2009 Funding Forecast

Shelter your business from the predicted violent financial storms coming in the year ahead.

This Hurricane season was an active one, leaving homes inundated with water, wiping out electricity and destroying personal property, and in some areas, even causing loss of life. But to some, this comes as no shock as it was predicted in 2007 that there would be above average activity in 2008.
There’s no doubt that the tumultuous changes taking place in DME could act as a category four storm by knocking the vitality right out of your business. The warning signs are there. Just as a meteorologist predicts the weather, experts in the DME industry are ringing the alarm in anticipation of a gloomy 2009 financial forecast. It would behoove you to heed the warnings — tuning them out, could lead you to being forced to pack your belongings, turn out the lights and permanently evacuate the industry.


Preparing for the Big One

With the wars in Afghanistan and Iraq, there was already a huge budget deficit. But now the credit crisis has triggered a bail out of financial institutions. The resulting impact on funding is unclear.
“There’s no question that the funding landscape will be horrible in 2009,” says Michael Reinemer, vice president of communications and policy with the American Association for Homecare. “The only question is, ‘How bad will it be?’ ”
Kurt Schmitz, assistant vice president and sales manager of the HME Division of VGM financial services, says it’s going to be a lot more difficult for customers to get funding with the economic crisis on Wall Street. And you’re going to notice that more banks are getting more stringent with their credit requirements.
The 9.5 percent cut, which was required to pay for the competitive bidding delay, will go into effect on Jan.1. This coupled with the continuing cuts that have been occurring every year hurts access to homecare, and ultimately, that could affect the quality of care the beneficiaries receive — especially, if HME continues to get disproportionate cuts compared to other sectors of health care, Reinemer says.
It is a substantial cost to pay, but the homecare sector didn’t really have a choice.

“It was either accept this national cut or go forward with this bidding program which we knew was a train wreck, and it obviously wasn’t something that the homecare community wanted to do,” Reinemer says. “But since it was either that or implement this bidding program, the industry had to accept it.”
It all comes down to survival of the fittest.

Smart providers will continue to do what they’ve done for a while now, which is make sure their operations are efficient as possible and have a mix of payer sources, he says. Providers have to be able to roll with the punches in this type of environment where there are a lot of changes.
“There can be more changes,” he says. “We’re not entirely sure what things will look like a couple of years down the road.”
But he does know that providers need to be adaptive and efficient.

“I feel it’s going to be very important, as I have felt for several years, with all the changes going on for providers to really streamline their processes as well as dig into things that they could do internally to boost revenues,” says Lisa Bargmann, president and CEO of Bargmann Management LLC, dba Homecare Collection Service.

Annie Nation, owner of Scooters Unlimited and DME Inc. in Plano, Texas, already knows what she has to do. She’s been shopping around to compare prices and believes patients may have to suffer as far as quality of products and speed of delivery is concerned. “It’ll be drastic,” the small provider says.
The 9.5 percent cut has put a strain on her business, especially employees, who will be more than likely laid off. Manufacturers, Nation says, have gone up 20 percent and when Medicare added an additional 10 percent to that, she knew her business would suffer.
“That’s 30 percent right off the top that we’re faced with,” she says. “The 20 percent we’re facing right now because manufacturers have gone up that much and when the 10 percent does go into effect it’ll be like wow. But it beats competitive bidding.”

Congress declared a mandatory evacuation of competitive bidding

Bob Harry, vice president of the Alabama Durable Medical Equipment Association, who owns AABON Home Health Care in Ozark, Ala., says that the bidding program was similar to auctioning. The foundation of competitive bidding, he says, was not to receive a price reduction but to reduce the number of providers and the amount of fraud and abuse. However, there were a number of ways to do those things, Harry says, including making state licensure mandatory and having site visits.

Competitive bidding would have totally killed the business, Harry says. “A lot of us feel that competitive bidding should have went on and taken place so Congress could see what a farce this really was because there’s absolutely no way that it could work.”
Competitive bidding was designed to put a lot of providers out of business, Reinemer believes, which is not the way to strengthen homecare. There were issues about homecare in rural areas; there were questions about whether this was the type of equipment and the type of service that you would want to go to the lowest possible bidder.

“It was sort of a race to the bottom,” he added.
In terms of costs and quality, there were a lot of concerns about the effect on patients getting the level of quality services they needed. There were also concerns and legitimate questions about the basic law, but then the implementation of the law presented another list of problems in terms of disqualifications for reasons that were not clear.

“I think Congress understood that there was a very good reason to put the brake on the program and try to delay and reform it,” Reinemer adds.
The delay of the program does suggest that Congress saw that there was room for improvement; whether or not improvement will come is unclear at this stage. But economist Kerry Anne McGeary, Ph.D. of Drexel University’s Department of Economics and International Business, says she’s hopeful.
“When you’re doing a competitive bidding program, it has to be flawless and the fact that there were so many holes and so much room for error was very concerning to me especially when you’re talking about durable medical equipment,” she says.

Stephen Foreman, Ph.D. of Robert Morris University’s Department of Finance and Economics, was also shocked at the way the program was going forth. When CMS became a win-at-all-costs advocate for competitive bidding rather than an unbiased evaluator of the franchise bidding program, Foreman thought a delay would be unlikely. He believed a delay was even further away when CMS persuaded a major national news outlet that the objections to competitive bidding were merely a result of corrupt lobbying by special interests.

As providers breathe a sigh of relief because of the delay in competitive bidding, they should also realize that it is probably not a thing of the past.
Because competitive bidding exists in other sectors of CMS programs, McGeary doesn’t believe that it will vanish. But there would definitely have to be some changes if the program were going to work. CMS would have to pay more attention to the suppliers, she says. For instance, you would want to make sure that access to suppliers is not going to be restricted in any way.

“For people using durable medical equipment, it would be horrible to make their lives harder, so you want to make sure that this bidding program doesn’t make access for them any more difficult,” McGeary says, “and I think … they weren’t paying enough attention to how these items were actually going to be supplied if they reduced the number of suppliers so substantially.”

Foreman hopes that a new look at DME will emphasize competition rather than limit it. If this occurs, he says, then everyone will benefit.
“If there are not major changes in concept, the franchise bidding program will destroy the DME industry as we know it and patients and consumers will suffer,” he says. “Any franchise bidding program that allows only a few firms to provide service will create monopoly power. The remaining firms will be free to raise price at will, harming patients and consumers.”

Clearly the 9.5 percent reduction will impact DME funding for 2009. This means that DME will be the only category under Medicare to have been reduced in recent memory. “It remains an open question why the focus on DME when there has been double digit increases in hospital costs and health insurance administrative costs?” Foreman pondered.

Hopes of washing competitive bidding away
When the program does come back, Reinemer says, there will be an effort to repeal it. In fact, AAHomecare created a task force to develop an alternative to competitive bidding, where the association will work to get Congress to consider a different approach to the bidding program.
“At this point, we would rather not have this program, but we have to look at what the landscape will look like,” he says.
Seth Johnson, vice president of government affairs for Pride Mobility Products, says the industry’s efforts to kill the competitive bidding program will be moving on two parallel tracks: legislative and regulatory.

“There are going to be challenges that we have to work through next year from a funding perspective, when you look at the impact that the 9.5 percent cut is going to have that goes into effect January 1, and then the industry’s efforts to kill the competitive bidding program from a legislative perspective,” he says. “We also have a regulatory track that’s going to be pursued to modify the competitive bidding program as well because the MIPPA language (Medicare Improvements for Patients and Providers Act of 2008) that was passed back in mid-July and signed into law only delays the implementation of competitive bidding and does not kill it.”

However, there is significant support for completely eliminating competitive bidding, he adds.
Consumer groups are also strongly articulating support for eliminating this reduction and providing a parallel exemption from the cut to marry that with the exemption from the competitive bidding program that complex rehab received in that Medicare legislation back in July.
Johnson says there is a lot of support from both the consumer perspective, the provider/manufacturer perspective and clinician perspective on that initiative, and those efforts are going to continue into next year with the goal of securing that parallel exemption cut in a retroactive manner.

Johnson says the Bush administration made it clear that if legislation was developed to kill the program it would absolutely be vetoed.
“So the best that we could get this year was the 18 to 24 month delay,” he says. “But we do fully expect there to be legislation introduced next year to kill the program.” Then the debate in the industry will be determining what cost will be incurred to kill competitive bidding.
“Clearly, from our perspective, we think there is a lot of money out there that the Medicare program could put toward any cost that would be incurred to secure the killing of competitive bidding via anti-fraud measures, and toughening up the anti-fraud efforts of the Medicare program could save a significant amount of money and those dollars really should be put back into the industry in order to help kill competitive bidding.”
To make franchise bidding disappear all it will take is for the public and legislators to clearly understand what it will do to the industry and DME costs, Foreman says.

“Competition provides incentives for firms to reduce costs,” he says. “Franchises like those in the CMS approach have never done so.”
But in the meanwhile, providers should prepare for the return of the program, even if it means merging together to become large enough to receive a contract award.

“I would also advise them to calculate the present value of future monopoly profits that they can generate after competition is eliminated from the market — and reduce their original bid low enough to ensure they remain in the market,” Foreman says.
Providers should be using this 18 to 24 month time table to reevaluate their business processes. Providers should be revisiting what items they’re supplying and what type of items they want to supply in the future, McGeary says.
They should also think about access: Who are the beneficiaries they are supplying to? And figure out a way to match other suppliers to survive this in the end.

The Rebuilding Process: rethinking the way you handle business

Some providers are looking at reducing services, no longer providing repairs and restructuring their overall business model in order to account for this reduction in payments that’s going into effect on Jan.1, Johnson says. He urges providers to make their legislators aware of the impact that the 9.5 percent cut will have on their ability to provide the level of product and services that they’re currently providing to Medicare beneficiaries.

One thing the delay does is give providers the opportunity to consider their cash and use alternative ways to finance, Schmitz says. Maybe in the past they had been using their cash to pay for equipment, where as now they could use financing or leasing to finance their equipment. It also gives them an opportunity to build up their balance sheet if they conserve their cash. Building up their balance sheets will give providers a greater opportunity to go into more financial institutions and establish multiple lines of credit or multiple funding sources, which will be really important for them over the next 18 months. This will allow them to get through any time period where they’re short of cash or running low on cash flow for a month.
“They can use that line of credit to shore up that shortage of cash for the time being, and that combined with financing their equipment allows them to cash forecast,” he says.

Bargmann agrees that the delay of competitive bidding does allot providers time to get their proverbial ducks in a row.
“They have the clinical expertise and the sales expertise, but they don’t seem to really run their businesses, like true businesses and focus on internal operations as much as they should,” she says.

The only way to survive when your revenue is being brought down is to buy cheaper, Harry says. “The words in this business have been ‘streamline’ and ‘efficiency’ but what is left to cut?” he asked.

There may not be room for cuts, but there are certain business processes that can be handled differently.
“Obviously the 9.5 percent cut is going to hurt, but by putting money in a stronger equity position that’s going to allow providers to have stronger funding sources, so when the 9.5 percent cut starts cutting into their cash flow each month, they have back up,” Schmitz says.
Efficiencies are important. Bargmann says when she’s consulting clients she often notices that they’re doing the same thing multiple times. For instance, they’ll keep a spread sheet of something, enter it in the computer and also keep a manual log of it. Some providers don’t trust the software packages, only use a few features and conduct a manual process on top of it, Bargmann says. But it’s time out for doing things the old way.

“If they would streamline those things and rely on the software system they made the investment in, and optimize all those processes — they’re going to save a lot of time and resources,” she says.

Providers must also remember that their existing patient base is a great way to tap into reorder sales and even new add-on sales. Providers who stay focused on that end up generating four to five times the revenue than they would if they just let the patients call in when they feel like it, Bargmann says.

Manufacturers have been squeezed for many years, so there is not going to be much savings that can come from vendors. But here are a few things providers can do: consolidate vendors, drive lowest total costs with rebates and even putting GPS systems in trucks can help with saving on gas and keep track of where the drivers are to determine whether they’re taking the best routes. In the oxygen industry, it’s all about finding the modality that’s the most cost-effective for the patient and company, Bargmann adds.

Providers can also help to minimize costs by offering high-end products that reduce backend service and warranty calls while resulting in a more satisfied customer base, says Kirsten DeLay, senior vice president of sales management and operational planning at Pride Mobility Products.
Expanding their product portfolio to include retail products enables providers to take advantage of cross-selling opportunities, which allows them to accommodate more mobility needs.

“Providers need only to look at the first wave of baby boomers turning 62 this year to be convinced that there is tremendous potential available for retail expansion,” DeLay says.

Possibly due to the 9.5 percent shake-up, providers are now paying closer attention to their margins.
“In the past, I think a lot of customers lost focus on growth and growing their marketplace,” Schmitz says.
But now’s the time to get back on track — especially those providers who are planning to ride out the storm. Providers who plan to be around for the long haul are running businesses leaner. They’re not keeping as much inventory on hand. They are also leveling off their cash flow each month by using terms from other vendors in an effort to be more prudent, Schmitz says.

If they haven’t already done so, providers should be using the next 18 to 24 months to shore up their balance sheets and try to build their asset position.
“This is an excellent time to really get their business shaped up financially and make sure their financials are investing back in the business, not taking anything out of the business,” Schmitz believes.

When rehab cuts went into place a couple of years ago, a lot of companies didn’t change how they operated. They had more money built up, but those cuts slowly ate into their cash reserves. With the right equity position, they can make it through these cuts, Schmitz says.

“If they figure out their processes, streamline their company and set their balance sheet up in a good position where they have equity in their business, they’re going to be able to see opportunities out there right now,” he says. “One of their competitors might not survive … but if they’ve got themselves in a good enough equity position, they can go in and acquire someone that can grow their business or they can take over contracts from other competitors or bring in new contracts because they have the credit lines out there that’s going to allow them to purchase the equipment that they can finance and then go out and service those patients for new contracts.”

If providers don’t tune into the financial weather channel, changes in funding could act similar to a hurricane and sweep them by surprise. Providers must be prepared, know what sectors of their business to evacuate and rethink the way they’ve been doing business. Although next year’s funding forecast isn’t predicted to be the brightest, for providers who begin preparing for the challenges of 2009 now, sunny days are up ahead.

Points to Take Away

•    To stay ahead of the game, providers must institute new processes and work efficiently— they don’t have the manpower or time to do things more than once.
•    Providers will have to streamline business processes to survive this cut.
•    Competitive bidding was designed to put a lot of providers out of business.
•    It is important that providers make legislators aware of the impact the 9.5 percent cut will have on their ability to provide quality services.
•    The 9.5 percent cut implemented to pay for the delay of competitive bidding coupled with the cuts that have been occurring every year in rehab will be devastating to the homecare industry.
•    Providers should look internally to cushion the blow from the cut because there won’t be much savings that will come from vendors.
•    The upcoming year’s bleak funding landscape is the perfect opportunity for providers to expand their product portfolio to include retail products.
•    Providers who use their existing patient base as a way to tap into reorder sales will generate four to five times more revenue than those who don’t.
•    Providers should use the next 18 to 24 months to shore up balance sheets to improve their asset position.
•    If providers are going to survive, they must start running their businesses like businesses by focusing on internal operations.

Learn more

•    http://www.hme-business.com — check out a variety of articles on our Web site for updated information on competitive bidding and funding.
•    Please visit, CMS’s Web site for information on competitive bidding and funding http://www.cms.hhs.gov/

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

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