Six Truths About Oxygen
On March 30, 2005, the Department of Health and Human Services Office of Inspector General (OIG) issued the final reduced Medicare oxygen reimbursement amounts as required by the Medicare Modernization Act of 2003. Though the amounts were reduced by a smaller percentage than the OIG had originally proposed, the cuts had a dramatic effect on profit margins.
It’s not enough anymore just to be prepared to run your daily operations in normal conditions. You’ve got to be prepared for external factors that you have no control over, like fuel increase, like energy increase, like forces of nature. — Michael Walsh, president of LifeGas
“Both the changes in reimbursement and gasoline prices have made it much more difficult for home care providers to operate profitably,” says Carla Laureano, the marketing manager for CHAD Therapeutics. “Home care is already a low-margin, service-intensive business, and providers are now having to look at more economical ways of doing business.”
With the new Medicare monthly payment amounts ranging from $194.48 to $200.41 for stationary oxygen and from $30.57 to $32.08 for portable equipment, reimbursement cuts are possibly the biggest setback to the home oxygen delivery market. Some manufacturers predict reimbursement cuts will impact profit margins far into the future. “As we look ahead in the future, it’s probably the best that we could expect is that reimbursement would stay the same,” says Invacare’s Wilkinson. “And it’s probably even more likely that if you look far enough out, it will be cut again somewhere down the road.”
Part of the reason reimbursement is such a big issue is that the market is growing so rapidly. What could mean big business for dealers — more people diagnosed — is balanced by the burden of increasing expense for the government. And that means the possibility of more reimbursement cuts. “At the same time, as the market grows,” says Wilkinson, “it puts more pressure on the reimbursement market because Uncle Sam is trying to control their costs.”
LifeGas’ president, Michael Walsh, says reimbursement cuts have impacted what his customers can charge their patients. “When those caps are reduced or cut back, there’s pressure all the way through the value chain, which goes back to us as the supplier. So we have to constantly … stay lean and mean in order to continue to make a profit in this market, so that our customers can make a profit.”
Walsh talked to his clients during the Medtrade show in Atlanta to find out about the challenges they face. “From the individual conversations that I had … a lot of it has centered around one, finding more products to sell to the patients, more services to the patient, and second, you always have this looming over them the cost cutbacks: How can they become more efficient with the government cutting back on their reimbursement?”
For providers, even getting oxygen to patients without cutting into profits already reduced by reimbursement cuts is becoming more difficult. The Energy Information Administration in Washington, D.C., estimates that the average gas price will be up $0.60 per gallon to $2.45 in 2006 from just $1.85 in 2004.
Walsh says that rising gas prices have definitely put a damper on profits because it now costs more to deliver oxygen. “This year has been a real struggle for us to keep up with the increase in energy costs,” says Walsh.
Part of that struggle, at least after the hurricanes, was finding adequate supply, says Walsh. “We’ve formed relationships with … companies like Penske and Ryder to make sure that we can purchase fuel from them.”
The flip side of the coin, says Walsh, is rising energy costs on the whole. Electricity is a major component of making oxygen, and energy costs are expected to increase by 4.5 percent from 2004 to 2006, according to the Energy Information Administration. Fluctuations in market demand and unexpected weather conditions, such as the hurricanes experienced in late 2005, make even these energy predictions uncertain. Percentages could easily rise much higher.
“Moving back a step, the air separation plants, which are the huge facilities that make the oxygen,” says Walsh, “there’s a large component of energy that goes into making this product and we looked at doing forward purchases on power costs.”
Invacare’s Wilkinson, on the other hand, is optimistic about the challenges on the oxygen front for 2006. “I’ll tell you though, what a lot of people would see as setbacks, which would be reimbursement cuts, rising fuel costs and the threat of competitive bidding, I think they are temporary setbacks,” he says. “To be honest, I think that they drive more efficient ways of operating a business. And I think you’re seeing a lot of what I’ll call ‘non-delivery’ oxygen products introduced in the market and it’s driven by these market dynamics.”
Constructing A Raft
Wilkinson asserts that the revolution of replacing traditional home delivery with “non-delivery” oxygen products has already begun.
“A long time ago, people used to deliver ice to folks’ homes and they had ice boxes,” says Wilkinson. “And then along came the refrigerator, a better technology, and it essentially rendered delivering ice obsolete. And I think with the newer technology products in oxygen therapy … is these things take hold and they’re a superior economic model, it just doesn’t make sense to deliver oxygen.”
For that reason, some manufacturers are gearing new technology toward allowing patients to refill oxygen tanks in their homes, thereby reducing the patients’ dependence on oxygen deliveries and addressing the stigma of oxygen trucks in driveways. The benefit for dealers is the virtual elimination of delivery costs.
Invacare’s home oxygen system, HomeFill II, provides unlimited portable oxygen through an oxygen concentrator, a compressor and portable cylinders.
“The beauty on the home care provider side,” says Wilkinson, “is that they eliminate the cost of those deliveries. And with Medicare reimbursement cuts … providers struggled with how do I continue to supply outstanding service to my patients but yet still make a fair return on my investment? And HomeFill is a way that they can accomplish that and give the patients better service than they could ever give them delivering oxygen, and yet they save money to boot because of no contents costs and no delivery costs.”
“All reimbursement cuts force providers to take a close look at their operations, even in those areas that are not directly affected,” says CHAD Therapeutics’ Laureano. In the wake of reimbursement cuts, CHAD Therapeutics has launched the TOTAL O2® Delivery System, a home oxygen system that incorporates stationary and portable oxygen in one unit. The system is a win for both the patient — who gets the convenience of filling their own portable oxygen cylinders at home — and the provider — who reduces overhead by eliminating costly deliveries while still maintaining the same standard of care for the patient.
On the other hand, LifeGas’ Walsh says the company’s “fastest growth segment is delivery to patients’ homes.” To help smaller home care providers, the company launched LifeGas Express, a service that transports oxygen directly to the patient’s home on behalf of the home care company.
“It’s been a good marriage for us with home care,” says Walsh. “We don’t provide any of the therapy. We’re basically an operating company that’s very good at getting things from point A to point B and producing oxygen.”
In 2006, LifeGas Express expanded to include delivery in 40 major cities.
For dealers who are continuing to deliver oxygen, rest assured. New oxygen technology is focused on oxygen products with improved efficiency.
CAIRE Inc. is introducing a conserving device for the company’s liquid storage vessels that will “double the usage time and reduce in half the delivery times,” says Vice President Jeff Hennelly. He says many of the company’s dealers have coupled these devices with the implementation of satellite delivery systems, which further improve delivery efficiency.
Luxfer Gas is improving how much oxygen a patient gets in a standard tank. With a new patented alloy, the company is able to deliver tanks with pressures at 3,000 psi, as compared to standard 2,000-2,200 psi, says Sales Director Rob Dupuis. “We’ve got a cylinder that will weigh essentially the same as the 2,000 psi tank but hold 50 percent more gas,” says Dupuis.
“And there are benefits to all of the people involved,” he continues. “The benefit to the patient is they can now extend the time that they’re away from the house with the same size tank — because you’re holding 50 percent more gas — or they can carry a lighter weight, smaller tank and get the same … ambulation time that they would have with a larger tank.”
For HME dealers, that means leaving 50 percent more oxygen with the patient, thereby reducing delivery frequency by half. “It costs about $50 a trip to a patient’s house,” says Dupuis. “So if you’re in the once-a-month delivery situation, you’d save around $200 in delivery costs to the patient, or if you were twice a month, you’re going to save in the neighborhood of $400 in delivery costs to the patient on a per year basis. The savings are quite dramatic.”
One of the biggest trends in the oxygen market is making oxygen cylinders portable, incorporating such things as discreet carrying cases, so patients will not have to cart around large oxygen tanks.
“There’s more emphasis on portable systems, more emphasis on being out away from home,” Wilkinson says. “So that drives manufacturers like ourselves to develop products that will provide ample time away from home … like being small and lightweight and inconspicuous.”
CHAD Therapeutics’ Laureano agrees. “With oxygen reimbursement cuts and rising gasoline prices, single-solution products like home transfilling concentrators and portable concentrators will continue to be the technology of interest in the coming year.”
Hennelly says CAIRE is answering the need for portability with a new lightweight liquid portable unit called the Spirit 600 that will last more than 14 hours. Hennelly says that “with all of the portables before, they’d only last six to seven hours, and … if the patient went to work, they’d have to go back to their house or go somewhere else to fill it.”
Part of what is driving the switch in oxygen products is the new dynamic in the market generated by baby boomers. “They’re a more demanding group of people,” says Wilkinson. “They’re not satisfied with just some of the old style equipment that people dropped off in their home. … They want things that look nice or that look inconspicuous. They demand things that are easier to use. And they’re willing to switch providers and manufactures if they don’t get them.”
Back on the Boat
As in most home care markets, there’s a substantial amount of good news and bad news for home delivery.
First, the good news: The market is growing and technology is enabling companies to cut down on costs.
“Home care providers are becoming increasingly more sophisticated in how they provide oxygen to their patients, and that?s good for the business in general,” says CHAD Therapeutics’ Laureano.
Laureano puts her chips on oxygen concentrators in the future. “Oxygen concentrators will likely remain the preferred method of oxygen delivery, but as technology advances, they will no longer be ‘just’ oxygen concentrators.” She says products that “incorporate an ambulatory component serve both the patient and the provider better than a standard concentrator, and so they are likely to grow in popularity.”
In addition, how people use oxygen is changing. Wilkinson says, “People are coming to the consensus that why should I be tethered to the oxygen concentrator even in my home when I can use these portable cylinders?”
As a result, technology is changing to make oxygen devices that are portable, lightweight and easier to use.
Now, the bad news: It costs more to operate a business today than it did two years ago and profit margins are significantly scaled back.
“I think the key thing is that there’s pressure clearly from an inflationary standpoint,” says Walsh, “so we’ve got to find ways internally to become efficient to mitigate those external factors that we can’t control. And then, from a revenue standpoint, with pressure coming on the top line with specific products in this industry, we need to focus on other sources of revenue. … I think those are the two big drivers for 2006.”
In addition, Walsh says you have to be prepared. “It’s not enough anymore just to be prepared to run your daily operations in normal conditions.” He says, “you’ve got to be prepared for external factors that you have no control over, like fuel increase, like energy increase, like forces of nature.”
As more dealers brace for rising costs and future cuts in reimbursement, that means bad news for home delivery as a whole.
Walsh says “a big part of the focus is on distribution. How can you take some of that cost out of distribution, the cost of getting the product from A to B?” He says that in addition to becoming more efficient, companies will have to introduce new products to answer that question in the future.
Invacare’s Wilkinson sees it in a different way. “We see delivered oxygen as being obsolete when we look out into the future.”
Pre-Owned Supplies Could Save Dealers Money
Dealers hit hard by reimbursement cuts have another option to reduce costs and increase profits — pre-owned equipment.
Dusty Muck, vice president of sales and marketing, says that Healthcare Dynamics Inc. offers refurbished equipment at 25 percent below manufacturer cost, which can help companies “lower product costs on the front end to save money on the back end.”
Though pre-owned equipment is not something many dealers consider when looking at cost-saving measures, Muck says, “There is a market out there for pre-owned equipment by reputable companies in which you can save money.”
Companies like Healthcare Dynamics purchase and sell oxygen equipment (and many other types of DME) and then employ technicians who repair and update the equipment to the proper specifications.
“I realize we’re not going to be the answer in all cases,” says Muck, “because you have your private insurance companies that say ‘you can’t use pre-owned on our patients’ and Medicare/Medicaid in some states is regulated that way also.”
Still in 13 years, Healthcare Dynamics has served companies as large as Apria to smaller mom-and-pop providers. Muck says, “Whenever you have decreasing profits, Healthcare Dynamics can be the solution in so many cases for your rental programs.”