Retooling for Survival
A look at oxygen providers who have overhauled their businesses to not only survive, but thrive.
- By Joseph Duffy
- Feb 01, 2012
Building and maintaining a stable oxygen business in today’s volatile world of funding cuts, caps and competitive bidding have proven very difficult. The last two years have brought about some of the greatest challenges the industry has ever seen, testing the will and tenacity of oxygen providers to either find a way to adapt to ongoing challenges in an unstable funding environment, or risk closing their doors.
First came oxygen patients reaching their 36-month rental cap, where providers were left stranded without future funding to support these patients. Then, oxygen providers found themselves with a 9.5-percent cut to help pay for the initial delay to implementing Round One of competitive bidding, another revenue-draining program that is affecting an already beleaguered industry.
With Round One behind them and Round Two looming, providers continue to drown in the burden of audits. CMS increased its Comprehensive Error Rate Testing (CERT), Zone Program Integrity Contractor (ZPIC), and Recovery Audit Contract (RAC) audits in the midst of competitive bidding. According to an HME Business poll:
- 32 percent of respondents said audits had diminished their cash flow by up to 5 percent.
- 9 percent said it had cut it by up to 10 percent.
- 9 percent of respondents said it had cut it by up to 15 percent.
- 13 percent of providers said audits had cut their cash flow by up to 20 percent.
- 34 percent said that pre- and postpayment audits had slashed their monthly cash flow by more than 20 percent.
The news goes on … but there is hope. And that hope comes from fellow oxygen providers who have made it, so far, by reengineering their business models to outlast the draconian effects of funding cuts. And not just make it — in some cases they have positioned themselves for future growth and success in a difficult industry. Here are three of those companies and how they have survived in today’s volatile oxygen industry.
Medical Necessities & Services LLC
David Baxter is the president of Medical Necessities & Services LLC, a provider of medical equipment and supplies, located in Tennessee. With more than 14 years of experience in the healthcare industry, Baxter considers Medical Necessities& Services a medium-sized company, with 70 employees.
During his 14 years, Baxter’s seen a lot of industry turmoil, and about six years ago, even considered selling the business to a national company.
“It was tempting,” he says, “because we could see all the challenges ahead of us, which we have gone through over the past few years.”
Baxter reports that 2009 was the first year that his company lost money since Medical Necessities & Services was established in 1997. He says his company has been fortunate to continue to grow at over 20 percent over the seven years prior to 2009. It’s also no surprise what has been affecting the company’s revenue potential.
“Probably the biggest effect has been the change in oxygen reimbursement and developing strategies to combat this and continue this as a profitable part of our company,” Baxter says. “The 36-month cap has been a challenge because we have to run additional reports to find out who is capped; who is going to cap out; who is eligible for new equipment; who is eligible for MS on equipment and content deliveries. Therefore, not only did we take a decrease in reimbursement with this but we have had to add an additional employee to track these reports and stay on top of it.”
Baxter also points at audits and explains how they have added stress to his business operations.
“Audits are not fun but we have realized that they are part of the business,” he says. “Unfortunately, the most frustrating part of audits is that nobody is auditing the auditors or there is no penalty for denying our claim and then we get them overturned in redetermination. This happens often and should be a penalty if the auditors deny in error. I think they would then review the information better.”
Third on his list is competitive bidding, which like most in the industry, Baxter says he sees as a huge obstacle for future growth and revenue for his company.
“If things go like Round One we will face another 35 percent reimbursement cut,” he notes. “I know 2009 was a challenging year for us with the 9.5 percent deduction, because it was the first year in the history of our business that we lost money as an organization. We have rebounded nicely over the past two years but don’t look forward to having another year of possible loss. We also have four of our locations in Round Two, which will be a challenge.”
Even with a report of lost revenue in 2009, Baxter says they did not downsize.
Baxter credits his management team and sound strategic planning as the reason they have so far successfully navigated through the fickle funding challenges over the last few years.
“We are believers in getting our management team involved with decisions about our company,” says Baxter. “We need them to be on board in order to make our operations successful. Strategic planning is a key component to our operation. We do this annually and look at it mid year to see if we need to make adjustments or change our focus. We have monthly meeting to talk about how we are doing and if we need to go in any direction.”
Baxter said that instead of falling victim to the many outside influences threatening company stability, he looked at statistics and realized the opportunity with baby boomers and that there will always be a need for home care.
“There are several things that we have had to do to retool our organization for the cuts and challenges of our industry,” he said. “One of the most successful things we did was centralize our intake department for our CPAP program. By doing this we improved our efficiencies and were able to process orders more effectively. We have been able to double our number of referrals that we can process monthly without adding staff by having it under one roof and having our manager involved with them during the day. We expect this part of our business to continue to grow with the hopes of not adding staff. We plan to do the same thing with our regular intake in 2012 to improve this area of our company.”
Another very important strategy that Baxter implemented was a move to using a non-delivery model.
Over the past few months, Baxter has invested in Inova Labs’ LifeChoice Portable Oxygen Concentrator. “This has been great to minimize our tank deliveries for high-use patients,” he says. “It also gives us the ability to deliver this model to the hospital so it limits the number of miles we were traveling in a day to drop tanks off at the hospital and then go to the patient’s home two hours away from our location. We are hopeful to continue this model to help eliminate adding additional personnel and continue to grow our oxygen business by double digits annually.”
To recap, Baxter says there are three strategies to consider to survive in today’s difficult oxygen industry:
- Implement a non-delivery model. In the long run you have to eliminate the need for personnel to stay in business with a 30-percent or more cut in revenue.
- Be organized and make sure you stay on top of your capped patients and know when they are eligible for contents, MS, and restarts to make sure that you are ahead of the game.
- Have an effective outcome-based program that is measurable so you have something to show referral sources that you are able to invest in technology and still give patients outcomes that are ahead of your competition.
“We continue to service a number of new patients annually, which is exciting, but we have to do it smarter than ever before,” says Baxter. And even as the industry remains difficult to navigate, his goal is to grow at over 20 percent annually over the next few years.
Barnes Healthcare Service
Barnes Healthcare Service, a home healthcare product and service provider with locations in Georgia, Florida and Alabama, is a large company with 317 employees. Recent funding challenges caused this company to reorganize twice – including a workforce reduction – and to close less-profitable locations.
According to Barnes Healthcare Services President Robert Steedley, the turning point for retooling the company was after watching their gross revenue erode.
Steedley cites MIPPA funding cuts for lower growth margins and the rental cap for an increased need for full-time employees to keep up with patients. He also says the rental cap led to the company needing to update its billing engine in order to adjust to the cap. And although the rental cap was followed by less reimbursement, Steedley says his company’s service remained stable.
Regarding audits, Steedley says he needed another full-time employee just to oversee the consistent requests.
“In addition to the money that is held, we also have the additional expense of collecting, preparing, and sending the response,” Steedley says. “And we feel compelled to respond to every single request, regardless of the amount. We know we do it right and do not want to give the impression that we are unprepared by not responding. Audits are overwhelming at times. We are currently reassessing our staff needs and process to ensure we are robust enough to respond appropriately and timely every time.”
Although not in Round One of competitive bidding, Barnes Healthcare Services has three locations involved in Round Two.
“Right now we are looking at our long-term strategy, such as what categories to bid on, what to walk away from, what can we do to that is profitable and still allows us to take care of customers,” says Steedley.
The management team at Barnes Healthcare didn’t respond to the funding threats individually; instead they aimed for the sum of all their parts.
“We don’t see the issue as competitive bidding versus oxygen cap versus other cuts versus audits. We see a hostile environment that required an overhaul to remain viable,” he says. “We see our strategic direction continuing to take care of complex customers. That includes ventilation, negative pressure wound therapy, high-end power mobility, as well as manual complex mobility in addition to the standard HME products. We regularly review our revenue/FTE and have specific targets that we strive to hit. We closed some locations and broadened the reach of existing branches to take care of the customers. So our plan was to retool our whole company, not respond to a specific threat.”
Steedley says there are three directions that every oxygen provider should consider as they try to stay afloat through these difficult times:
- Manage your 37- to 60-month period closely.
- Get the customers back in to see their physician at the 60-month mark.
- Get into a non-delivery model. If you haven’t started already, you are way behind the curve.
Extrakare LLC, led by Cofounder and President Scott Lloyd, has experienced no downsizing, no lost revenue and no “epiphany” to change company structure or direction to better handle funding challenges. “We have been fortunate to grow the number of patients served, referral sources that refer patients to our company and total revenue, despite all the challenges in recent years,” Lloyd says.
With 41 employees, Georgia-based Extrakare, a home medical supplier, including home oxygen, PAP devices and knee CPM devices, was in the midst of a significant census growth prior to the reimbursement changes associated with both the MIPPA fee schedule changes and the oxygen rental cap. So despite both of those events reducing average revenue per patient significantly, Lloyd says Extrakare was able to achieve significant revenue growth in the period following both events.
“Our original business plan involved widespread use of non-delivery oxygen devices so we had a much lower-than-average operating cost structure before these events,” says Lloyd. As a newcomer to the industry in 2004, Lloyd says it seemed apparent that non-delivery products were the future of the home oxygen business.
Audits have had the most impact on how Extrakare does business.
“Because the majority of our revenue is derived from oxygen and sleep therapy, we have had a significant number of claims audited in the past year,” he says. “That process has helped us identify areas where we can do our jobs better, particularly with regard to gathering relevant progress notes, documenting signatures, etc. We engaged a compliance consultant to conduct independent claims reviews and assist our management in the development of action plans to improve our rate of compliance. Communicating the additional documentation requirements to referral sources has been challenging and expensive. We have dedicated a significant amount of time educating referral sources with our staff and printed materials. Frankly, some referral sources have stopped using our company. But when we communicate things properly we find that most referral sources eventually provide us the documentation that is required.”
Lloyd believes Extrakare must be a leader in the oxygen market with regard to providing timely and accurate information about coverage criteria. He says the current audit environment is a permanent condition and suppliers must adjust their business practices to the current environment.
Regarding competitive bidding, Extrakare does not serve any patients in the first nine CBAs, but Lloyd plans to submit bids for a number of product categories in the current round of bidding.
To Lloyd, retooling is part of everyday business and cannot be implemented only when a drastic funding change challenges your viability.
“We believe the fundamental demand for the products we supply will continue to grow for many years,” Lloyd says. “As business managers, it is our job to adjust our operations so we can remain profitable while delivering a high level of service and operating the business in a compliant manner. The simple fact is that our industry must become more efficient. And by efficient we mean revenue per employee must increase and operating expenses as a percent of revenue must decrease.
“This entire dialogue is really about cost cutting, but people must realize you can grow expenses while cutting costs, as long as revenue is growing faster than expenses,” he adds. “We describe cost cutting in terms of a percentage of revenue rather than absolute dollars (obviously if revenue is not growing, cost cutting requires a reduction in absolute dollars). The thing we talk about in our organization is that cost cutting is a process and not an event. Anyone can make a big reduction in expenses. But in doing so there is frequently a significant negative impact on revenue. The management challenge to make cost cutting a process that is implemented over a period of time that is done in such a way that revenue can be grown while costs are reduced.”
Lloyd suggests that oxygen providers should:
- Be compliant. And have a backbone. It is acceptable to provide feedback and instructions to referral sources. Do not believe “you are the only one asking for this” when referral sources push back. In reality there may be a company that is not asking for the same documentation as you but you are not the only one asking.
- Choose a business model. We believe in Invacare’s Homefill as the best combination of patient benefits, reliability and cost. But you may reach another conclusion. Be deliberate, make a decision and see it through. And do not overlook the capital requirements in the decision-making process. If you need to buy 100 portable oxygen concentrators but do not have enough capital, do not begin buying them. Choose a different business model.
This article originally appeared in the Respiratory & Sleep Management February 2012 issue of HME Business.