Looking Ahead

2013: A Respiratory and Sleep Outlook

Will 2013 be a year of growth for respiratory and sleep providers? A lot depends on the first storm of the season -- Round Two of competitive bidding.

• By Joseph Duffy
• Oct 01, 2012

Another challenging year for respiratory and sleep industry providers will end in a cliffhanger that in 2013 will reveal competitive bidding’s Round Two winners, the attempts of providers to better prepare for audits, and the continued discussions about the Patient Protection/Affordable Care Act.

It’s a lot to consider, and a thorny gauntlet greeting the start of the year, but providers have become battle-ready and hardy from a constant volley of cuts, caps and competitive bidding challenges.

Regardless of these events, and the ongoing reimbursement decline the industry has faced over the last few years, many providers are hopeful to find ways to continue fighting costs, expand product offerings and ultimately grow revenues in 2013. But first, perhaps their most significant challenge to date — Round Two of competitive bidding — is poised as an early 2013 roadblock.

But first, a few thoughts about 2012.

The sleep market continues to grow and adds some stability to most respiratory companies, says Bob Hoffman, RRT, Vice President, Nationwide Respiratory, VGM.

“Those companies that have a comprehensive compliance and resupply program are doing well in growing their sleep base,” he says. “In the non-competitive bid areas, oxygen business growth has been stable. For those who have won bids in competitive bid areas, oxygen referrals range from no change prior to the bid, to moderate increases in business for others.”

For Scott Lloyd, cofounder and President, Extrakare LLC, 2012 was a challenging year for respiratory and sleep given the audit environment with Medicare FFS claims, consolidation of insurance networks and the effort required to submit bids for the first 91 CBAs under the Medicare competitive bidding program. He said that many providers looked forward to the implementation of DOT rules regarding mandatory screening for OSA for certain professional drivers, only to have the criteria published and then revoked early in the year. Recognizing that Medicare payment rates are likely to decline significantly in 2013 due to competitive bidding, Lloyd feels that many suppliers have focused their attention to implementing cost-savings plans that will lower their future operating costs.

“In aggregate, this market is still doing very well,” says Doug Hudiburg, Vice President of Marketing and Sales, CareTouch Communications. “The fundamentals are strong in terms of demographics and the need to reduce healthcare costs overall. When you have these kinds of market forces, growth will happen, but there can also be a lot of churn in different segments of the market. So the macro picture is good and the micro picture depends on your perspective. It’s great for some, OK for others, and bad for some.”

Round Two

The continuation of the DMEPOS Competitive Bidding Program in 2013 is likely the greatest concern for providers in the respiratory and sleep community.

In Spring 2013, CMS says it will announce contract suppliers and begin its education programs. In July, providers will see the implementation of competitive bidding Round Two and National Mail-Order Competition contracts and prices.

Tom Ryan, president and CEO of Homecare Concepts Inc., has bid and is in five MSAs for Round Two. He is very concerned about the effects of competitive bidding in 2013.

“Round Two is the nemesis of this industry,” he says. “Competitive bidding is horrendous; it’s a flawed program. It decimated 85 percent of the providers in Round One. There’s not one night that doesn’t go by that I don’t get concerned for my 27-year-old business and where we are going to be in Round Two.”

Ryan says a major concern of Round Two is many providers weren’t using activity-based costing and rationalization when bidding. Instead providers were thinking competitively, that if they didn’t get their bid, they are going to be out of business. As a result, Ryan thinks bids are going to be very high.

“And I think that the savings are going to come out at a number that is going to be scary,” he says. “Probably worse than Round One. I’m hoping with all hope that as we continue to pick apart the flaws — such as the Bloomberg Report and some of these latest studies showing that the Medicare counterpunch of Round One has not had an effect on care — we begin to put holes in all these theories and we begin to show job losses. I’m hoping we can get MPP [Market Pricing Proposal] in before Round Two starts.”

Hoffman points out that the uncertainty leading up to the bidding puts providers in such a holding pattern that they simply are hesitant to invest in new equipment and technologies until they know whether they get the bid.

“You can’t predict with any accuracy your business growth, even if you are a bid winner,” Hoffman says.

According to Lloyd, Round Two, in which his company has bid, will have a significant and negative impact on revenue across all respiratory lines of business, particularly oxygen. Sleep therapy, he says, will be impacted less significantly because Medicare represents a lower percentage of Extrakare’s sleep business than other respiratory lines of business.

“CMS has not begun patient or referral source education in Round Two cities, which means there is likely to be a period of confusion for both patients and referral sources in the months after the program is implemented,” he says. “Sleep supply patients will likely be impacted more than most as they attempt to switch to a different contracted supplier once competitive bidding is implemented. The contracted supplier will be required to have the initial face-to-face exam, diagnostic sleep study, letter of interpretation by a qualified physician, objective evidence of adherence to therapy and the follow-up face-to-face exam in their file before dispensing any replacement supplies. Based on recent Medicare audit statistics, 60 percent of the time, the original supplier of the equipment cannot produce these records, which means there will likely be significant barriers to access for this group of beneficiaries. Suppliers are making changes to their operating models to reduce costs and this will result in some changes in the service levels patients and referral sources have received historically.”

Kelly Rudolph is President of Hans Rudolph, a designer and manufacturer of respiratory valves and other respiratory products. Hans Rudolph sells CPAP Masks to DMEs and distributors that are bidding. The company’s goal is to keep their prices low and non-changing so providers can bid with assurance that their costs will not change. Kelly reports that his company had slight growth in 2012 and says that Round Two will be detrimental to the sleep market and specifically the respiratory side of the sleep business.

“Competitive bidding limits service and that is not good for patients,” says Rudolph. “It’s detrimental to the sleep market and specifically the respiratory side of the sleep business. Getting the OSA patients in the most effective CPAP or bilevel blower device for them set at the correct settings and using the best mask is very important for compliance. Limiting competition never benefits any industry so this will be detrimental to the respiratory and sleep industry as a whole.”

Preparing for the worse

Ryan says he continually tries to diversify his company’s revenue mix. This is one way to try to prepare for losing one or more Round Two bids. But the products Ryan deals in — oxygen and sleep — deal with the Medicare population, and this makes it hard to forecast.

“My Medicare business at one point was as high as 55 percent and at one point as low as 37 percent,” he says. “I actually grew it a little bit this year from the first quarter to the second quarter. Not intentionally. This is the line of business that we do.”

To prepare for spring 2013, Ryan, whose company is located in New York, looks at other areas to grow his business. New York State has a mandatory Medicaid managed care component that is moving rather quickly to having 100 percent of their patients in the program. Ryan wants to capture more of those contracts and do other types of business, but he admits it is difficult.

“It’s hard to stay way from the Medicare market,” he says. “So we bid and we bid aggressively to be in the game.”

Even so, Ryan says he has done all the key things that providers need to do to keep a company profitable through cuts, caps and competitive bidding. This includes some revenue diversification and downsizing. Ryan is even looking at outsourcing services for billing to see if that makes sense for his business model.

“We are trying to look at the incremental sale of our patient,” says Ryan. “In the past we didn’t dig deep enough into our patients. We are beginning to mine our own patients and look for their other needs. But until you call and ask for the need and find out whether they have uses for other items, you just don’t know. We’ve grown our incontinence drop ship business considerably just by doing some internal sales. We look at everything. We have been an advocate of homefill delivery for years. Five years ago 25 percent of our delivery was for portable tanks. I call them non-valuated deliveries. Now we are less than 5 percent. And 95 percent of our fl eet is nondelivery technology. We are leveraging technology wherever we can. We didn’t really look to downsize — we looked to rightsize. It’s the human asset part of running the business. You’ve got C players and sometimes you can’t turn them into a B or an A, so in some situations you replace them with higher quality employees, which has been a great thing.”

Living with audits

Audits remain a big challenge going into 2013 — not only because of the effort to successfully meet documentation requirements but also the heightened stress level already at a tipping point from competitive bidding and other cuts and caps. Most providers would likely agree that a system of checks and balances is important in the industry, but when the system seems to hurt providers who are trying to cooperate, perhaps a change is warranted.

“From my perspective, the impact of the upswing in audit activity has, I’m sure, prevented or caught some illegal activity,” says Hudiburg. “No one likes a cheater, and it’s hard to argue against the need for careful monitoring for fraud. But (and this is a big but) again, there has got to be a better way because audits have, for many HMEs, either paused, or reversed, their growth. And most HMEs are just honest business people trying to do the right thing. For those of us watching from the side, it’s clear that there is a baby in the bathwater. The easy thing to see is the criminal who is caught cheating the system. The harder thing to see is the impact on business growth and innovation. When an entire industry has to stop what they are doing and implement sophisticated document management systems and modify policies and practices to adhere to strict, sometimes confusing, frequently changing rules, you can bet it will have a negative impact on all involved. We count on HMEs to adapt and evolve quickly, but wouldn’t it be better, for all concerned, both financially and morally, if we helped HMEs focus on those things that improve outcomes, raise the standard of care, and reduce costs?”

For starters, providers must take a proactive approach and develop a system for documentation collection, says Hoffman. “It is a painstaking task, as we all know, and not all physicians are going to be overly cooperative. It all goes back to physician relationships and education and letting the physician know it is a Medicare requirement.”

Audits add more than a burden to everyday operations. Lloyd points out that they have added a layer of expense to Extrakare’s operations at both intake, where they require more documentation prior to dispensing than ever before, and where they have spent considerable resources educating referral sources on how certain aspects of patients health conditions must be documented to ensure they are able to access their benefits, and in audit response resources. Lloyd says the upside from their efforts is their success rate in audits continues to improve.

“We remain concerned about the wide latitude afforded auditing entities when interpreting coverage criteria,” he says. “We are hopeful the various auditing entities will make more consistent determinations about the same information in the future.”

Affordable Care Act

Although there might not be significant movement of the Affordable Care Act in 2013, the 5-4 Supreme Court ruling to uphold the 2010 Patient Protection and Affordable Care Act, which contains several provisions that impact the home medical equipment industry, gives providers yet another milestone to prepare for.

“I have a wide range of opinion regarding the ACA,” says Lloyd. “Perhaps the most important opinion is the ACA is a process and not an event. The law, as written, is implemented over years. And regardless of which party holds the White House or majority in either the House or Senate, the ACA will be changed hundreds of times in future legislation, appropriations, non-appropriations and rule-making by both federal and state departments. The only thing that appears certain regarding the respiratory and sleep industry is the ACA will result in more lives having health insurance coverage (which means more people will have access to benefits to use for respiratory and sleep products) and certain provisions in the ACA will have modestly negative impacts on future payment rates.”

Hoffman says the Affordable Care Act actually provides an opportunity for the HME industry to provide real value to health systems. Hospital Readmission Reduction Programs are mandatory for all acute-care facilities, and this provides the HME provider an opportunity to measure compliance, readmissions, and outcomes for heart failure and COPD and deliver that data on patient populations back to the health system. Now more than ever, Hoffman says, the value of homecare will be measurable and deliverable.

This article originally appeared in the Respiratory & Sleep Management October 2012 issue of HME Business.