Conventional 02: 'It's declining, not dying'

Handling the traditional oxygen side of the respiratory business is likely to be a shrinking segment for most home medical equipment providers. The technology breakthroughs that led to stationary and portable oxygen concentrators have advanced the industry so far forward that conventional tanks and delivery seem like relics of yesteryear.

Even so, traditional oxygen still occupies a notable space within HME and providers need to figure out how they can manage the operation for a nominal profit or at least break-even. Some companies may be operating the conventional tank business at a loss while supporting it with their more profitable non-delivery segments.

Opinions differ about the sustainability of traditional oxygen. Some are reading its eulogy while others say it's not dead yet.

“The traditional home oxygen market in terms of ambulatory oxygen by way of cylinder delivery is no longer viable,” declared Jim Clement, director of global product management for respiratory at Somerset, Pa.-based DeVilbiss. “With competitive bidding and continuing reductions in reimbursement, the cost to deliver cylinders is not sustainable. The successful bidders in the new reimbursement environment are moving or have already moved to a non-delivery type of model.”

Ray Huggenberger, president and CEO of Goleta, Calif.-based Inogen, agrees that conventional oxygen delivery should be eventually terminated, but points out that a significant percentage of Medicare respiratory patients are still using tanks and that providers are obliged to furnish them even if they are committed to adopting a non-delivery model.

“It is declining, but it is not dead,” Huggenberger said. “Some companies can still make a dollar on it, but they need adequate economies of scale. The margins are nothing to write home about and fleet management is going to cost you. But if you are a Medicare contractor, you are obligated to continue providing tanks for the patients that want them.”

Investing in infrastructure is one way to shore up the non-delivery model, but that takes more capital than the typical provider is able to spend. Therefore, some companies may experience a slow phasing out of the business, Huggenberger said.

“There is no question that non-delivery will be the standard of care, but how long that takes depends on a host of issues—it could be a couple years, it could be 10 years—we just don't know,” he said.

Efficiency is key

Respiratory providers who follow an efficiency plan can build a strong program, both financially and clinically, said Sean Kharche, vice president and general manager of Garfield Heights, Ohio-based Chart Industries.

“Home medical equipment is progressing through a typical market life cycle, similar to what has transpired in other industries, transitioning from a high-growth market to a low-growth market,” he said. “This transition requires providers to become more efficient operators.”

Among the steps to becoming a more efficient provider, Kharche said, are generating more oxygen referrals, improving patient outcomes, reducing hospital readmissions and partnering with a reputable manufacturer.

'Total cost of ownership'

While conventional oxygen tanks require constant expense, concentrators offer the financial advantage of “total cost of ownership,” Kharche and Clement say.

“By reducing delivery costs and better quality products reducing 'late night' repairs, the portable and stationary concentrator combos are the preferred modalities,” Kharche said.

Likewise, demand for DeVilbiss' transfill unit is also on the upswing, Clement said, because “it serves the need to provide ambulatory oxygen while reducing delivery costs.”

With the total cost of ownership benefit that comes from a concentrator, “we are experiencing continued growth in our five-liter unit due to its high reliability in the field,” Clement said. “It has been critical to maintaining profitability in the business.”