Oxygen Systems Update: Remaining Profitable with New Technology

It has been just more than one year since the tornado of reimbursement cuts ripped through Main Street of the home oxygen therapy market. Home medical equipment (HME) providers slowly have been looking out of the windows of their businesses to survey the damage.

According to Elizabeth Gallenagh, director of rehabilitation and reimbursement with the National Association of Medical Equipment Services (NAMES), there is no data yet as to how the 25 percent reimbursement cuts in January 1998 and 5 percent in January 1999 affected the HME industry, but most feel the cuts have forced some HME providers to focus on other segments of the market. The Balanced Budget Act of 1997 (BBA) cut oxygen reimbursement more than any other market segment, and those cuts have driven product demand and development ever since.

The current Medicare reimbursement gives HME providers little room for profit, which means most providers are seeking lower-cost systems that include oxygen concentrators, liquid oxygen, oxygen cylinders and conserving devices; providers also are seeking to reduce operational costs, which include costs of oxygen and oxygen delivery.

"It is a race in manufacturing to see if you can produce the lowest-cost item," said Jon McLellan, manager of clinical services at Mallickrodt Puritan Bennett in St. Louis. "Whoever does that wins the game."

Rich Kocinski, vice president of product management for the respiratory products division with Sunrise Medical, Longmont, Colo., said not all providers are seeking cheaper modalities. However, since operational costs comprise most of the expense of running an oxygen business, providers are looking for reliable and affordable machines that require little maintenance and a reasonable capital investment while simultaneously meeting patients' needs.

"I am watching the market, and I am seeing some of the market going to low end and some of the market looking not to spend more money but maybe not to spend less money; but, they are pushing a lot of the features and benefits," Kocinski said.

The fewer trips made to a patient's house for service means less cost and more profit. The smaller the capital investment the quicker monthly reimbursements recoup costs. Kocinski said providers' priority for machines before the BBA had been noise level, reliability and cost, respectively. Today, providers are concerned with cost first followed by reliability and noise level.

"There is a double-edged sword like with most things," Kocinski said. "The market is pushing for: 'give me a unit that I can put out and I never have to touch again.' The other side is that the payers will also see that. So if anything will make reimbursements worse, it is providing less service value to the customer."

Keys to Survival

The oxygen systems market is trickier than it was two years ago. Providers now walk a tight rope between profit and loss that leaves no room for error. Several manufacturers offer many variations of different types of home oxygen therapy systems, and it is crucial for providers to match the right system to the right patient. Not every patient needs liquid, and not every patient needs cylinders or a concentrator. The key variable in determining the appropriate system for each patient is patient ambulation, and providers must match the right systems to the right patients if they are going to prosper and if the patient is going to be satisfied.

The more a patient walks outside of his or her home, the more cost there is for the provider. For example, a patient that frequently leaves his or her home will need more than a concentrator - probably a portable liquid system; but, a concentrator with a backup cylinder may be ideal for the patient that rarely leaves.

It is imperative that during the first visit to a patient's home the provider interview him or her thoroughly to determine exactly how much time he or she spends outside his or her home. Ask patients how often they go to church, go to the store, go to visit friends or relatives, etc.

"Initially, (HME providers) really have to interview patients and identify what ambulation they are doing," McLellan said. "Otherwise, you have to do it retrospectively after you have had the patient on service for two months."

Once the provider determines how often the patient ambulates, the provider can determine the best and most cost-effective system for the patient. This is a critical decision for the HME provider. When multiplied by dozens of patients, a small savings each month accrued by choosing the right system can mean the difference between profit and loss.

For example, a concentrator, cylinders and a conserving device combination will cost approximately $100 per month for a patient that ambulates 20 hours per week and needs a 2-liters-per-minute flow rate, according to figures based on Mallickrodt products provided by McLellan (figure). If the same patient used a large capacity stationary liquid oxygen system and a standard liquid portable, the average cost per month eclipses $350. That is a difference between a $100 profit and a $150 loss based on an average $200 per month reimbursement.

For most modalities, fixed equipment costs make up a small percentage of total cost. Therefore, providers can manipulate variable costs to ensure a profit. Providers can do this by using conserving devices, which save oxygen and thus the numbers of deliveries and oxygen required. They also can do simple things to reduce operational costs like coordinate deliveries or ask patients or patients' caregivers to pick up their cylinders.

New Products

Products that enable patients to fill oxygen cylinders from their oxygen concentrators remain in the forefront of major developments in the oxygen systems market. Conserving devices are getting a lot of attention as a means to reduce cost by extending the life of cylinders and liquid oxygen.

Currently, Chad Therapeutics' Total O2 Delivery System and the Venture HomeFill Complete Home Oxygen System by Invacare Corp. are the only two patient-filled systems on the market. Perry Cook, marketing manager for portable oxygen systems at Invacare said patient-filled systems could be the wave of the future because they reduce providers' service calls, which make up a major component of providers' costs. They are popular with patients because they allow freedom, he said.

"I will be very surprised if there are not other players out there that already have (patient-filled system) prototypes together but have not announced," Cook said.

Bob Jacobson, vice president of sales and marketing with AirSep, Buffalo, N.Y., said the initial capital investment of the patient-filled systems and reliability questions have deterred many providers. Patient-filled systems generally cost more than twice the cost of a traditional oxygen concentrator.

"We are taking a wait and see approach to the cylinder refilling market. It really does not look like it is all that big," Jacobson said.

Many providers cannot afford to wait the time it takes a $200 monthly reimbursement to recoup the initial investment on a patient-filled system. However, some providers may have some patients, such as those with high ambulation, whose use of a patient-filled system can save the provider enough operational costs to make the initial investment worth it. Kocinski said Sunrise is working on a "next-generation" patient-filled system, which it is not ready to publicize, but he said it should reduce providers' capital and operational expenses.

"In all of our product development, our goals are really to limit the capital and cash flow constraints that any equipment puts on the dealer and to look at the dealers' operating costs and try and develop product solutions that reduce overall dealer operating costs," Kocinski said.

Oxygen reimbursement cuts did not deter AirSep from developing the approximately $2,000 QuietLife, which Jacobson said is the quietest concentrator on the market. He said providers can use the silent concentrator to develop referral sources by offering clinicians a product for patients with special needs.
"We do have a number of customers that like this idea of trying to market a unique product to the referral sources," Jacobson said.

Providers are turning to oxygen conserving devices as another means to save money by reducing operational costs. McLellan said demand-type conserving devices are becoming popular because the lack of electrical components and batteries make them easier for patients to use. The conserver-regulator combinations use a diaphram or valve that responds to the user's expiration, which opens the valve to allow oxygen in on inspiration. McLellan also said demand-type conserving devices are easier on providers because they require no additional parts or batteries that must be stocked. Regardless of whether they choose pulse or demand conserving devices, more HME providers are looking to conservers to extend time between deliveries.

In addition to patient-filled systems and conserving devices, concentrators with telemetry systems remain an option for providers. However, most providers have not embraced the option that allows them to monitor an oxygen concentrator via modem because of the additional expense required. In light of reimbursement cuts, the approximately $100 per machine cost to add telemetric technology may not be worth it, Cook said.

"(Features) require a lot of value to get a higher price point. It used to be if I add $2 of value, I could charge $1 in price. Now it's like I have to add $5 of value to charge another dollar in price," Kocinski said.

Telemetry systems can be effectively used in many situations. They are ideal for remote patients because the provider can diagnose the problem via the modem and go to the patient's home prepared, which should eliminate the need for a second trip. The further the patient is from the provider, the more savings the provider will accrue by eliminating a second trip.

"If the patient phones up and says 'I have a yellow light on,' which tells (the provider) that something is going on, (the provider) can call up the unit and analyze it at that point," Cook said. "If he needs to repair it, he can at least go to the patient's home with the right component in hand and repair it on the spot."

If a provider can regularly eliminate an additional trip to a remote location, the savings in delivery costs may make the option worth it.

By the end of the year, the home oxygen systems market should have an idea of how Medicare reimbursement cuts affected HME providers. The additional 5 percent cut launched in January could push many providers over the edge and out of the market, or providers could find ways to successfully operate under the new system. As the chart indicates, their providers can still survive in the home oxygen system market but not without work. It takes a smart provider to understand patient needs and to provide a system that meets those needs in a cost effective manner.

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

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