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The HME supply chain is evolving in ways that can strengthen providers' ability to expand their businesses. How is it changing and how can HME businesses adapt?

HME supply chainAs the saying goes, if there’s one thing that is for certain, nothing is for certain. Such has been the case for the home medical equipment industry, which has found itself in a constant state of change for roughly the past decade. Various Medicare policies and funding cuts have forced providers to completely redefine how their businesses work, and sometimes even their entire business models.

How providers supply their customers is case in point. Back when providers could depend on Medicare reimbursement to drive 80 percent of their revenue, providers maintained a very straightforward, largely manufacturer-direct supply model. Providers ordered the DME from manufacturers; put that DME in their warehouse; delivered it to patients; and billed Medicare. That model might not have been ideal, but it worked.

Unfortunately, in 2014, that model does not work. Some providers, whether due to competitive bidding, capped rental or other combination of Medicare policy changes and reimbursement cuts implemented over the past decade, cannot afford to order product, maintain inventory, and supply patients in the old way. Because of that, they are looking at new approaches to the HME supply chain.

Breaking with Tradition

As mentioned, the traditional HME provider supply chain model has functioned largely on a billed-as-needed sort of model. Providers maintain a warehouse (or warehouses) of durable medical equipment and supply items. However, as reimbursement cuts have had their affect on the industry, providers have tried to minimize that inventory footprint so as to reduce the hit to the bottom line — a critical effort given that inventory typically represents a providers’ single largest overhead item.

“The supply chain previously was more paper and purchase order-oriented, whereas now it is about how quickly you can get it, how efficiently you can get it, and therefore inexpensively you can get it,” says Ryan McDevitt, major account manager for HME industry software company Brightree LLC. McDevitt and Brightree work with a providers to use IT to fine tune their businesses in various ways, including their supply chains, inventory and purchasing processes.

Providers have become expert at trying to have just the right amounts of resupply and heavily ordered items in stock, while ordering bigger, more expensive, but less frequently ordered items on an as-needed basis. And, to that end, HME providers’ software systems have become critical resources in helping them reduce inventory-related expenses while maintaining optimized supply. (To learn more about these tools, read the sidebar “The Inventory Balancing Act,” page 24.)

Now, even that model is changing. Regulatory and reimbursement reality is forcing providers to reconsider how they approach their distribution models altogether.

“You don’t get as many dollars, and the dollars you do get, you get slower,” McDevitt explains. “That’s the driving force for innovation and interconnectivity between your supply chain and your patients.”

“It’s changed a lot,” says Jeremy Stolz, vice president of VGM Fulfillment, which is the largest consignment-based CPAP resupply company in the United States. VGM Fulfillment ships CPAP supplies to patients on behalf of providers, with manufacturers billing the provider for the cost of the product, and VGM Fulfillment billing the provider for the shipping and handling.

“We’re adding more customers now than ever,” Stolz continues. “There’s more interest in this program than there’s ever been. With competitive bidding, providers are making decisions now that they wouldn’t have made three years ago — because they are tough decisions to make.”

And those tough decisions are fixated around how much inventory and hands-on delivery should providers be doing? The question has gone from “how do we make this process more efficient,” to “do we need to be doing this process at all?”

That’s a scary question, but when you take a moment to reduce the scenario to its component parts, providers can start to see new supply strategies and scenarios come into focus. McDevitt breaks the basic elements of provider supply into three elements: how providers contact patients, how providers contact vendors, and how providers get the equipment to the patient.

“Ultimately we used to depend more on phone calls and gas in our trucks,” McDevitt says. “Now with each of those elements, we have three or four different options that could work within a provider’s organization.”

Distributed Supply

Which is why providers are starting to work with distributors to order product for patients that gets drop-shipped to the patient’s home, and the provider never actually physically touching the inventory. The product is boxed in packaging that is branded to the provider, so from the patient’s perspective, the entire process happened with the patient, and the distributor is essentially invisible. In this case, now the UPS driver becomes a partner in the process, delivering items that don’t require specialized set-up, and in-house delivery staff is reserved for its expertise in set up and training on more complex items.

That said, there are different approaches to this arrangement. In VGM Fulfillment’s case, the provider orders the DME electronically; VGM integrates with their billing system and provides information to the provider to help it start its billing process; and VGM ships the product for them. The manufacturer and VGM both bill the provider and the provider saves in inventory and delivery costs.

“We’re getting the stuff there just as fast as the provider can do itself,” Stolz said. “We’re likely to have every piece of equipment in stock, so we’re speeding up their DSO by quite a bit.”

That approach is just one model. Other companies such as McKessson function as distributors that are working directly with the provider and then shipping to the patient. But, regardless of approach, the provider doesn’t have to stock thousands and thousands of dollars of inventory.

“It’s almost of the opposite of conventional purchasing,” Stolz says. “Instead of buying a bunch of product and hoping you sell it, you sell the product and then you buy it.”

“From a financial perspective, those that are utilizing a distributor, their overheard or inventory asset is minimal, because they don’t have to maintain stock in-house,” says Richard Mehan, president of HME software company Noble House, which also helps provider businesses implement these sorts of solutions. “We have some very large providers that do have a warehouse with their own inventory, but a lot of our base is of the model that makes them perfect candidates for a distributor.”

Certain things lend themselves to drop shipping more than others, such as sleep products, incontinence items, or diabetic supply. Resupply and replenishables are ideal for the drop-ship approach.

“I don’t think it’s prefect for every provider,” McDevitt notes. “You have to do a fairly significant volume of products … anything that has a replenishable.”

What is likely is that providers could wind up approaching inventory and supply chains in a bit of a mixed fashion. For instance, it might keep beds or power mobility devices in the warehouse, and deliver those items to patients on its trucks, so that provider staff can perform set up and tutorial. Meanwhile incontinence products or diabetic supply items would get drop shipped.

But again, the key is that for the drop-shipped items, the provider working with that distributor’s inventory as if it was its own inventory, so that it can tell patients what items are available. Financially, the provider is not treating the inventory as though it were a cost. Call it “virtual inventory.”

“They [the provider] populates their inventory management software with the appropriate part numbers and they basically ignore quantity on-hand,” Mehan explains. “Depending upon the distributor, we have an interface where the request will go to the distributor electronically. So the distributor receives the electronic request that contains all the demographic information for the patient, and the items that are to be received. So the system automates that process.”

Of course, this arrangement begs a question about pricing: How are prices set in a distributed/drop-shipping arrangement? Typically, the larger drop shipping vendors have pass-through pricing, which means that a manufacturer would pass the provider pricing through the drop shipper, so the provider can negotiate directly with the vendor, McDevitt explains.

“That still allows for a traditional relationship, which is great, because the larger manufacturers are really the ones that educate providers on how to dispense their product and ultimately do the best with those products,” he says. “Because I don’t think you can live in that world where you’re doing replenishable meds or trachea tubes if you don’t provide the education to go with it.”

Maintaining Control

So how should providers approach a drop-ship model? Start easy and pencil it out, Stolz says.

“How I think it should evolve is that providers should start looking at using distribution for the things that make sense,” he explains. “I think that they should be taking a close look at what’s costing them the most money. Having trucks out on the road delivering items is very expensive.”

That lets providers focus on what they’re good at, “which is taking care of the patient; not taking care of warehouses,” he adds. So, the provider should look at its cost model for delivery and carrying inventory, which isn’t necessarily a simple calculation when factoring in obsolescence.

It’s important keep in mind that relinquishing control over product doesn’t equate to relinquishing control over the business. Providers must keep a firm grasp on how on how product distribution is working. What gets measured gets managed, so, providers must start reporting on drop-ship performance.

A good place to start would be to gauge the performance of the distributors and vendors with whom the provider is working. A few good metrics in this regard would be the time elapsed between acceptance of an order to the fulfillment; the time between date of order and payment of order; and the cycle time for any replenishable item.

Moreover, converting a portion of the supply to drop-shipping isn’t a slam dunk. Once the process is in place and automated, the provider must go back and check its own work and review the cost model of the warehouse and compare to see if money is truly being saved on the back end.

“The tricks are in the ‘look back,’” McDevitt says. “Let’s say I’m going to do a traditional drop-ship model, and I’m going to all of my new set-ups out of my warehouse, and all of my re-supply via drop-ship. I think that the only true way to find out whether that wins for your company is to automate that process; when your customer service rep sends that order that nobody else has to touch it.

“You have to look back at a quarterly or annual comparison of what that really means for your company,” McDevitt continues. “Because some organizations do better by employing more people, because they exist in a community where local wages or cost of real estate allow them to do that.”

Also, branding also remains a key point of maintaining control.

“When you talk about outsourcing and distribution, providers’ fear — and it’s a valid one — is that they don’t want to look like they’re outsourcing these services, and distancing themselves from the patient,” Stolz explains. “And that’s the last thing we want, as well.”

So the provider must ensure that the entire process remains invisible to protect and reinforce the provider-patient bond. All packing labels, boxes, documentation, etc. needs to be connected to the provider.

Acceptance and Adoption

So, are providers truly adopting this model? At one time, drop-shipping sometimes could draw sidelong glances from providers suspicious of its reputation as a tool of less scrupulous businesses. However, that was then and this is now. If “drop-ship” was a dirty word five or six years ago, now it’s getting serious consideration — and integration into the business.

Stolz says VGM Fulfillment sees increasing use by providers and adds that he is certain other distributor-type companies or manufacturers with distributor services are seeing similar uptake.

“The shift for us has been over a period of four years that we’ve seen increased business coming in,” he says. “And there hasn’t been a sudden demand or switch. What there has been is — like with any product or offering in our industry — once there is acceptance by providers, word of mouth travels so fast … and once they hear that something is working they will typically adopt that offering.”

McDevitt says that the change really comes down to providers considering their core competencies. Once they do that, the more “how to” elements of their supply chain become less fundamental and open to change.

“One of the things that we need to accept is that we are in the documentation business,” McDevitt says, explaining that providers are moving towards collecting documentation up front, such as the face-to-face documentation and eligibility information for the patient. Beyond that, they need to ensure the product gets to the patient, but how that happens is becoming less of a concern. The back end can become distributed in the long run, and the provider focuses on ensuring patients get what they need, and educating them on how to use it. That restores and reinforces the quality of care that providers have worried might diminish in the rush to cut costs.

“This business model is truly a win-win-win,” Stolz says. “The vendor wins, because they’re selling more product. The patient wins because quality of care increases. And the provider wins because they save the cost of doing it themselves.”

This article originally appeared in the September 2014 issue of HME Business.

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