OXYGEN: Cutting the Costs of Service

No doubt you have heard (if not read) about the latest pronouncements from the federal government about the HME industry. The “Medical Home Oxygen Equipment: Cost and Servicing” report published by the Office of Inspector General (OIG) on Sept. 4, 2006, not only signals another blow to the HME industry – it could well turn out to be a significant milestone on this long and winding road of federal cost-saving measures. One of the key findings states:
Based on our analysis, minimal servicing and maintenance for concentrators and portable equipment are necessary.
And as if that perspective weren’t clear enough, the OIG spells it out with another finding:
Based on the 2006 median fee schedule amount, Medicare will allow $7,215 for 36 months for concentrators that cost $587, on average, to purchase. At today’s median monthly rental rates, Medicare will allow $7,215 for beneficiaries who started renting in January 2006 and continue renting for 36 months. Beneficiaries will incur $1,443 in coinsurance over this period. If Medicare rental payments for oxygen concentrators were limited to 13 months, the program and its beneficiaries would save approximately $3.2 billion over 5 years.

The federal government has all but lit up in neon the reality of reimbursement cuts, rental capping, transfer of ownership and competitive bidding.

This report flies in the face of an earlier independent survey, the Morrison Infomatics study, with its now familiar conclusion that only 28% of the costs of providing home oxygen therapy are directly related to the equipment. Over 70% of a provider’s costs are related to the servicing of the patient.

The American Association for Homecare (AAHomecare) disputes the OIG study as “deeply flawed” and comments that it puts “patients at risk.”  In a statement released Sept. 15, AAHomecare said that, “The OIG study does not reflect the full range of services provided to patients nor does it reflect the actual costs incurred in providing them,” and then goes on to cite several areas of concern, including the relatively small sampling of oxygen users involved and the narrow scope of the study, which only looked at oxygen concentrators.

The report cut very deeply for many providers. “We can no longer be the buffer between reimbursement cuts and the patients,” says Patrick Hanna, president and owner, B&K Home Medical Services, Inc. “People in this industry are good people and are used to taking care of the customer. It’s frustrating after we have spent time talking to different people in the government about what we do, to see the OIG come back with a report that disregards service.”

Just the Facts
Talk to any HME respiratory provider and there’s no need for additional data–service costs are the primary cost of doing business. “They only surveyed a small number of patients especially compared to the reports that say there are about 1.25 million oxygen patients. How can you take such as small population percentage of oxygen patients and extrapolate it? It doesn’t make sense,” says Jim Spellman, sales manager, Oxygen One, Inc.

Many delivery costs are connected to the number of processes involved in providing for just one customer: “From the time of processing an order, when it goes to the customer service department, then to the distribution and delivery department, then to the person who has to fill cylinders, swap them out, bring them back to the company, keep track of lot numbers, and then have it processed by the billing department — after just one delivery you’re losing money, based on reimbursement," explains Bill Kleiman, VP, AirCare Home Medical.

Other Costs
Clearly, delivery is the primary concern but there are other factors to consider when measuring the costs of doing business: “Delivery costs are a very large percent of the costs of doing business, but they are not the only costs of business,” says Joe Lewarski, VP government and clinical affairs, Inogen.

Lewarski maintains that the real “meat and potatoes” of a well-run business are operational efficiencies in all areas, including clerical, billing and collections processes, patient data, tracking of the infrastructure, eliminating duplication of efforts, efficiency in intakes, getting reimbursed as quickly as possible, and minimizing claims denials. Providers should take a close look at their entire infrastructure, Lewarski advises, because, “even we forget it’s there, it’s so much a part of what we do.”

Personnel and Salaries
Employees represent another major portion of expenses for many providers. “Labor is always the most expensive cost,” explains Patrick Hanna, president and owner, B&K Home Medical Services, Inc. “For example, when gas prices go up you have to pay people more to come to work. It’s a significant component of services.”  One strategy Hanna has used is to have respiratory therapists involved with other parts of the business such as marketing: “It’s effective. It’s good to have the clinicians speaking to referral sources.”

Employee costs are universal, but perhaps the greater challenge lies in finding the right balance between economizing and offering the highest level of care to the customer. “We’ve got great people and we want to invest in them because that’s what makes the company. Anybody can buy equipment. It’s the people that provide the service and training and they are such a big part of making this work,” says Jim Spellman.

Finding the right balance between assisting customers and reducing unnecessary home visits is a scenario played out on a daily basis. Spellman describes a recent situation to explain the difficulties; a customer called at 1.30 a.m. They had been experiencing problems and had used up their emergency back-up tank. However, the customer waited to call until the last minute when they had run out of oxygen so a technician was sent out at no charge to the patient, and at the cost of time and half to Oxygen One. To make matters worse, Spellman points out the paradox that emergency back-up tanks are not recognized as important enough to be reimbursed by the government, whereas the accrediting bodies say that a provider must have them.

Gas Prices
And what about those pesky gas prices, a universal knife in the back of many HME businesses? There is still a chance to economize: “Our next vehicle will be diesel powered,” says Michael Kuller, founder and president, Allstar Oxygen Services. “Diesel vehicles require much less maintenance, the engines last longer, they use less fuel and overall cost less.” For others, it is a case of working closely with the distribution department so that deliveries are more effectively consolidated.

Cost Analysis: A Necessary Evil
This all sounds so simple on paper so why do some providers continue to struggle? Time and manpower are the two reasons most often cited for not dedicating more efforts to performing a cost analysis: “I’ve heard that over 90% of providers have five or fewer people that work for their company; they run a very small shop so you don’t have the resources to do much analysis and you don’t have time. The more sophisticated and bigger companies have more resources and tend to have the ability to analyze the business,” says Jim Flacke, VP, sales and marketing, Home Therapy Equipment, Inc.

The bottom line is the need to sit down with the numbers. “Cost reduction is a never-ending effort,” says Flacke. “You have to go through every one of these services and try to whittle away at the costs of performing services. There’s nothing sexy about this. It’s not very attractive work because of the drudgery of going through the processes, but it’s the nuts and bolts of saving money.”

This article originally appeared in the Respiratory Management Nov/Dec 2006 issue of HME Business.

About the Author

Deborah Cooper is the former Respiratory Management editor.

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