After working in home health care for 17 years, I founded Allstar Oxygen Services in Concord, Calif., in late 1999. In 2004, we were ranked the fourth fastest-growing private business in the San Francisco Bay area by the San Francisco Business Times. By 2008, Allstar Oxygen Services had weathered numerous Medicare reimbursement cuts and shifting risk between medical groups and managed care payers, and had grown to $2.5 million in annual revenue. About half of our business was home oxygen, a little less than half was CPAP and the rest was DME.
But by mid-year 2008, we recognized that the Medicare reimbursement cuts coming in January 2009 — including oxygen patients who would cap after 36 months and the 9.5 percent across-the-board cuts — could be devastating and put us out of business if we didn't do something. So we began an analysis to develop a strategic plan.
I gathered the company managers together in July, and we had a brainstorming session. Fifty-eight percent of our reimbursement was Medicare, so we were looking at a pretty significant exposure. Of our 600 oxygen patients, roughly 24 percent of them would cap in January.
We were looking at a top-line revenue loss of 14 percent at the first of the year, so we needed either to grow our top line or cut out $25,000 to $30,000 in monthly expenses, or a combination of both. At that point, we had 17 employees, a 40-day DSO and a 6 percent net profit.
We came up with a number of ideas to help grow our top-line revenue: We would push overnight pulse oximetries to drive more oxygen patients. Our two sales reps agreed to call their hospital discharge planners on Saturdays to see if there were any patients we could help take home. Our customer service reps would begin a “would you like fries with that order” campaign to remind our referral sources we also provided DME.
When our delivery techs were in the hospitals delivering equipment for patients going home, they would seek out the discharge planners to ask if there were any other patients we could help them with. And finally, we would pursue three managed care contracts we had not been successful in obtaining.
Looking at the expense side and where we could cut was much more challenging. We decided not to replace a delivery tech who had left and instead have the logistics manager become our third driver. In order to operate with fewer drivers, we needed to invest more heavily in nondelivery oxygen technology like transfill and portable concentrators. We also decided to eliminate a part-time respiratory therapist position and schedule as many of our CPAP mask fittings in our office as possible to create more efficiency.
We froze everybody's salaries. At the first of the year we would switch to a less expensive health care benefit plan with a higher deductible, and increase the employee percentage from 20 percent to 30 percent. Since the new plan was cheaper, the employee's cost didn't change much, but the company's portion went down.
I looked at our sales commission plan and decided it needed to be revised. Commissions on oxygen were cut 14 percent as of Jan. 1. The vice president of sales was given a lower base salary and a higher commission potential. This was not an easy sell, but we went back over the past six months' numbers and I showed her how, under this new plan, her income would be the same, if not better.
In addition, two vehicles were coming up for lease renewal after the first of the year, so we decided to replace them with less expensive models.
The key now was to get the staff to understand the magnitude of the problem and get them to buy in on the solutions, as painful as some of them were.
At our monthly staff meetings, I usually go through the previous month's financial results to keep employees informed on our performance and the trends. At our August 2008 meeting, I put up a white board and showed the staff what the impending 2009 cuts would mean to our revenue, step-by-step. I translated that dollar amount into expense reductions if we were to maintain any bottom-line profit at all.
We discussed most of our plans, including the staff who wouldn't be replaced. But it was obvious payroll was our single largest expense, and there was no way to make the rest of the necessary expense reductions without cutting additional staff.
Then came the hard part. Who do we cut and how do we do it? We decided to cut our lead biller, who had been with us for seven years, and a senior customer service rep, who had been with us for five years. Because of their length of service, their salaries represented significant expense.
The employees in our company are like a small family, and it was extremely difficult and emotionally wrenching when we announced the decision. We talked to the individuals privately and then told the rest of the staff. This was one of the hardest things I've had to do in owning a small business, and there were tears flowing all around, including mine.
We gave the two employees 30 days of severance pay and worked to help them find jobs before the holidays began last year. Then, because of having fewer employees, we had to cap everybody's vacations at two weeks and pay them out the additional, since we had little overlap for coverage.
The economic meltdown started in November 2008, so after the New Year began, people settled in to our new philosophy of doing more with less. Surprisingly, morale remained quite high.
Fortunately, we had invested in a paperless scanning system, and this created a lot of efficiency for us. We had also agreed to become a preceptor for a local career college, taking in unpaid medical assistant externs for six weeks at a time. With our workflow reorganization, our billing and collection department began to bill Medicare daily rather than three times a week.
At the end of the second quarter in 2009, we analyzed our results. We had been successful at signing one additional managed care contract. We now had only 13 employees, a 23 percent reduction.
We realized that of the patients who had capped in January, 14 percent of them had been on service five years or longer and had begun a new 36-month billing period. We were now only billing for 550 oxygen patients and our revenue had fallen 8 percent, but that was better than we had projected.
With daily Medicare billing, our DSO had actually dropped to 34 days. And our profit was at 10 percent.
Having successfully weathered this potential crisis, we began to put plans in place to prepare for the next. In August, we joined a professional employee organization to lower our health insurance and worker's comp insurance costs by being part of a larger group. We were able to save about $2,000 a month and get additional HR services and insurance coverage at the same time.
We outsourced our CPAP supply replenishment program to a company that warehouses the inventory, packages and drop ships to our customers cheaper than we can. We are also evaluating digital signature software, which would allow signed work orders to be transmitted directly to our billing department to speed work order clearing and billing.
While the DME business remains an old-fashioned business where we have to pull items from our warehouse, put them on a truck and deliver them to the patient's home, there are many technological innovations and outsourcing opportunities available today to help lower our costs and increase our efficiency.
With competitive bidding on the horizon (we are in Round 2), we see the need to diversify our business away from its heavy reliance on Medicare. I am preparing to open Allstar Medical Supply, a separate-site retail operation, early next year. After studying the demographics and competition in the area, I believe there is an opportunity for a modern, well-designed medical equipment store in the downtown retail area near an upscale retirement community of 10,000 seniors.
Most of that business will be cash only, but we will bill Medicare for lift chairs and rollators. I plan to spend most my time building that business and will leave the day-to-day management of Allstar Oxygen Services in the capable hands of my operations manager, Penny Girard.
We are all operating our business on an ever-changing playing field. On one hand it is very dynamic and challenging, but it can also be depressing at times. I am optimistic, though, and believe the home respiratory/DME companies that can survive the changes over the next three to four years will own the industry in the long run.
With an increasing volume of patients but lower margins, I only hope this will be an industry worth owning.
How does Mike Kuller feel about what could happen under competitive bidding?
“My belief if is that competitive bidding will not go through all the way. I'm optimistic because of what happened in 2007,” Kuller says. “There was such an outcry when the average Medicare reimbursement was cut by more than 20 percent in the first round that we were able to push it back. I feel that something not different from that is going to happen again …
“Even if it does go through and reimbursement is cut by 15 to 20 percent again, my plan is after a couple of years to be able to pull my salary out of Allstar Oxygen Services and put it on Allstar Medical Supply, because that would reduce our costs here.
“We have cut our expense as far as we can, and other than the things we're doing … we're about as efficient as I believe we can be,” Kuller continues. “The transfill oxygen technology will help us limit our delivery costs, but beyond that, the only alternative I can come up with to survive more cuts from Medicare and possibly even the HMOs is diversification into a retail operation and eventually being able to offload my salary.
“But I'm still optimistic,” he says. “There will be a fewer number of providers but a larger possible market share and economies of scale.”
After working as a hospital pharmacy manager for 10 years and founding two home infusion companies, Mike Kuller, RPh, became regional vice president of Apria Healthcare before founding Allstar Oxygen Services. Kuller has served on the California State Board of Pharmacy Home Health Care Committee and is a NIPCO Certified Respiratory Care Pharmacist.
