Monday, December 31, 2001

It appears that the home medical equipment industry has reached a crossroads in its evolution - a juncture where HME providers face a decision of going one way or another to avoid hitting an abutment.

Industry navigators say the fork in the economic road branches out in two distinct and different flanks: one way points to the more familiar durable medical equipment or "bent metal" business; the other leads to uncharted territory in the clinical, or "white lab coat" field.

Traditional DME - beds, wheelchairs, scooters, walkers, canes and crutches - typifies the bent metal business. It's the prototypical home care operation, furnishing equipment for sale or rental, accepting Medicare assignment and conducting Part B billing. To boost profits, many of these companies are placing greater emphasis on retail cash sales. Rehab services are also a major part of the bent metal market.

The clinical side includes the mainstays of respiratory and infusion, but increasingly the white lab coat sector is being defined by chronic care protocols, such as clinical pathways, disease management, outcomes measurement and sleep studies. Advances in home-based diagnostic and therapeutic technology are opening new horizons for providers in this area.

Although many providers have casually straddled both of these sectors, each side is gradually becoming more specific in their characteristics, forming divergent paths. As a result, those jack-of-all-trades providers will soon run out of road unless they decide which route to follow, observers say.

"Organizations are definitely beginning to choose their core competencies," observes Mario LaCute, president of Andover, Ohio-based Seeley Medical. "Within that, they are deciding to pursue very specific directions."

Moreover, these arteries are splitting off into other trails that venture into even more unexplored terrain. Each of the industry's halves - DME and clinical - contain a grid of sub-specialties that require narrowly specific skill sets.

This means providers will soon have to make some profound decisions about how to proceed. Traveling the same well-worn road is not an option. It's either left or right and there's no turning back, pundits say.

While some organizations may have a clear idea about where they're going, others may be hesitant. In order to decide which way to go, providers need to review the circumstances that are pressuring the industry toward this critical stage of development.

To help readers evaluate their position, HME News offers two reports that analyze how the bent metal and white lab coat markets are developing and where they are headed in the future.

- Forging bent metal
- New distribution paradigm emerging
- focus on service and education touted
Small HME shops need to face a stark realization about the future of their business, industry observers say ­ that mass merchandisers from the general retail sector are poised to gain a greater share of the durable medical equipment market as product distribution efficiencies take on greater prominence.

In addition to the standard warehousing, inventory management and logistics functions associated with distribution, the DME world of tomorrow will also focus on e-commerce, large scale purchasing contracts and new "smart" products, such as oxygen transfilling systems, says Dexter Braff, president of The Braff Group, a Pittsburgh-based mergers and acquisitions firm for the HME industry.

These demands will make it difficult, if not impossible, for mom-and-pop DME companies to continue selling mainstream wheelchairs in an antiquated fashion, he said.

"Because reimbursement for DME is so low, providers have to cut costs, which means reducing service levels to the lowest point tolerable," Braff said. "Because costs have been cut as far as they can go, the only way to become more profitable is to increase volume. Therefore, the market will belong to the big distributors."

Some clarifications are needed to explain the new distribution model, though, he said. Such as:

- "Big distributors doesn't mean giant medical/surgical box-movers like Allegiance, Owens & Minor or McKesson. Instead, it's national retailers Wal-Mart, K-Mart and Sears that will gain more market share.

- Not all DME will flood the mass merchandising arena - only commodities such as disposables and mainstream mobility aides.

- The billing and collection end of the business has no role in distribution and will still belong to the independentsif they want it.

What it boils down to, Braff says, is that "certain product lines, such as commodities, avail themselves to distribution, while others, such as power chairs, don't."

So those independent DME providers have to adjust to the new paradigm accordingly, which means focusing on what they do well and what the giant mass merchandisers won't touch.

"They need to create a specialty company that focuses on single product lines that reap some strong distribution efficiencies," Braff said. "Look at nebulizer companies like ExpressMed or diabetic supply companies like Liberty Medical. What they're doing is medical distribution, but they distinguish themselves from the McKessons and Medlines by serving the home care patient directly, taking assignment and offering billing services."

Independent HME companies that plan to continue in the bent metal supply business can take a page from the hardware industry, offers Bob McCoy, managing director of Valley Inspired Products, Minneapolis.

"In the hardware industry, there's Home Depot and then there's True Value," he said. "While the products are cheaper at Home Depot, True Value provides the service."

Although the owner of Joe's Wheelchairs may consider his business to be primarily a medical supplier, he should instead see himself more as a consultant, McCoy said.

"Patients want information and service," he said. "They'll pay out of pocket for it."

The independent can also use expertise to turn the mass merchandisers from competitors into partners by forging subcontracting arrangements on equipment maintenance and billing services, McCoy said.

"Contact them and say 'If you get into the DME business, we'd like to be an authorized distributor," he said.

Schuyler Hoss, president of Vancouver, Washington-based Northwest Health-care Management echoes McCoy's view, adding that independents should embrace, not repel, the subcontracting concept.

"Companies will be doing business less as Joe's Wheelchairs and more as part of Wal-Mart and Walgreens," he said. "Identity contracts will have these companies representing a hospital system, physician group or even Kaiser Permanente. These agreements have a lot of potential because hospitals and other facilities like having access to the home care business without actually having to be in it."

DME companies that offer rehab are well positioned for the future, sources say, because it is a specialized area that the mass merchandisers won't do.

"Custom rehab will be an important part of the bent metal side," Hoss said. "It is what the industry does best."

Indeed, if the small-scale DME provider offers a product mix that is equal parts rehab, high-end mobility and accessibility items, such as stair glides, ramps, lifts and vans, that business will be in the driver's seat, said Wallace Weeks, president of The Weeks Group, Melbourne, Florida.

"Dealers need to consider the range of acuity of the disease states they are working with," Weeks said. "That is the factor that determines the business model of the future. For the most part, they are serving customers with the most acute disease states or conditions. Everything else will go mass market."

Still, that doesn't mean that the corner DME store can't get a piece of the commodity business. Arnold McMann, director of the home medical equipment service line for The Corridor Group, Kansas City, Missouri, says that despite the lethargy of health care business-to-business electronic commerce so far, business-to-consumer sites have a lot of potential for small business.

"The Internet is a great leveler," he said. "Accessory items are perfect for Web distribution. Combine sales with health care information that consumers will use as a research tool."

Contrary to common perception about the Internet, it is not expensive, nor difficult to launch an e-commerce site, McMann said.

"Approach this venture with a budget, revenue goals, a marketing plan and don't rely on it as a sole source of revenue," he said. "Partner with [a major manufacturer] on it and let them do the hard work. There is a lot of content you can bring in with no development costs."

In assessing the viability of the independent DME provider for the future, most sources agree that these "mom and pop" shops can continue to operate the way they always have if and only if they recognize and focus on the traits that make them unique while forsaking the procedures that others do better.

"Offer commodities only if someone asks for it," McMann concluded. "But don't go chasing down that business. It's a futile pursuit."
- Clinical condition
- 'White lab coat' field requires commitment
to technicians, physicians, and technology
Pursuing home-based clinical products and services business seems like a natural fit for those HME companies with a history of respiratory and infusion services. But working in the brave new world of home-based medicine presents certain risks for early adopters, requiring them to invest in clinical staff and technology while performing services that aren't currently being compensated by payers.

Overall though, the providers who are moving in this direction are confident that they are on the leading edge of a domain that will soon become an established convention in home care and that payers will eventually offer coverage for these services.

"No question it's a big commitment," says LaCute. "You have to bolster your pool of clinical staff - RTs, RNs and LPNs, so the payroll impact is substantial. The equipment cost is also substantial. You have to provide different types of equipment as tools for your clinicians, but also the equipment needed to deliver the type of service you're selling to physicians. That is what discourages most people from ramping up this business."

LaCute, whose company has roots in the traditional home respiratory business, says oxygen providers can most likely survive by maintaining the status quo. But to expand and flourish requires adding another dimension to the service portfolio - partnering with the physician community on home-based plans of care.

"When you choose the respiratory route, you can continue to do that and attract business from a variety of sources, including managed care and hospital referrals," he said. "But there is another distinction in respiratory that we are pursuing - the physician relationship.

As primary care physicians, internal medicine specialists and pulmo-nologists regain power over the treatment of their patients, we can sell to them the modality and clinical aspect of the service as opposed to just the product component."

Therein lies an emerging dichotomy within the white lab coat sector - one piece concerns the provision of appliances to the patient's home, while the other consists of using that equipment to take an active role in the care of the patient.

As Hoss asserts, "The choice is up to the provider whether to just deliver the hardware or to take the extra step to provide the communications piece."

The process of "delivering the hardware" fits an HME distribution model that Braff sees happening on the bent metal side of the business. Small, local durable medical equipment dealers face an uphill battle against national retail organizations that have superior warehousing and logistics capabilities. And according to Braff, the same challenge applies to the hometown shop that - because of reimbursement cuts - simply delivers concentrators with no extra service.

"There is a challenge in taking a distribution approach to the clinically oriented business," he said. "Once they pare off the service, [the independents] lose the ability to distinguish themselves."

By entering the care management market, clinical independents can work in an insulated environment, Braff contends.

"Conceptually, distribution models greatly favor very large and efficient organizationsif I were a million dollar company, I'd be troubled at the thought of trying to become a competitive distribution guy," he said. "Locals and regionals have the greatest opportunities in the orientation that doesn't favor distribution ­ the highly clinical market. It favors small companies."

A profusion of high tech applications for home care presents an opportunity for HME providers to branch out into a whole new realm of clinical services, Hoss says.

"These are not necessarily highly clinical in nature, but an application of technology in the home," he explained. "There are models where a communication-based hub is placed in the home and the HME provider can offer products that tie into these communications. It's a side contracts," LaCute said. "It makes all the sense in the world to me that if you can help the physician by helping them with patients, it elevates our position."

Seeley Medical sells itself by claiming to be "the physician's eyes and ears in the home." Quality patient care is the company's value proposition, a service level LaCute says is "at the same level or higher than pharmaceutical companies because they aren't hands-on."

Yet questions remain about the financial viability of this new clinical medium. Chief among them is the fact that payers aren't offering coverage for new in-home procedures, such as sleep studies and chronic disease management protocols. So far it has been a tough sell for providers, even though in several cases they have effectively demonstrated their cost effectiveness.

Will the situation change? Ron Bendell, president at the Waterloo, Iowa-based VGM Group says it's possible.

"Watch what happens with Pfizer in Florida," he said. "They went to the state Medicaid agency and guaranteed their disease management program would produce a lot of savings. If it works, it could open a lot of doors."

The two-year pilot program features disease management for patients with congestive heart failure, diabetes, asthma and hypertension. By providing treatment for these patients, the New York-based drug manufacturer promises a savings of more than $30 million to the state.

Likewise, Hoss is optimistic about future insurance coverage, notably for a new technology that is becoming prevalent for home care patients who need to regularly check for blood clots. The Pro Time (also known as prothrombin time or PT & INR) monitor is a test used to monitor the effects of the blood thinner warfarin (trade name Coumadin).

"These monitors have been paid for and a half-dozen insurers are looking at them right now," Hoss said. "They save the cost of paying a professional to make daily blood checks. I'll go out on a limb and say CMS will have a benefit for it by 2003."

Roberta Domos, a New Albany, Indiana-based consultant who helps providers launch COPD management programs, admits that coordinating home-based care protocols "is a little ahead of the curve" with regard to insurance coverage, but says providers shouldn't hesitate because of that reality.

"The synergy is there," she said. "If there is no other benefit right now, it's a good marketing tool. Go for the glory of having it. That's how you take steps forward." HME