develop a plan. Should you need assistance, the U.S. Small Business Administration’s website (sba.gov) offers fairly good support for developing a general business plan. Perhaps you say, “We have our plan and we are sticking to it.” Great! But when was the last time you updated it? Your business plan should be as living and fluid as the outside influences on your business. Does your business plan reflect the recent reduction in reimbursement and your business response to that downturn? Does it reflect the number of audits facing the industry and the effect they will have on your business structure? As new industry barriers are presented, hard questions with honest answers should be asked and answered. Whether you are building your plan for the first time, or you’ve developed and modified your plan for years, we recommend including the following four elements to respond to this evolving marketplace.
Aggressive Collections
Implement an aggressive up-front patient responsibility collection policy. For years, HME owners, including hospitals, have taken a back-end approach to collecting the patient responsibility portion of their income. Provide the product, bill the insurance carrier, wait for the Explanation of Benefits and then bill the patient. While there is nothing inherently wrong with this practice in many businesses, it can no longer be the norm for the HME industry. With reimbursement cuts, pre-payment reviews, post-payment audits and recoupment of payments, HME providers are often faced with negative cash flow situations. Patients are responsible for payment of this portion of your income. What you need to do is collect it up front. Whether you develop table reference tools or fully automated methods using your HME management software, you need to do something to collect those amounts that are rightfully yours. Set goals to reach specific milestones. For instance, if you have never had a policy to collect these amounts up front, begin by setting a low but attainable goal for your first month to collect 5 percent of all patient responsibility portions up front. For an average HME provider, this could mean as much as $2,500 in additional cash flow the first month of implementation. “Collecting patient responsibility amounts is much like going out to eat a fine steak,” explains Steve Baker, an Allied Management Solutions team member. “I’m happy to pay you for the steak at the time I eat it, but if you ask me for the same amount months later, I’ve forgotten how good the steak was, and I’m not nearly as inclined to pay you the full amount, if anything at all.” The same holds true for HME providers; customers are likely to be more willing to pay their responsibility portion at the time of service than when you bill them months later.
Cost of Goods
Reduce the cost of goods sold (COGS). In our engagements, we commonly see providers paying as much as 25 percent more than a similar provider one state away. Several factors play into this, such as a) how prompt the business is in paying its debt, b) how aggressively the business has negotiated its prices, c) how well the business does with its inventory controls, and d) how generous additional rebates or incentives are. Ultimately, providers need to save every penny they can without sacrificing quality. This can be done, but it takes work and negotiation. When beginning your bargaining, keep this in mind: if you are slow or late to pay, vendors won’t be as eager to negotiate pricing.
- Creative ways to reduce cost:
- Look for ways to lower cost by purchasing in larger quantities. CPAP and some other vendors, for instance, oftentimes include an add-on unit with purchase of a minimum quantity, thus reducing the cost per unit.
- Ask for a reduction in cost. Make sure that you’ve paid your bills on time so that you have more negotiating power with your vendors. Then don’t hesitate to ask for a greater discount than what you think you’ll get, but be polite, professional and patient. The art of negotiation takes time.
- Incorporate a good-better-best mentality. Good products typically cost less than better and best products. That doesn’t necessarily mean that good products are inferior; they just don’t have the additional features that better products normally do. Evaluate each customer for the good product, always working up the ladder to the best product. This practice will eliminate any prejudice because you will evaluate all customers for the least expensive product, not just one or two groups.
- Implement aggressive inventory control methods. All staff, especially those in clinical roles (certified orthotic fitters and respiratory therapists) must understand inventory slippage and how it occurs.
- Ensure that your mask or orthotic replacement policy procedures don’t artificially deflate or inflate your inventory levels, eliminate paper (manual) stock-and-bill closets and look for technology that will aid in tightening your inventory control system.
- Finally, ask your vendors whether they have incentive or rebate programs that reimburse you for either paying promptly or meeting certain purchase threshold limits.
Oftentimes these can provide for a 1-3 percent cash rebate to the organization. Additionally, check whether your financial institution offers incentives to use their debit or credit cards.
Improve Revenue
While increasing income is the most sensible and obviously necessary measure, many HME providers don’t know where or how to begin. We see three golden opportunities for revenue enhancement in the current environment: Retail opportunities—For several years, industry forums, Medtrade and VGM have been talking about HME providers gaining additional market share and replacing revenue lost to competitive bidding; however, we see very few providers taking advantage of this opportunity. We continue to believe retail opportunities can be grown and can provide an additional sustainable revenue stream. Diversification of product line—Providers should look for additional complementary product lines for their businesses, many of which could be retail. For instance, a provider sets up 150 hospital beds each month, yet does not provide bed sheets; another provider is owned by a large health system specializing in orthopedics, yet does not provide orthopedic bracing; another is in a non-competitive bidding area where two of the hospitals have wound care clinics and are looking for an HME wound partner. Providers must think creatively about areas that are possible, profitable and sustainable. Enhancement of non-Medicare payer contracts—Did you know there are ways to gain access to payers that still reimburse upwards of 100-130 percent of the 2010 Medicare fee schedule? There are! More providers should be taking advantage of this opportunity.
Streamline Operations
Whether you are impacted by Competitive Bidding or not, if you have not made changes in your operations, you are not preparing your organization for long-term sustainability. CMS has forced this industry to become something much different than what is has been. While we have prided ourselves in being a service industry, CMS is forcing us to become a commodity-focused industry. We maintain we can be a commodity-driven and a service-focused industry, but that requires a change in focus and a lot of hard work. It requires a detailed focus on management by metrics to ensure the company is right-sized and that all appropriate personnel fully understand their job requirements, have been adequately trained, are competent and employ the highest customer service skills possible. It requires a complete retooling of the front-end revenue cycle process to ensure that all documentation is received before the product is delivered while, at the same time, ensuring the product is delivered as quickly and efficiently as possible by employing both traditional and non-traditional delivery methods. And it requires a sales force that fully understands and has bought into the business model, and is proactively educating referral sources about changes in the industry as well as the business model response to those changes. In short, our industry has changed and is continuing to change, and so must we. Continuing to do the same things we have always done will cause us to encounter the same roadblocks over and over. Changing both our behaviors and actions based on our past experiences and knowledge will allow us to build more customer-focused businesses that will be sustainable for years to come. Are you ready to change?
