Half-Full or Half-Empty?

Air continues to flow out of oxygen's reimbursement balloon, and the phenomenon has sparked fundamental changes in the way home care providers run their businesses. Still others have thrown in the towel and decided to stop running the business altogether.

The upheaval stems from the need to do more with less, a process that has exacted a harsh penalty on weaker providers who failed to make the right decisions. The result, says Scott Wilkinson, executive vice president of sales and marketing for Inogen, is more patients taken care of by major national entities. Wilkinson adds that when weaker companies sell to stronger players, it means fewer independent providers.

Consultant Tom Williams, RRT, agrees that requirements such as surety bonds, accreditation, competitive bidding and the 9.5 percent DME reimbursement cut are all driving many providers to sell their businesses. National suitors want to expand their geographical range, and some overburdened independents are eager to make a deal.

Ambitious independents can also get in on the action to boost their economies of scale, pick up patients from other providers and extend their range. "Good business owners are asking: How can we leverage our business and what are we really good at?" says Williams, managing director of Strategic Dynamics. "Some businesses are good at acquiring patients while others have great service, the best truck routing or the best non-delivery model. It's about economies of scale."

The problem, laments Williams, is that savvy providers are still dealing with the effects of bank turmoil. The difficulties make it tough to maintain and obtain quality credit in what are still tough economic times. "Small businesses are still having difficulty obtaining loans to buy new equipment and new technology," says Williams. "And there is just so much that you can fund through cash flow. So what we have seen in general is a slowdown in equipment purchases."

For many, market conditions all but demand the familiar wait-and-see approach. Providers are wondering whether to invest in new technology now or wait to see how reimbursement, competitive bidding and the effects of health care reform shake out. One thing they can count on, Williams says, is that demand for oxygen will continue to increase.

"The future of the market is still good, and the number of patients being diagnosed with lung disease is not changing," he says. "We are still seeing aging baby boomers who have smoked throughout their lifetime. Many of these patients want portability, and they want the ability to live as normal a life as they can so they are looking for new technology."

The challenge, says Williams, is to transform into a low-cost provider through a relentless focus on margins and trimming fat. After that, emphasize what you do best (call it a core competency) and leverage it across more patients. "In the retail stores, we always talk about sales per square foot," says Williams. "Whether it is sales per employee or another measure, you are going to need tight financial measures that show you are taking costs out and driving your profit. And unless you have branches eight to 10 miles apart, I still think the model of choice is non-delivery."

According to Williams, the non-delivery model typically falls into four categories: 1) stationary concentrator at night and a POC for daily activities and travel. As a result, manufacturers now have POC and standard stationary concentrator combinations that are profitable and work well for patients; 2) a lightweight POC all the time (if the patient does not desaturate at rest) during exercise and sleep; 3) a "transportable" POC that weighs more than 10 pounds and provides both continuous flow (up to 3 liters per minute) and pulse dose features; and 4) a concentrator/cylinder transfilling system that allows patients to fill their own portable cylinders while using the stationary concentrator when resting or during sleep.

Since reimbursement rarely goes up, consolidation will likely continue along with a business model that emphasizes lower service costs. "Businesses realize they can't continue to survive by hammering out 3 percent annual cost reductions when reimbursement falls 10 percent," says Inogen's Wilkinson. "Conversions to non-delivery service models such as home transfilling systems and portable oxygen concentrators are examples of business model changes that began eight years ago and are accelerating each year."

Calling it "alternate revenue development," Wilkinson says many providers have expanded their business practices to include cash sales of premium portable oxygen concentrators. Thanks to solid net patient growth, there is still strong demand for these devices. "New technology enables providers to still make a fair profit and offer improved patient services even in the face of probable reimbursement reduction in the future," he says.

Experts stress that it's important to keep the market in perspective and understand the growth rates and segmentation of patients. Joe Lewarski, RRT, FAARC, vice president, clinical affairs, for Invacare, points out that Medicare claims data shows close to 40 percent of home oxygen patients have only a stationary concentrator without the portable add-on.

"I just did a look back over five years, and the average annual increase is about 6 percent in stationary O2 patients and less for those with the portable add-on," says Lewarski. "Despite the appearance of a relatively mature area of medicine, hospitals are still looking for ways to get people out sooner and the population of chronically hypoxemic COPD patients continues to grow, as does the number of newly diagnosed patients.

"In the two decades that I have been in home care, we have transitioned from patients who were basically end-stage and homebound to active and highly ambulatory patients traveling on an airplane to their summer home," Lewarski adds. "Although the annual rate of growth may be slower than other areas of medicine, the demands for new and improved technology are growing rapidly."

Ron Richard, RRT, president and CEO of SeQual Technologies, estimates that growth for long term oxygen therapy will hover around 5 to 7 percent annually for the foreseeable future. As a result, portable oxygen technology will play an increasing role in promoting mobility and meeting the lifestyle demands of COPD patients.

Richard predicts that ever-lighter portables with extended battery life will continue to attract attention. "The other areas of long term oxygen therapy interest will be in telecommunication and managing data regarding patient adherence with their therapy," he says. "As monitoring LTOT devices becomes more affordable, payers will demand more information on COPD patients to improve outcomes."