A Time To Exhale

Revised rental cap rules reinvigorate industry’s oxygen outlook

Along with the delay of the competitive bidding program for DMEPOS came a few other victories. One of those included the repeal of the transfer of ownership of oxygen equipment, which has many providers breathing easier now. The transfer of oxygen equipment to patients after three years of rental was set to start in January 2009, but it came to a screeching halt with the passing of H.R. 6331. However, with payments stopping after the 36th month, providers will have to cut costs and explore new opportunities to remain profitable in the face of change.

What does the repeal really mean?

Repealing the transfer of ownership means that patients will not assume ownership of their home oxygen equipment should they stay on therapy for 36 months, and therefore will not assume the responsibility for all maintenance and service, says Joe Lewarski, vice president and general manager of the respiratory group for Invacare.

“There was consensus among all oxygen stakeholders that transferring the ownership of oxygen equipment to the patient was simply bad policy, as the vast majority of patients are not prepared or capable of appropriately maintaining their oxygen equipment,” Lewarski says.

Scott Wilkinson, senior vice president of sales and marketing at Inogen, believes that the repeal of the transfer of ownership to patients is good for both patients and providers. The law under the Deficit Reduction Act of 2005 could have caused some providers to care less about the machines since it technically wouldn’t be their’s anymore. After losing that asset, Wilkinson says that providers’ interests in maintaining tip-top-condition equipment naturally wanes.
But with the passing of H.R. 6331, when a patient goes off oxygen, the provider can get the asset back and redeploy it. “For that reason, I think they’ll have a higher interest level to maintain it in top condition,” Wilkinson says.

Phil Porte, executive director of the National Home Oxygen Patients Association, says many patients were aware of what was going to happen. There were even a few instances where patients contacted the association to say that their supplier came and took their new concentrator and gave them a four-year-old piece of equipment, he recalls.

“In the anticipation of losing the equipment, the supplier understandably wanted to give up a four-year-old piece of equipment rather than a new one,” he says. “It was not illegal but we think it was wrong.”
There now seems to be a renewed interest in investing in better equipment because providers are now able to keep the equipment, says Wilkinson. Some providers, he says, were reluctant to making big investments in premium-priced products that they would lose.

Is the glass half-empty or half-full?

While some are in opposition of capping oxygen equipment, many will admit that the new model is good for both the patient and the provider. The repeal of ownership is good for the patient because it will ensure that they continue to have access to the appropriately prescribed home oxygen technologies that best meet their clinical lifestyle needs, Lewarski says. Since oxygen patients may have periodic changes to their clinical condition and or living arrangements, the flexibility to change equipment is essential and in the best interest of both patients and providers, he added.

“This will enable providers to better manage their rental fleets as they can assign equipment to patients based on their needs, not what happened to be in their home in the 36th month,” he continued.

With the title transfer, patients will more easily have access to newer equipment, Ron Richard, CEO of SeQual, says.
Tom Bannon, president of Responsive Respiratory, doesn’t think that the cap rental patient will see better or new technology. The guidelines, he says, state that providers cannot switch out equipment unless the physician makes the change. “Plus, the investment cost versus the payback is marginal at best,” he adds.

However, he does believe that providers will be more open to invest in newer technology and new Medicare patients will see this technology as providers slowly convert over.

Under the current law there are conditions under which a switch out of equipment is warranted. For instance, if a physician determines that another device would be more beneficial to the patient’s condition, then the patient may be assigned another piece of equipment, which may include a lighter system, as weight is often a prime factor in an ambulatory patient’s compliance, says Bob Jacobson, vice president and general manager of the medical division at AirSep Corporation.

“The government has clearly recognized that access to new technologies needs to be reimbursed at a higher rate due to greater acquisition costs, etc.”
As long as the concept of ad-on remains embedded in the statue there will be a problem with access to the more expensive equipment, Porte says.
The industry proposed and Congress accepted a 9.5 percent cut so the ad on, for example for oxygen generating portable equipment traps from $51 to $51 minus 9.5 percent, Porte says. Keep in mind that an OGPE can range anywhere from $2,500 to $4,000. Medicare currently pays $199 for stationary concentrators, which cost approximately $400, but that coverage will drop to $180.

“There’s a strong disincentive to provide the more expensive equipment as long as payment for the newer technology is based on the base rate for a stationary concentrator,” Porte added.

Whether providers should be happy about the repeal of the transfer of ownership depends on their viewpoint, Wilkinson says. If providers are comparing things to the way the law was (being responsible for patient care, having reimbursements stopped, but keeping the equipment)then, relatively speaking, you’re better off keeping the equipment, he says.

“I think if providers compare it to that by and large they’re happy that ‘I’m not going to lose this asset,’” he says. “But if you go back and compare it to the way it was several years ago before there was a cap, people would like to have an ongoing reimbursement. But that is ancient history now.”

While there were some providers who disagreed with the repeal, all of the home oxygen stakeholder groups strongly supported the repeal of the transfer of ownership requirement, Lewarski says.
“We believe most HME stakeholders view this as a win-win situation for both the patients and the providers.”
Provider ownership of equipment is essential for a variety of reasons, prime among them being industry safety and traceability, such as in the event of a product recall, Jacobson says. Here are a few reasons why he believes the repeal of ownership is good for all players involved:

Patients and their families can be better assured about the origin and history of the equipment and that it has been properly maintained and serviced.
Oxygen is listed as a federal legend drug and the equipment that dispenses it is heavily regulated by the FDA. The industry needs to continue to ensure that these products are handled through appropriate and proper channels to prevent unauthorized and unsafe usage.

Beyond that, the medical equipment provider retains a valuable asset, which is available in the continual rental pool. When oxygen equipment is no longer needed in a particular setting, it can be utilized again and again to economically service additional patients, hence the categorization of it as durable medical equipment.

Three years and counting:

When providers are in the game past 36 months
Some suppliers are curious to know what they will receive in compensation after the last payment is received.
Lewarski says that the Centers for Medicare and Medicaid Services will have to govern the process following the 36-month payment cap. There are still a lot of unknowns, Richard adds.

Some providers have expressed concern about becoming liable for the maintenance of equipment throughout the machinery’s lifetime. Richard says if he were a provider and he owned a piece of equipment that he wasn’t getting continual payment on except for the maintenance of it, it would feel as if he was being told ‘you’ve made enough money off of this and now we’re basically controlling your costs by capping this.’”

“And really how can you own an asset if you’re not making any revenue on it except for service beyond the 36th month and it’s tied up in someone’s residence so you really don’t have access to it?” Richard says.

The patient’s responsibility is to take care of the equipment by not abusing it, keeping it clean, changing out the filters as they’re directed by the provider and reporting any suspected equipment malfunctions, Wilkinson says. But there’s no guarantee that every patient will adhere to these guidelines.

Suppliers have no way of knowing in what condition these machines will be returned. As a comparison, Richard compared the cap to leasing a car. He says that if he sold or leased someone a car and after 36 months he was not getting any more lease payments but was still expected to take care of the car whenever the person was done using it, and it came back to him in poor condition, what is he to do? Is he expected to clean it up and figure out how to lease it out again and get additional use out of it?

“So it’s really confusing to me as a business owner and a manufacturer how that’s all going to work.”
Under the previous capped rental policy, the maintenance fee was equal to one-month rental and was billable every six months, Lewarski says. While CMS has not yet released policy governing capped oxygen equipment, this is the standing precedent, he affirms.

Currently, only about one third of Medicare beneficiaries reach the three-year point once they’re on oxygen, Porte says. If they do, the cycle starts again in five years and the beneficiary is entitled to a new piece of equipment. Porte gave two scenarios. If the patient dies at the 30th month, the equipment can be billed to Medicare for another 36 months. If the patient dies at the 40th month, the supplier recovers the equipment rather than losing it and can bill Medicare for another 36 months with the same equipment.
“I’m not sure how that’s a loss,” Porte says.

To remain profitable in this ever-changing industry, providers will have to do all they can to remain credible, and accreditation is the key. The initial costs of being accredited impacts the bottom line, but it’s now integral to entering or staying in home healthcare, Bannon says. “This will raise the standards in our industry and the fly-by night operations will be greatly diminished.

Providers will need to ensure that they have clinical protocol and guidelines in place for education along with the set-up, delivery and follow-up of the patient, which is normal procedures for most companies, Richard says.
“They should seriously look at getting accredited and following those guidelines because it should improve outcomes and reduce healthcare costs if these things are done properly, he adds.
To stay competitive in this business, oxygen suppliers will have to step up on every level, even if it means changing a few things.

Outside-the-box exploration can help providers to stay ahead of the game

Although service and maintenance fees have yet to be established, some providers are assuming that those fees may not be enough to drive their trucks off the lot. There’s probably some emotion there, but certainly there is some financial impact, Wilkinson says.

However, if providers would invest in new technologies you wouldn’t have to take the truck off the lot, Wilkinson adds. The patients shouldn’t require ongoing visits other than an annual equipment check-up, but going out every 10 days or two times a month just isn’t necessary anymore.

“New oxygen technologies are proving highly beneficial for both patients and providers, so we hope that since the risk of losing a capital asset after 36 months has been lifted, providers will use new oxygen technology to improve their operations and grow their home oxygen business,” Lewarski says. “Most of the costs are operational, including delivery, gas management and administrative.”

Wilkinson says if providers convert to a non-delivery model they will save money because this is the lowest total service cost model. It requires the least amount of ongoing maintenance and he believes the providers that make that investment will be fine in the long-term.
“I think that providers who hold on to (the delivery) model will see a service reduction because those models are expensive,” he says. “It’s going to cost more money to go out to the home on a regular basis and the government’s already indicated that we’re not going to reimburse you for it. But I think as providers migrate their model over to non-delivery, it is a lower total cost.”
“With gas prices going up, it’s getting harder and harder to understand how you can even be in home care and deliver oxygen to people’s homes,” Richard says.

The 36-month cap hits the bottom line hard on most of the smaller independents, but the larger, better run providers see this as an avenue to limit future competition, Bannon says. The equipment transfer will allow providers to invest in newer technology without worry that they will lose the asset.
The new regulation will allow providers to purchase new types of equipment, which can now be implemented for the patient in all phases of the 36 months. Retaining equipment after the 36th month reduces the providers cost in numerous way, Bannon says.

Like any other business, if a home care company cannot make a profit, then it can’t reasonably be expected to stay in business to serve beneficiaries, Jacobson says. These medical equipment suppliers provide irreplaceable value to the home care equation.

In the face of caps, providers must reevaluate their business concepts and model

Home care company personnel need to look closer than ever at their bottom line by analyzing overall equipment costs, which include manufacturers’ warranties, overall reliability, maintenance and filter costs and equipment checks, etc., Jacobson says.

Although the newer-technology systems often represent greater acquisition costs, the long-term profitability of these systems makes for a much more feasible scenario than the old model of oxygen equipment deliveries, Jacobson says. AirSep advocates the use of the traditional and time-proven reliability of 5L concentrators for the in-home paired with the more flexible POC for daily ambulation outside the home and travel.

“In effect, less mileage is run up unnecessarily on the smaller unit,” Jacobson says. “Both concentrator models working in conjunction as a combo system are coded for Medicare reimbursement with an oxygen patient’s ambulatory oxygen prescription.

“An economical combo system has a concentrator virtually backing up a concentrator to create a duplication of equipment— which offers the most adaptable oxygen solution in situations such as major power outages or storms. In these critical situations, The POC allows the patient to move to another area with ease.”
Those who aren’t quite ready to go to a non-delivery model, should look for other ways to save money such as having patients bring in equipment to their offices for repairs, Richard says. If providers have to go out to the patients’ homes, an in-home service fee may have to be established.

When profits are cut, then you start sacrificing on service and the patients end up taking care of more and more things out of pocket or figure out how to do them on their own, he added.
“You really have to watch the whole economics behind this and then put some rationale behind it,” Richard says of capping oxygen. “It’s gotten pretty disjointed over time just to save money. They could have simply lowered reimbursement rates and left it uncapped.”
It is imperative that providers try to control their expenses on a per patient basis and really scale the technology to the needs of the patient, which may take reevaluating the geography and scope of the business.

“I think some dealers are going to start cutting down on their coverage areas and saying, ‘I can’t go beyond 70 miles from our base office,’ and they’re going to tell their referral sources, ‘look this is as far as we’re going to deliver,’” Richard says.
Some providers may be reluctant to moving to new OGPE because they equate good service with home delivery. But as Wilkinson says, self-service doesn’t have to mean poor service.

Many years ago people delivered ice to iceboxes and then along came a refrigerator and there were no more deliveries. That doesn’t necessarily mean that customers are getting poor service. In that analogy, self-service turned out better. He thinks things will work the same for oxygen.
“The non-delivery technologies are better service in that the patient has complete control and they don’t have to depend on anybody else,” he says.
Adopting more of the non-filling type modalities such as the portable oxygen concentrators and the home-filled systems is the way to go, Richard says. Providers will have to start adopting technology that meets the needs of the patients, he advises.

In an era of ever-increasing fuel costs, the new-category OGPE, specifically portable oxygen concentrators, makes even more economic sense for the equipment provider.
“The POCs don’t require deliveries, never need refilling, and above all, the patients’ health benefits from greater ambulation never need to be compromised,” Jacobson says. “This is the true win-win for patients and providers.”

In order to remain profitable, you must adapt to your environment, Bannon says. Providers cannot keep delivering oxygen cylinders every three weeks when there is equipment that is one delivery every three months, which costs no more than a typical patient set-up.
“Like all good businesses, management must get involved and look at the opportunities that manufacturers are providing,” Bannon says. “Letting subordinates make these decisions without them knowing the full impact of their decision hurts the business financially. There is still very good money to be made in home health care.”

 Points to Take Away
•    There’s a renewed interest in investing in better equipment since providers retain ownership.
•    The repeal of ownership will ensure that patients have access to appropriately prescribed home oxygen technologies.
•    Provider ownership better assures patients and their families’ about the origin and history of the equipment.
•    Oxygen is a drug regulated by the FDA and needs to be handled appropriately to prevent unsafe usage.
•    Retaining equipment is a valuable asset to providers that allows them to get continued use out of the product.
•    Only about one-third of Medicare beneficiaries reach the three-year point once they’re on O2.
•    To ensure that they remain profitable after the 36-month rental period, providers need to convert to a non-delivery model.
•    Newer technology represents greater acquisition costs; however, the long-term profitability is more feasible than the old model of oxygen equipment deliveries.
•    Providers must adapt to their environment.
•    Providers must scale technology to the needs of the patients and reevaluate the scope of their business.

Learn more
Visit the following web sites for more information:
•    http://www.hme-business.com — Check out a variety of articles in our Oxygen Solutions Center, which is located in our sites Resources section.
•    http://www.homeoxygen.org
•    http://www.aahomecare.org
•    http://www.lungusa.org
•    http://www.cms.hhs.gov

This article originally appeared in the September 2008 issue of HME Business.

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