Diabetes Supplies -- Reimbursement in 1998: Did it Help or Hurt?

Last year brought many changes to the home medical equipment (HME) industry. Some of the changes provided opportunities, and others presented themselves as defeats. In the world of diabetes products manufacturing and supplying, 1998 offered both.

The year began with a 10 percent reduction in Medicare reimbursement for testing strips. Then in July, the market opened up with increased coverage for people with Type II diabetes. The reimbursement change allowed Medicare beneficiaries with Type II diabetes to receive 100 test strips and 100 lancets every three months - coverage that was not previously offered. Although this coverage is not as comprehensive as that for Type I diabetes, the increase offered more profit options for HME providers.

So as the industry moves through 1999 with inherent reasonableness reductions slated for diabetes supplies later this year, which change was most felt by HME manufacturers and providers in 1998?

Evaluating the Changes

Both changes had industry-wide ramifications, according to Tom Groom, director of home care for McKesson Red Line, a distributor of medical supplies and services to the extended care industry in Golden Valley, Minn.

"The 10 percent reduction forced providers to look for ways to cut business costs, but the Type II opportunity in July certainly opened many new doors," Groom said. "Since there are 10.3 million Type II patients versus 900,000 Type I patients, providers who planned programs around this client base should see benefits. Even though providers can bill a third of what they could for Type I patients, Type II (coverage) created a brand new billing market."

Due to reduced Medicare reimbursement, providers are seeking lowest cost lancets regardless of quality because of their shrinking margins, said Michael Moore, product manager for Owen Mumford, a lancet manufacturer in Marietta, Ga.

"The reduction in Medicare reimbursement has created essentially a price war between lancet manufacturers," Moore said. "The reimbursement reduction has impacted the lancet manufacturers as they try to squeeze out cost more and more just to meet some of these prices that are being thrown out."

Other manufacturers have also felt the pinch of competition. "For us, what has made the biggest impact has been the increase in competition in the lancet business," said Julie Arel, marketing manager for Can-Am Care, Chazy, N.Y.

However, according to Moore, expansion in coverage for those with Type II diabetes has made a positive impact on the industry because of the increase in numbers, although the coverage is not as comprehensive as for those with Type I diabetes.

"For some reason, they think Type Is are not needing to test as often," Moore said.

The new Type II coverage opened up a new market and new customers for HME providers.

"The coverage for Type II made a bigger difference (than the reduction in reimbursement for testing strips) because it allowed more people to become aware of the products and to take more control of their diabetes," Arel said. "A lot of these people who were never covered before are now covered and can start testing and afford to do so."

The impact on the providers' side has been positive and negative. Tod Robinson, president of Nationwide Diabetes Supply Co., Solana Beach, Calif., said the reduction in Medicare reimbursement for testing strips had a more immediate effect while the expansion in coverage for those with Type II diabetes will have a greater long-term effect. The expansion in coverage "created a substantial opportunity" that will be realized in two to three years, he said.

"The biggest impact of all is the frequency of paperwork - a huge negative impact," Robinson said. "It is hard enough to get a CMN or physician order - to do it twice is brutal. If you are doing it (filing claims) by the letter, the single cost is more than the 10 percent reduction."

Determining the Fairness in IR

"The proposed inherent reasonableness (IR) reductions have been extremely controversial," Groom said. "HCFA and the DMERCs have received a flood of negative comments regarding the IR reductions, and (the HME industry) does not expect to see resolution until the summer of 1999."

He said the methodology used by the DMERCs in arriving at the reductions is suspect, and that there are signs the DMERCs realize they may have a problem pushing through the proposed reductions. Another point made by Groom and Robinson is that the IR process is a tool to address aberrant fee schedules that are grossly excessive or inadequate.

"The 3 percent proposed reduction on diabetic testing strips, for example, is hardly indicative of a fee that is 'grossly' excessive," Groom said.

"If (HCFA) is going to keep nibbling away until (providing diabetes supplies) is not worth doing, it will force all the good suppliers out of the business," Robinson said. "The people who will survive are the ones who will either have mass volume or don't follow Medicare guidelines to a 'T.'"

If the IR reductions are finalized as published, manufacturers will be pressured to reduce product costs so Medicare providers can afford to continue servicing the numerous Medicare beneficiaries who depend upon diabetic testing supplies, Groom said. "We share (the providers') concerns. Our goal is to produce the highest quality lancets for the best value. If you have to start reducing the price of the product, you have to look at how can you do that and you try to streamline your production," Moore said. "It may mean getting newer machines that run more efficiently or selling more in bulk or in larger quantities to offer better discounts. All of us are looking at ways we can reduce our cost to pass that on to the distributor."

Other companies are looking at other means to offer lower-cost products, while maintaining quality.

"As a distributor, it is very important to provide a low-cost proposition and we did that through partnering with manufacturers and utilizing our PhD (Patient Home Direct) program to reduce operating costs," Groom said. "Providing a cost effective quality product allowed the providers a viable diabetic business. Having the manufacturers be part of the education program worked well for participating providers."

Moving Forward

This said, the diabetes market is one that is just beginning to grow. Of the 16 million diabetics in the U.S., only one-half are already diagnosed, and within this group only 20 percent monitor their blood glucose levels on a regular basis, said Jack Evans, president of Global Media Marketing, Malibu, Calif.

"Think of the market potential for blood glucose monitors and strips. The diabetic customer currently spends 10 times more than the average customer in pharmacies," Evans said. "But what is interesting to note is that of the $3,000 per year they spend on health care, only 10 percent is on diabetes supplies. They spend their money on related products such as foot, skin, dental and eye care."

Evans also said some of the fastest-turning impulse products in drug stores and home health care provider stores are sugar-free candies and snacks.

Groom advises communicating business concerns with distributors and manufacturers.

"We can help in getting the right product to the right patient when it's needed and help reduce operating costs that could limit a provider's billing opportunities," he said. "One of our vendor partners Jay Slouffman, director of national sales for Chronimed, believes market education will be key. Also, developing relationships with endocrinologist and diabetic educators for referral purposes is extremely important for providers."Staying abreast of changes and working with state and national associations and lobbying groups can keep HCFA aware of why these cuts in reimbursement are not in the best interest of Medicare beneficiaries or the industry. HME providers must also look to other resources, such as marketing to referral sources and managed care entities, to continue profitability in certain areas. Hopefully, changes brought about in 1999 will only offer a positive, not negative, impact on the industry. However, it is better to be prepared for both.

This article originally appeared in the March 1999 issue of HME Business.

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