2011 Big Ten

New Business Models

Many providers will have to reshape their businesses in order to survive and thrive in 2011.

If anything, 2011 will be the year of reinvention. As we enter this new year, the industry faces numerous funding challenges: the implementation of Round One of competitive bidding; CMS’s inevitable ramp-up of Round Two of the program; the removal of the first month purchase option for standard power mobility; and an ongoing increase of both pre- and post-payment audits on Medicare claims. The result is that providers’ revenue has been slashed and their cash fl ow has slowed to a trickle. They must wage political wars, but they also must change their business models if they want to survive in the short term in order to win those fights.

Already we have seen one set of HME providers have to radically change their business models: oxygen providers. When CMS’s 36-month rental cap for oxygen equipment went into effect, it meant that providers would no longer be able to rent equipment over the full five months of their service commitment. Instead, they would only experience three years of revenue while serving those patients for the full five years.

Also, the cap required them to ensure their patients had support when they traveled or moved during that five months — even if they were in the final two months. Finding a remote provider to work with posed an expensive obligation.

That said, even before the program’s implementation date, oxygen providers were already devising ways in which they could alter their businesses to survive the funding cut. If they could not control their per-patient revenue, at least they could control their per-patient costs. So, they began devising new business models that slashed their expensive delivery overhead so that they could increase their margins.

The effort paid off and now they serve as an example to other HMEs looking to change their strategies this year. (See “Oxygen,” page 24 to read more.)

The next provider group in line to radically overhaul how they do business is mobility providers. The removal of the first month purchase option went into effect Jan. 1, and now those providers must rent out standard power mobility devices to patients — even those with permanent conditions — over a 13-month period.

This means that instead of receiving full compensation for the chair at the outset of a claim, they must now be satisfied with that amount trickling in while they still endure the costs associated with serving that patient. While the overall funding for that chair actually increases by roughly 5 percent, that provider has had its business model turned upside-down.

Now mobility providers must transition to what is essentially a rental business and with that comes a whole new set of priorities and business practices, such as shaping inventory management procedures; building maintenance processes for refurbishing previously rented equipment; and devising new accounting procedures for a rental business. Talk about reinvention.

But reinvention will be a trend felt industry-wide. All providers will continue to feel the pinch from audits and declining funding levels, and they will have to come up with new ways to drive revenues.

One of the major ways to do that is to expand into cash sales. If providers can tap into cash sales items such as bath safety, home access, auto access, aids to daily level, and compression, as well as entire well-heeled patients that want expensive DME for which they don’t have funding, then they stand a very real chance of not only surviving funding cuts, but actually thriving despite them. The key for those providers will be to put into place the sales and marketing savvy necessary to reach out and secure those cash customers.

Of course, providers that have lost their bids (or didn’t bid) to provide services in the Round One CBAs will face the potential loss of an entire segment of their businesses. This will truly force them to reinvent their business models. They might become subcontractors to the bid winners, but given the razor-thin margins resulting from the program’s “suicide bids,” this doesn’t seem likely.

If anything, the non-contract providers will have to get very creative indeed. It could mean expanding into new areas of DME, or shaping whole new businesses related to their current business. For instance, a provider serving a largely geriatric market could spawn a wellness center focusing on senior healthcare.

It is important to remember that the market for HME products and services will always be there. There are vast populations of diverse patient groups that need what HME providers have to offer. The problem is that Medicare — and private payor — funding is diminishing. That means that those patients will have to find some way of getting the DME they need, and the providers that find a way to help them do that will be the ones that will be the ones that will survive and thrive so that they can battle CMS to return sanity to Medicare’s DMEPOS funding.

As the saying goes, water finds its level. The challenge for providers facing substantial revenue declines during 2011 will be to reinvent themselves in some way so that they can tap into that revenue stream.

Points to Remember

  • Providers enter 2011 facing numerous funding challenges, such as increased Medicare audits, the removal of the first month purchase option, and competitive bidding.
  • Many will need to change their business models if they are going to survive the short term in order to win on Capitol Hill.
  • Oxygen providers have proven that it is possible to reinvent businesses that have been radically upended by CMS.
  • Mobility providers will be the next group of providers to do so now that they must rent standard power mobility over 13 months.
  • Providers not holding Round One contracts will be forced into even deeper overhauls of their businesses.

This article originally appeared in the January 2011 issue of HME Business.

About the Author

David Kopf is the Publisher and Executive Editor of HME Business and DME Pharmacy magazines. Follow him on LinkedIn at linkedin.com/in/dkopf/ and on Twitter at @postacutenews.

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