Quiet stability fled the oxygen market so long ago that providers are all but committed to living with strife. Manufacturers are no different as they feel the effects of the uncertainty with fluctuating bottom lines.
From smaller equipment makers all the way to Ohio-based giant Invacare, legislative and regulatory edicts continue to influence buying patterns as providers wait for an elusive calm that will allow them to catch their breath.
"We've often had peaks and valleys in response to bad news in the marketplace," says Joe Lewarski, vice president of clinical affairs at Invacare, Elyria, Ohio. "You will see some retraction in purchasing, and we'll hear from some customers that they are being cautious in their capital spending until they get more information."
A recent presentation from Lewarski and John Lescher, director of Invacare's Respiratory Group, reported that 2008 government numbers showed approximately 1.5 million distinct annual Medicare oxygen patient claims, with a monthly average of 1.12 million patients. Lescher and Lewarski concluded that the combination of claims, patient life cycle and annual net growth of approximately 5 to 7 percent (net meaning new starts minus discontinuations) suggests about 45,000 to 55,000 new patient starts per month.
Despite the consistent numbers, it has been no easy ride. Instead, providers who have managed to maintain steady (or better) growth in 2010 have had to deal with the 36-month oxygen cap and the 9.5 percent DME cut brought on by the competitive bidding delay. Both factors have impacted cash flow and profit, a twin hit that challenged even the most efficient providers.
In many cases, a population of patients who went off service at 36 months also remained on oxygen. "Adjusting to that as a new benchmark and a new attrition rate was one thing that affected the market, so people had to get an understanding of their oxygen traffic, because capping changed the traffic pattern," says Lewarski.
"Providers had to understand who was capping, who was staying, average lengths of stay, and what was the overall turn rate. Where and when in the rental cycle was the equipment coming in and out? How can you lower the cost of doing business?"
Lewarski believes technology will prove to be the provider's best response to continual turmoil, with elimination of routine delivery and other non-value-added services as a crucial first step. By allowing technology to replace non-reimbursed labor and expenses, the profitability math can work out — even in a volatile market.
Competitive Bidding Stunner
Lescher and Lewarski also note that oxygen took an undeniable "beating" when CMS announced bid rates for the Round 1 rebid. The mean concentrator price came in at $116 (with a range of $102.84 to $125) for an average cut of 33 percent. The mean portable cylinder rate wound up at $20.82, with an oxygen generating portable equipment (OGPE) mean of $41.89.
Overall, payment for oxygen supplies and equipment averaged 31 percent less than under current Medicare allowables. The size of the reduction stunned affected providers, who say they will have to run a tight ship and walk a thin line if they are to have any chance of staying in the business under the new rates.
"You've got to be ridiculously efficient, an astute buyer and a heck of a marketer," says Chris Rice, whose company, Diamond Respiratory Care in Riverside, Calif., was offered an oxygen contract. "Any provider who won has to increase their market share very quickly."
"I was very surprised when the rates came out that low," agrees Patrick Clevidence of Medical Service Co. in Cleveland, where the concentrator rate settled at $103, a significant decrease from the current $173.17. "It kind of just felt like a punch to the stomach that leaves you staggering. And then, once you get your focus, you say, 'How do we provide the same service to our patients?'"
The question hovering over the entire sector is whether providers in Round 1 can even stay in business at Medicare's new reimbursements. While Rice believes it is possible — he points out that many companies already have managed care contracts at 70 percent of the current Medicare rate — he admits it will be tough.
"Providers need to start now thinking about the new margins and where they can expand to improve them," he says. "Even though the most frequent items have been cut significantly, there are other complementary product lines that are not part of the [bidding] program. In addition, we need to look at technologies that truly reduce cost and are not just 'fluff' or 'me-too' products."
Clevidence's company was also offered an oxygen contract. The meager reimbursement is much lower than his company bid and much, much lower than he expected the new rate to be — "I thought $120, $125, $130," he says — but the company is going to "give it the old try.
"It's going to be tough and it is going to be a good lesson in economics and efficiencies and recreating your business like you never thought you'd have to just to keep your head above water," Clevidence says, adding, "I hope our preparation is enough. We're just as scared as the next guy."
Joe Priest, president of AirSep, Buffalo, N.Y., says while the Round 1 pricing is disappointing, it is not so surprising. "You get people who probably bid out of panic, and they throw bids in that are potentially unsustainable — driving the remainder of participants into a level of service that is really not appropriate," he says. "Competitive bidding is a wild card. It is an experimentation that the government is willing to take with home care patients."
Despite competitive bidding, Priest agrees that the basic need for prescribed home oxygen will not go away, regardless of the reimbursement situation. "I really don't see anything that changes the growth rate of this disease pattern, and as a result the growth of the overall market," says Priest. "I expect demand to be fairly consistent, year in and year out."
Satisfying that demand with a non-delivery system is a shift that Priest expects to continue as ambulatory patients shape a new dynamic in the marketplace. "My perception is that the market is going to gravitate to a non-delivery mode, so I do believe there are dramatic changes afoot here," says Priest. "We are in the early stages of the transition from an aspect of home oxygen that requires a substantial infrastructure delivery to a non-delivery mode. I'm convinced it's not a question of if, just when."
AirSep plans to push the evolution with its Focus, the company's new mini-weight portable oxygen concentrator. "It will be the lightest POC in the world at less than two pounds," reports Priest. "We already have the lightest with the FreeStyle, which is less than 4.5 pounds. We think this POC will address about 50 percent of the ambulatory market."
The home transfill model also continues gains due to demographics and clinical need, and Lewarski believes that the maturity and reliability of the product will only fuel that trend as they near 200,000 units in the field.
"Our HomeFill model, which incorporates the stationary concentrator and a home filling system, allows patients to fill their own cylinders as needed," says Lewarski. "This is the model I see servicing the largest majority of patients both clinically and to meet lifestyle needs."
Ron Richard, president and CEO of San Diego-based SeQual Technologies, which introduced the third generation of its Eclipse POC (Eclipse 3) last year, also estimates that growth for long-term oxygen therapy will continue to hover around 5 to 7 percent per year for the foreseeable future. He, too, believes portable oxygen technology will play an ever-increasing role in promoting mobility and meeting the lifestyle demands of COPD patients.
But he adds that the climate of today's market requires a delicate balance not only for oxygen providers but for manufacturers as well. "It is a challenge to competitively make excellent, reliable and durable equipment with all the pricing pressures placed on home care providers," says Richard. "Providers come back to the manufacturers and ask for pricing concessions so that the return-on-investment model works out in their favor …
"Eventually, home care providers may have to work with low-cost, low-quality overseas products that have little or no warranty," he continues. "You can't afford to repair the equipment, and you are going to get to a point where you get to an exchange program and just throw concentrators away."
With oxygen reimbursement falling by almost 50 percent over the last three to five years, manufacturers are also struggling to cut expenses while continuing to maintain quality. "We have FDA overhead, we pay sales reps, and we have regulatory, certification, parts and registration costs that are not going down," Richard says.
More Changes on the Way?
In the midst of so much upheaval, most industry-watchers believe that oxygen providers will likely continue to go out of business. How many and at what rate is the big unknown.
Beyond the damage the dismal Round 1 reimbursements will do to bottom lines, oxygen providers say they also have other concerns — namely, that other payers will follow suit. That concern resonates with Andy Ingram, owner of Home Assist Medical Equipment in Laurinburg, N.C. Ingram isn't in the Charlotte competitive bidding area, but he's worried anyway.
"I worry about when they are going to follow suit," he says of private payers. "They don't follow Medicare in a lot of respects, but when it comes to pricing, they're going to come right along."
That could be devastating, he says.
"As it is now, we're not doing a great job of surviving on the O2 rates," he says. With the 9.5 percent cut and the 36-month cap, he notes, he gets paid about $103.80 a month if he keeps an oxygen patient five years. The new Charlotte rate of $122.12 per month would, when extrapolated over 60 months, come out to $73.28.
"Small providers like us, it's going to be really tough for us to stay afloat," he says.
Rice concurs. "I think this industry is turning into a place for mid- to large-sized providers and the independent is getting squeezed out," he says. "To win a contract, you had to rely on your volume purchasing power. In addition, you had to be very confident that you run a tight ship."
Still, it could collapse, he says. "As a prior bid winner, we went through a very expensive expansion. When the contracts were cancelled [when competitive bidding was delayed in 2008], the prior contract winners were left holding the bag," Rice reminds. "I'm concerned that may happen again."
Clevidence says he expects that patients around the country will suffer under the new rates. "I think there will be companies that turn down the bids because they just can't do it at that price," he says.
"Or they will try and will provide lackluster service and lackluster equipment and patients will be ending up in the hospital. And hospital re-admissions will be costing taxpayers more dollars.
"I think," he says, "that the government forgot that all these dollars [they are saving] are attached to patients and their lives."
Additional changes to oxygen rules may be coming as well. In June, CMS released its 2011 Proposed Medicare Physician Payment Rule, which would move up to month 18 the responsibility for providers to continue furnishing oxygen through month 36 (to address the problem of traveling beneficiaries in months 18 through 36). The proposed rule also includes possible reconsideration of the special payment rules for oxygen and capped rental items under competitive bidding.
On the other hand, the much-hyped baby boom generation is no joke, so demand and oxygen prescriptions will continue to flow.
Jay Vreeland, director of U.S. marketing, home respiratory care, for Philips Respironics, points to the variety of equipment now available for patients.
"As COPD prevalence and awareness grows, patients are getting diagnosed and treated earlier. For home oxygen users, there is a greater choice of solutions to help them to stay active and maintain their quality of life in their own homes," he says. New POCs, for example, make it possible for patients to "travel to see loved ones, or even around the world," Vreeland says. "This freedom was not possible in the past."
So technology, business savvy and perhaps even a legislative Hail Mary could come to the industry's rescue.
"I am an optimist, and I believe that in the next 10 years or so we are going to have other oxygen-generating technologies, and one of these may be a paradigm-changing technology that allows us to generate high flows and small packages with modest energy consumption," says Lewarski.
"I think the Meek bill [H.R. 3790] to repeal repetitive bidding is still a possibility. Obviously [as of press time] it does not yet have a Senate companion, but legislators are taking a serious look at this flawed program.
"It is easy to get bogged down in the bad," continues Lewarski. "But at the end of the day, I truly believe that home care is going to be the most important place for the provision of health care in the long term.
"The role of care in the home is going to continue to grow in importance as time goes on. It may not look exactly as it does today, but we are the preferred point of care."
Susanne Hopkins contributed to this report.
GAO to Report on Home Oxygen Costs
In September, the American Association for Homecare announced it had been called in by the Government Accountability Office to comment on a report in the works on the cost of providing home oxygen therapy.
In 2006, AAHomecare commissioned a study on the same subject from research firm Morrison Informatics. That study showed accompanying services including delivery, patient assessment and education, routine safety inspections, maintenance, ongoing support including refills, emergency services and related expenses such as regulatory compliance account for the lion's share of costs in providing home oxygen — 72 percent — while equipment represents only 28 percent.
On Sept. 17, several providers who are members of the association along with other industry representatives convened to review the report. Those taking part were asked not to discuss details, but the new GAO report on home oxygen therapy costs is expected to be published in November.
Average Cuts for Oxygen in Round 1 CBAs
| Oxygen Supplies & Equipment | |
|---|---|
| Charlotte | 29% |
| Cincinnati | 34% |
| Cleveland | 37% |
| Dallas | 29% |
| Kansas City | 27% |
| Miami | 27% |
| Orlando | 33% |
| Pittsburgh | 37% |
| Riverside | 28% |
| Average | 31% |
