Oxygen Outlook

Adapting to Survive; Adapting to Succeed

The oxygen industry may be stable, but competitive bidding and audits will endure through 2014, hampering oxygen providers’ ability to increase cash flow. The time to change is now. Industry experts offer tips to help respiratory providers find success in the new oxygen landscape.

Annual Oxygen OutlookAfter a challenging 2013, which included another round of Competitive Bidding, an onslaught of audits and new and enlarging potholes impeding the road to growth, providers are preparing for a precarious 2014.

“Based on the recently released Medicare 2012 data and input from many key oxygen providers, it seems as though the home oxygen market has flattened,” says Joe Lewarski, vice president of Clinical Affairs for Invacare Corp. “In theory, with the growing population of patients with COPD and earlier identification of the disease it would seem logical the home oxygen population growth should at least be stable, if not increasing.

“However, the increased documentation and paperwork requirements associated with the heavy audit activities may be adversely impacting claims and potentially, new oxygen orders, as physicians struggle with and adapt to the myriad new documentation requirements,” he notes.

The dynamics of change to oxygen qualification, the impact of competitive bidding, and increased audits have created what Karen Butterton, COO of Barnes Healthcare, calls “the perfect storm,” and she says it impacts a very critical area: cash flow.

As providers do their end-of-year assessments and planning for 2014, HME Business magazine interviewed industry experts about the status of the oxygen industry, what to look out for in 2014 and how providers can find success among the oxygen industry’s many challenges.

Joe Lewarski, Vice President of Clinical Affairs, Invacare Corp.

Although Joe Lewarski says the jury is still out on the full impact that Round Two of competitive bidding will have on providers in 2014, he feels much will depend on the structure of the individual business.

“If you are an oxygen-focused provider without a contract, it will likely have a material effect on your company because Medicare patients typically represent the majority of home oxygen users in most markets,” he says. “There will be continued industry consolidation, as providers sell, merge or exit the business. If you are a competitive bidding contractor, you will likely experience growth and, therefore, need to have a plan and infrastructure to operate your oxygen program profitably at such low reimbursement rates. Companies with strong and lean operational models, highly efficient billing, strong cash flow and excellent credit are likely positioned to survive with such lean margins.”

He points out that most private insurance companies cover home oxygen when medically indicated, but most mirror the Medicare coverage criteria, with the fee schedules varying greatly by both geography and company. Whether there are enough viable oxygen patients outside of Medicare to sustain a non-Medicare oxygen business, Lewarski says it depends on the specific marketing and the specific company’s business model.

“The combination of Medicare Advantage (HMO), Medicaid, private insurance, Hospice, long-term care and retail (cash sales) can offer providers a large and diverse population of oxygen patients to serve,” he says. “The business models for each of these different customer types can vary. Length of use, technology needs, clinical needs and payment models can vary greatly from the Medicare monthly rental. That said, some companies operate very successful oxygen businesses with little or no traditional Medicare patients.”

As challenging as competitive bidding is for oxygen providers, Lewarski says audits have the potential to have a more dramatic, negative impact on providers than competitive bidding. Reasons include audits impact all providers, are less predictable and are often subjective and error prone.

“Audits have stymied cash flow for many providers, as claims pile up while providers work to get copies of medical records and documentation that was not previously required,” he says. “This is especially true in pre-pay audits. It has also strained the relationships between the provider and referral sources, as the providers are forced to take hard stances to avoid audit errors and increased financial exposure. I think audits will continue to ramp in 2014 across all healthcare providers, especially HME.”

Like the pre-pay audits, the new face-to-face rules will force new levels of physician documentation and sharing chart notes and other elements of the medical record, says Lewarski. New face-to-face rules have the potential to strain the relationship with the referral source and can negatively impact patient access to medical devices if physicians simply give up and refuse to complete paperwork.

“It will be more complicated for a physician to order a home hospital bed than arrange for an MRI or prescribe an expensive new drug,” says Lewarski. “In regard to the oxygen business, I don’t think it will have much impact, as a face to face has long been a requirement for ordering home oxygen.”

Outside of competitive bidding and audits, Lewarski says the greatest, immediate concern for most providers is the potential for private insurance companies and Medicaid programs to lower their fee schedules to the Round Two rates.

So what can oxygen providers do to counter all the recent challenges facing the oxygen sectors of the HME industry?

“Companies with strong and lean operational models, highly efficient billing, strong cash flow and excellent credit are in the best position to adapt and change to the market,” Lewarski says. “Increasing your focus on non-Medicare patients and non-NCB markets is essential. The combination of Medicare Advantage (HMO), Medicaid, private insurance, Hospice and long-term care and retail, cash sales can offer providers a large and diverse population of oxygen patients to serve.” Lewarski’s top-5 tips for growing an oxygen business in 2014 are:

  • Develop a lean, operationally efficient home oxygen program. Critical to this model is adopting or expanding the use of non-delivery solutions, such as the HomeFill® System and POCs.
  • Diversify your oxygen patient population by expanding payer types and business models.
  • Expand your geographic footprint, focusing on non-NCB markets. This is easier to do today because of non-delivery systems.
  • Establish relationships with health systems and ACOs.
  • Take advantage of cash sales of new technologies.

Karen Butterton, COO, Barnes Healthcare

Karen Butterton’s company, Barnes Healthcare, did not win its Round Two oxygen bid. Going into 2014, Butterton has to navigate her company though the impact this loss and the long-term effects of competitive bidding in general will have on her bottom line.

“Our bid was based upon our ability to make a profit and sustain in the industry,” she says. “The companies that submitted these lower bids did not understand their cost structure and the overall impact to their gross margin and bottom line. Also, Medicare, in many cases, is the forerunner and now MCOs and Medicaid are reducing their rates accordingly. The bid competitor’s bid level is incomprehensible to sustain a company in this industry. In fact, we did not bid on most items — we bid only on specific categories that complemented our current business model and our future strategy. If they had asked us to accept, we would not have accepted the bid at these rates. Why? At the end of the day, Barnes wants to continue doing business for another 104 years.”

According to Butterton, Round Two has impacted her business because discharge planners cannot handle all the various nuances to competitive bidding providers.

They have to determine at this juncture who won what bid for what type of equipment in this MSA, she says.

“Referral sources are looking for options that will make the referral process easier,” Butterton says. “They don’t want to sift and determine what company has what managed care contracts. The discharge process has become very complex.”

For those companies coming up short in the Round Two bidding process, Butterton recommends that they create solution-based programs for reducing healthcare costs. They have to rethink their strategy and align with the current shift in the industry — from acute care to outpatient facilities and the home — developing robust relationships in the community, developing infrastructure, data, and technology to manage population health, move from treating sickness (episodic care) to managing populations and finally moving away from adversarial payer-provider relations to collaborative payer-provider relationships.

“Payers are focusing on reducing the medical cost trend; linking reimbursement to value creation, based on quality, cost efficiency and patient experience; creating product and consumer strategy that steers members to the highest performing providers; and providing members with reliable quality and cost information on providers,” she says. “Providers must identify patients at risk and develop protocols for prevention, working across the care continuum; share and aggregate information; and align and manage incentives between healthcare stakeholders.”

One thing you won’t find Barnes Healthcare doing in 2014 is subcontracting because Butterton says the company doesn’t want to be paid lower than the Medicare reimbursement or support another company’s bid award.

“Inherently, except for the nationals, all those who chose to compete in the bidding process needed to understand their cost model, and from their bids, you can quickly discern that they are not in touch with their costs,” she says. “Companies are unable to remain solvent. We are quickly seeing a reduction in providers across the country and some estimate what used to be 8,000 plus providers will reduce to under 2,500 in the future.”

To counter the recent cuts, Butterton says her company has done the following:

  • Exited out of unprofitable business and/or low-margin business and developed new revenue streams
  • Diversified payer mix, product mix and added additional business lines to complement and increase revenue per patient
  • Created business models that provided solutions to reducing healthcare costs
  • Revised the incentive compensation program around the highest margin business and created ROIs for each sales rep
  • Created a formulary tying all contracts and all purchases to its formulary and insure that its product fleet meets a 5-year life cycle.
  • Created partnerships with vendors and close ties with credit managers
  • Implemented GPS route optimization for delivery costs and developed staff efficiency reporting for performance output
  • Implemented and optimized new computer system
  • Utilized every facet of the computer system: perpetual inventory, bar code scanning, serialized tracking, contract management, interface ordering, EDI, and implemented electronic bar coding charts
  • Created a Biomed Department to reduce preventative maintenance costs and maximize asset management
  • Implemented just in time inventory, in which they currently have seven days of sales inventory on hand, which is more effectual than turns because it is based on last month’s sales (They turn four times a month or 48 times a year)

“It’s not about growing your oxygen business in 2014 and hereafter — it is about offering solution-based selling to assist with healthcare cost reduction,” says Butterton. “Episodic care is going away and bundling of services is forthcoming. A company needs to understand every facet of its cost structure and how it might position itself in the market place and prepare for future revenue streams. The RT/DME providers cannot stand-alone any longer. They must coordinate and collaborate with other providers and solidify a futuristic strategy.”

Kim Brummett, Senior Director of Regulatory Affairs, American Association for Homecare

While Brummett says the oxygen industry was “very strong” in 2013, she points out that it did experience “large hurdles” in terms of pre-pay audits from the DME MACs. The repeated ‘clarifications’ to the oxygen LCD by the Medicare carriers has really changed the requirements for oxygen to the point of precise wording from the LCD, she says. And going into 2014, she says providers will face the continued issue of dealing with audits from the carriers.

Many oxygen providers in the country have hundreds to thousands of patients who do not now qualify for oxygen under the Medicare benefit, Brummett says. And with many of the updates, changes or clarifications that the industry has received from the Medicare carriers come the challenges with how to handle patients on service currently who now do not qualify.

“Providers cannot simply pick up the equipment, so many are fighting through the appeals process, which can take one to two years to resolve,” she says. “Another angle often employed is to explain to patients that they no longer qualify under Medicare and now have to sign an ABN and pay privately until re-seen by their physician, has appropriate clinical documentation and/or has another saturation test that meets clarified criteria.”

Another issue that Brummett says will increase in 2014 in part due to competitive bidding Round Two and continued audits is patients having providers that go out of business. She explains that as this occurs these patients are abandoned. They are in their homes on oxygen with no one to service them or assist them when the equipment breaks or there are issues. Current providers cannot afford to take care of these patients either because the patient is in a competitive bid area and they did not win the contract or Medicare has paid close to the capped number of months and the cost of the care significantly outweighs what Medicare will pay.

As far as how the face-to-face rule will affect oxygen business in 2014, Brummett does not believe it will have much of an impact on the oxygen business as oxygen already requires a face-to-face visit prior to setup. The requirement to get a written order prior to delivery is a slight challenge, but not insurmountable, she says.

Scott Wilkinson, Executive Vice President of Sales& Marketing, Inogen

Overall, Wilkinson says oxygen providers still have market demographics in their favor, as there continues to be a rising prevalence of COPD, and the oxygen market is still posting strong net growth in terms of patients. These market dynamics, he says, continue to make oxygen therapy an attractive space for home medical equipment providers.

“But obviously the oxygen reimbursement reduction driven by competitive bidding creates challenges for all of us,” Wilkinson says. “If you won bids, your reimbursement level was cut dramatically, and if you lost, you are scrambling to find a way to replace your Medicare oxygen therapy income. Round Two competitive bidding covered a large part of the country and impacts a significant portion of the oxygen provider community. In some respects, Round One created a lot of noise, but only a small number of providers were affected, but Round Two touches almost everyone in some way.”

An equally impactful roadblock to growth is the ongoing audits and the associated paperwork requirements required to do business with Medicare. This issue impacts all oxygen suppliers, even if their business is primarily outside of competitive bidding areas. Audits in particular seem to create a great deal of waste and distraction away from the business of patient care, he says.

Along with this article’s other experts, Wilkinson agrees that competitive bidding and audits are top concerns for 2014. He also adds collecting co-pays efficiently and effectively to the mix.

For a company that lost bids, Wilkinson recommends that they consider subcontracting if they have excess capacity and are efficient, such that they can provide services to other providers at a rate that more than covers their costs. Companies should not engage in subcontracting just for the sake of subcontracting, he says — there isn’t enough money through the reimbursement channel to cover an inefficient subcontractor or one that does not add value.

Wilkinson believes that oxygen providers should do the following to be successful in 2014:

  • Build your business for the future with a non-delivery model. Reimbursement cuts are here to stay and its essential to have a model that provides great service at the lowest possible cost. The non-delivery approach delivers lower total costs to the providers and also enhances patient satisfaction — it’s a win/win approach.
  • Make sure your paperwork supports a claim before you take on a patient. The lower rates simply don’t allow for patients on service without billing, so it’s important to make sure at patient intake that things are solid and will withstand the scrutiny of an audit later.
  • Collect those co-pays. Again, with the lower reimbursement rates today providers cannot afford to render services without collecting co-pays. Make sure expectations for co-payment are set up front during the intake process — we can learn a lot from physicians in this area.
  • Expand private insurance contracts. With more patients being prescribed oxygen at an earlier age than in the past, the private insurance segment is growing.
  • Do SOMETHING different. Find a way to add value to patients or physicians that separates you from the competition. It’s difficult to succeed if you just try to do a better job at what everyone else does. Find your own differentiation point and make a big deal about it.
  • Look for opportunities to add cash sale products to your business.

Brett Townsend, Marketing Director, CAIRE

Townsend says that Round Two non-bid winners can thrive in the oxygen market by embracing new technologies, such as portable oxygen concentrators, and pursuing a retail and Internet distribution channel. He says that patients who have been burdened with oxygen cylinders are increasingly willing to purchase or rent POCs due to their advantages in travel and ambulatory options.

“The biggest missed opportunity within the U.S. HME community is continued reliance on traditional oxygen cylinder-based business
models,” says Townsend.

In fact, he says providers must aggressively incorporate POCs, which have significant advantages in patient compliance while also driving more referrals by allowing differentiation versus other HME providers.

“HME providers should evaluate when expanding in the oxygen market the financial footing of their manufacturing partners,” he says. “Reduced reimbursement could prove challenging for small companies with limited product portfolios and obtaining parts and service could prove difficult for the HME provider down the road.”


Butterton says that oxygen industry members need to move away from the mindset of “survival “ and begin to think outside of the box to determine how they can thrive in the new healthcare arena.

“The Affordable Care Act will demand healthcare cost reduction and we, as an industry, need to be a part of the solution,” says Butterton. “I am always reminded that in every crisis, there is an opportunity. Barnes is leveraging itself to capture that opportunity.”

Homecare providers must embrace change in order to cope with the new reimbursement environment. If they are waiting for their world to go back to where it was before this volley of cuts and caps, their companies could wither in short time. According to Wilkinson, one problem with the homecare community is that it spends more time and effort trying to stop changes versus managing them.

“Reimbursement cuts are not going to go away, and the deep cuts we now face from Round Two competitive bidding force change,” he says. “Homecare providers do not have enough margin in their business to offset 45 percent reimbursement cuts by doing things better — they have to do them differently. Some things that have been taboo, like co-pay hardship waivers and up-front paperwork requirements, have to be revisited. There simply isn’t enough reimbursement to do things the same way — but the providers that embrace change, use technology to drive efficiency, continue to ask ‘why?’ and ‘what if?’ will have success. The market is still in our favor.”

This article originally appeared in the December 2013 issue of HME Business.

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