Business Solutions

Back to the Drawing Board

NCB Round Two will force yet another upending of the O2 industry. How can providers transform themselves to survive — and succeed — this time around?

• By Joseph Duffy
• May 01, 2012

Competitive bidding’s Round Two winners are expected to be announced in the winter of 2013, and with this round affecting the entire industry, there is time only for a few deep breaths before oxygen providers continue preparing for changes to the oxygen landscape once again.

To try to ready providers for the next volley of challenges, HME Business magazine talked to a number of oxygen industry experts to help explain the direction in which the industry might be going and how providers can survive the bumpy road ahead.

Is it getting harder to breathe?

Over the last 12 months, to keep pace with reimbursement reduction, providers have continued to look at ways to reduce their costs. Scott Wilkinson, executive vice president of sales and marketing for Inogen, says that overall, there seems to be more interest by homecare providers in nondelivery products that can reduce their costs over the long run. But while there is interest, many providers still have trouble adopting a new service approach with competitive bidding hanging over their heads.

“It’s tough for many providers to invest in the future when they are unsure they will be able to participate in the future,” he says. “So until winners are announced for Round Two, most providers won’t invest in business model changes.”

Wilkinson also says that providers are looking to diversify their payer mix to be less dependent on Medicare in the future.

“We are seeing more emphasis by oxygen suppliers on private insurance contracting as well as an unprecedented focus on retail sales,” he says. “While oxygen suppliers are still reluctant to invest in POCs as part of their Medicare service model, many are investigating POCs through a retail sales approach. Participating in POC retail sales gives oxygen providers the opportunity to offset Medicare reimbursement changes, improve cash flow, and gain experience with the various POCs available today.”

Kelly J. Riley, CRT, RCP director of the National Respiratory Network for The MED Group, says the state of the oxygen industry is best described as “chaos, uncertainty and frustration.”

At a recent meeting she overheard the following comment, “The only good thing about providing oxygen right now is that it makes providing sleep products seem easy!”

“Looking back at where we were as an industry in 2009 (in regards to providing PAP to Medicare), this is pretty telling,” she says. “The difference is the oxygen population is a totally different demographic than the PAP patient. Many providers walked away from Medicare PAP; to do the same for oxygen is going to affect access to the most affordable method of care for the COPD patient: home oxygen.”

For provider David Baxter, president of Medical Necessities & Services, his company saw an overall decline in reimbursement of 8 percent from the previous year despite growth in referrals. He says it is due to the oxygen cap.

“We were not part of Round One but seeing a reduction of over 30 percent in the top MSAs for Round One will be very hard to balance with the oxygen cap and the overall payment reduction resulting from these,” Baxter says. “I see oxygen as a very challenging product line going forward to try to balance the servicing of patients and making it cost efficient so you can make money, even using newer technologies.”

According to Baxter, oxygen is becoming the most challenging of all categories because of competitive bidding, the capped oxygen status and audits.

Baxter says that he is being asked to clinically make sure that physicians’ documentation suffices that all other treatment options have been tried and found ineffective before being paid for oxygen services. He finds this very challenging and is not able to train his customer service representatives to ensure that patients have, for example, tried four or five different inhalers and made sure they are ‘appropriate’ inhalers.

“We continue to invest in technology and use portable concentrators to minimize our deliveries of tanks,” Baxter says. “We also try to maximize our routing for tank or liquid deliveries to cut back on personnel.”

The good news is, says Joe Lewarski, Vice President of Clinical Affairs, Invacare Corporation, based on discussions with customers inside and outside of Round I competitive bidding, it appears the demand for home oxygen remains steady, which is consistent with the trends in COPD and Medicare growth. Home oxygen is a relatively mature market with steady, year-over-year growth.

Fighting the good fight

Wilkinson believes that there are opportunities for success in the oxygen services industry, but it requires that home oxygen suppliers change. Providers that are resistant to change will not be able to survive, but those that embrace and lead change will do just fine.

“We continue to have market demographics in our favor,” he says. “We participate in a segment with strong, steady annual patient growth. New products and business models allow providers to dramatically reduce costs while enhancing service and patient satisfaction. I am talking specifically about nondelivery oxygen products. The fundamentals of the segment are still sound.”

While the demographics are favorable, Wilkinson points out a key problem that must be addressed and solved: There is a great deal of distrust between the dominant payer (Medicare) and the service providers.

“The problem has escalated over the past two to three years, and this distrust is creating massive waste throughout the system,” he says. “We have more audits, stricter paperwork requirements for claims, a cumbersome competitive bidding system, and provider calls for transparency in the bidding process. All of these items add no value to the oxygen patient, but they drive up everyone’s costs. We need to find away for Medicare and the oxygen suppliers to work together to define proper and appropriate standards for eligibility, claims submission, and patient care that are mutually agreed by both sides.”

Another key to survival is oxygen providers developing and using a strategic process for “patient segmentation,” says Riley. Providers realize that a cookie-cutter oxygen provision is no longer going to work. Instead they must use tools and resources to match the patient to the device the first time, and every time. They realize the cost of providing this service is not in the “box,” i.e., a device; the cost is primarily in all other support services. It is essential to know those costs and control them, she says. Fuel, insurance and employees are not getting less expensive.

“One of the key things providers learned from Round One is that they must know their true cost of service, by product segment, if they are going to be a long-term player as a homecare provider,” says Wilkinson.

And for those providers who never found a way to change over the last 12 months, their doors may have closed. According to provider Sam Jarczynski, President, Rx Stat Inc., many providers’ have left the business either because of audits or being tired of dealing with reductions.

“Round One only emphasized that the rates are low and getting lower,” he said. “There was no large influx of business for bid winners because most providers grandfathered the existing patients. We learned Round Two will create service problems for patients in some product categories and will put many providers out of business.”

Lewarskisays that the overall results of Round One of competitive bidding were the 30 percent (plus or minus) drop in stationary O2 payment and the elimination of myriad providers from the ability to serve Medicare patients.

“I think the results of Round Two will better answer the lessons learned question but my fear is that without any changes to the bid rules, providers will be faced with a win or die bid mentality. Rational bids may be substituted with suicide bids, which I fear is even more significant in this round, as the weak economy and growing operational costs in conjunction with the audit pressures have strained many providers.”

But despite all the financial and business pressures, Lewarski says most providers are still working hard to maintain high quality and service programs that meet the patients clinical and lifestyle needs. Even in the Round I competitive bidding markets, there remains a competitive and free market mentality; so many providers are still working hard to earn the referrals from the hospitals and physicians, he says.

“Part of the success for many providers has been the adoption of new oxygen technologies, such as the HomeFill system and POCs,” says Lewarski. “This has allowed them to meet referral and patient demands while driving operational efficiencies in their business.”

For Wilkinson, the last 12 months have seen most oxygen providers fall into one of three categories:

Change Leaders — This group has changed their business model and practices to reduce costs without compromising service. They have made ‘red line’ service cost changes by embracing newer technologies and have made investments to change their business model to compete for the future. They are emerging with a lower cost structure, which will allow for success even in the face of significant reimbursement reduction through competitive bidding.

Stuck in the Mud — This group has tried to counter reimbursement reductions with ‘blue line’ cost reductions but they are finding this approach doesn’t work. They have tried to reduce costs through manpower reductions, elimination of key services, and through manufacturer price reductions. They fundamentally have the same service model today that they had three years ago, and they are frustrated that they cannot cut enough costs to offset reimbursement reduction. This group has had some success through expanded retail sales and private insurance contracting, but they are fighting a losing battle over the long term unless they migrate to the Change Leaders category. This is currently the largest category.

Lost/Dead — This group has done little to reduce costs in any way. They hoped reimbursement cuts wouldn’t happen and they failed to prepare for the short-term or long-term future. Most providers in this category (and this is a small category) are trying to sell their businesses before they fail. They lack the resources or the desire to move into either of the first two categories.

Round Two Strategy

Pens are down and bids are submitted as a short calm descends upon providers. They certainly deserve some rest after the frantic race to deliver error-free, on-time bids. A daunting task considering that most providers would like to see the competitive bidding process eliminated.

“I think the general feelings about competitive bidding haven’t changed much and most providers are against the current bid model and would like to see it go away — or at a minimum have it changed into a more logical and appropriately structured auction model, such as what has been recently proposed in the form of the MPP model,” says Lewarski. “Stress levels are appropriately high and there is fear but they are committed providers and business folks, so they are doing what they need to do to stay competitive, despite the terrible bid model that is still in place.”

Baxter had just completed the competitive bidding process before talking to HME Business magazine. He is now eager and interested to learn if his company will prosper from all the hard work put into preparing the bid.

“We are hopeful that more companies were educated and didn’t make suicide bids like Round One,” says Baxter. “The bidding process was stressful not knowing what exactly to bid on regarding each product in hopes of getting bids. We also spent countless hours of our upper-management’s time to make sure we did everything correctly in hopes of winning a bid. We spent many hours going thru this process, which took us away from the operational side of our business. I am not sure of the number of hours but it was substantial.”

Providers are approaching this as professionals, says Wayne Grau, vice president of sales and director of government affairs for The MED Group. Providers are doing the work necessary to get their bids completed and turned into the CBIC on time. The program overall has providers worried because the program is not transparent and as such there are a lot of questions that the CBIC did not answer.

“This is a huge project and as such it has had an effect on the day-to-day operations,” says Grau. “The bigger issue is now that the bids are in, providers will need to change their business models to be ready to compete in this new environment that begins the summer of 2013. That will be a tremendous amount of work on top of the day-to-day running of their businesses.”

Lewarski points out that running any business in the U.S. today is difficult. Add preparing for the bidding process, growing government regulations and rising operational costs, it is only getting harder. The HME community also has the unprecedented audit pressures; clearly this serves as a huge distraction and makes everyday business life even more difficult, he says.

“Of course oxygen providers continue to wish that competitive bidding would go away, and there continues to be a level of contempt for a program that has some inherent flaws, but I think Round Two, simply due to the geography and number of beneficiaries covered, has brought the realization to a critical mass of providers that competitive bidding is here to stay,” says Wilkinson.

Naturally there is some stress not knowing if a provider will be able to participate with the largest market payer, so there will be unrest and stagnation until reimbursement rates and winners are defined.

“The real anxiety and concern for providers are that their bid may be disqualified for a clerical or paperwork error,” says Wilkinson. “Most providers spend 10 times as much time combing their bids for paperwork errors than they do developing a reimbursement rate they feel comfortable bidding. And there is great fear that a bid will be lost because of a minute clerical error.”

Baxter’s strategy overall was to try to bid in relation to staying viable after the bid. The company went less on capacity and didn’t say that it could do any more than what it did in previous years in hopes that it allowed more providers in to help lower the median bid.

“We are hopeful that the overall price reduction will not be comparative to Round One and that we will see better prices in Round Two, ” says Baxter. “Our concern is if companies started with Round One pricing and then lowered from there, it would mean that we will not win a bid in Round Two.”

Baxter only bid in states where the company is physically located. He feels that doing otherwise is a disadvantage to the companies that already have brick and mortar locations in the area. Baxter only submitted bids in some of his other MSAs within states that he feels that he could expand into without difficulty.

Life after Round Two

So now that the bidding has closed, the possibility of oxygen providers not winning a bid will spur some into preparing for a worse case scenario. What are you to do while waiting for the announcement of bid winners?

Many providers are trying to build a retail sales pipeline now as they wait for Round Two results, says Wilkinson, who calls this a sound strategy as it takes little investment, expands business revenue, improves cash flow, and has positive business impact whether bids are won or lost.

“Our members have been and are continuing to change their business models to become more efficient through technology, diversifying their revenue, enhancing their existing revenue, and looking to reduce operational costs,” says Grau. “They are preparing themselves for the summer of 2013. They will be reducing their dependency on Medicare and will become better companies so they can compete and be successful in any environment. The MED Group has created a program to assist them with these changes.”

Grau points out that the proactive companies competing in Round One started changing their business models 18 months before Round One and some as much as 24 months.

“As an industry we have 15 months before competitive bidding is set to begin with time to make the changes necessary to compete in this new environment whether they were offered a contract or not,” says Grau. “The good news is that providers have changed over the years. No one is managing business today the same way they did three years ago. They have all changed and they will have to do it again. The MED Group will be there to assist them with this change with new programs, new products, and new services so they can make the changes as smoothly as possible.”

Wilkinson says the two biggest opportunities for providers to hedge against Round Two results are to increase private payer mix and enter or expand retail sales.

Baxter is hopeful that Medical Necessities & Services will win a bid. If not, he will focus on Medicare advantage plans and private insurances.

“We will keep working to continue to grow our business 20 percent plus annually,” he says. “We will look at opening up locations in non-competitive bidding areas if we were to lose the contract between now and then.”

He will also consider doing subcontracting with winning bidders so his company can stay in the Medicare game. It is not Baxter’s first or even second option but he feels it is a viable strategy.

Is subcontracting a sound ‘Plan C’ solution?

Despite the rate reductions the industry is seeing through competitive bidding, Wilkinson says there is a place for subcontracting if it’s used properly.

“It’s very hard for a provider to be excellent at everything, so it makes sense to subcontract in areas where a provider does not have a core competency or a competitive/cost advantage. As an example, let’s say I’m a home oxygen supplier and I don’t have the capability to provide liquid myself. Liquid O2 is a small piece of the overall market so it probably doesn’t make sense to invest in assets to do it myself, so I work with a subcontractor to fill in this service void. I probably won’t make much money on this segment, but I can likely deliver adequate business results from other aspects of my business where I am vertically integrated and I have a core competency or lower costs. In this simple scenario, it’s important to offer liquid so I can take care of the patients that really need it — subcontracting a segment allows me to round out my service offering. And from the subcontractor’s view, if they can provide services to many providers, they achieve some cost reductions through customer volume that allows them to offer some services at a reasonable cost.”

Grau calls Round One a blueprint for Round Two. He points out that the industry has not seen the full implications of Round One and will most likely not see it until 2013.“The old saying, ‘Those that do not learn from the past are bound to repeat it’ is something that holds true for Round Two and that includes subcontracting,” Grau explains. “Some people are using subcontracting effectively and others are just trying to survive with subcontracting. A lot of out-of-state bidders are using it to expand their operations into different CBAs.”

There are a lot of variables that have to be considered when you agree to use a subcontractor or you agree to become a subcontractor. The rules must be followed and Grau says that CMS will be paying closer attention in Round Two for subcontractors that are doing the intake and assessment of patients.

“Subcontractors are limited to perform certain services and all providers must understand what they can and cannot do; otherwise, they will be in violation and face penalties,” Grau says. “Smart providers understand the opportunities and limitations of subcontracting and are going to use it when the situation deems it necessary.”

This article originally appeared in the May 2012 issue of HME Business.