Hospitals steer a new course: revive slumping profits by turning to DME

DAVISON, Mich. -- A generally accepted trend has made an about face, say some industry insiders: Hospitals are making their way back into the home healthcare and durable medical equipment businesses. While the shift toward shorter hospital stays has created more opportunity for home care providers, hospitals have become burdened by the loss of their cash cow. Changes in the Medicare Modernization Act and among private insurers have also hurt the business to a point where many hospital systems are now fingering DME as a way to make up some lost profit. "In the past, you'd see hospitals selling off their HMEs, closing them up, saying we don't want to deal with home medical equipment," said Jack Evans, president of Malibu, Calif.-based Global Media Marketing. "Now I see the opposite happening. I see hospitals realizing that homecare is a vital part of their continuum of care, and many are now creating for-profit divisions to run homecare nursing, closed-door pharmacies, regular pharmacies and HMEs. Anecdotally, Evans said he has received more calls from hospitals looking to expand into DME since this fall than he has in the past 10 years. Aurora Healthcare is one such hospital system. It is in the process of expanding its pharmacy system and adding DME to each of those locations. (See story page 38). "We believe in the aging population, and that the growth will be there in these product categories," said Bill Frodl, director of retail services and merchandising for Aurora Healthcare Ventures, the for-profit entity within the Aurora Healthcare system. "We also want to provide greater access to our patients and consumers in the marketplace." Perhaps a more practical reason for the shift can be found on the financial end. "They used to make their money on patient stays, and now those patients stays have been cut in half. Yet, they still have the same operating costs and literally half the revenue," said Evans. Allen Hunt, director of operations for medical supplies for Visiting Nurse Services, a wholly owned subsidiary of Flint, Mich.-based McLaren Healthcare Corporation, said regulatory changes have also prompted the switch. In 2004, the OIG came out with new guidance on joint ventures that narrowed the scope of what would be considered an appropriate partnership. "I think you saw some hospitals say, 'If we still want a piece of the pie, we are going to have to do this by ourselves instead of subcontracting to someone else,'" said Hunt. "That may be why you are seeing a reversal of the trend." This time around though, Hunt said, many hospital systems are putting a much bigger stake in the businesses by hiring people with DME experience to run operations and do the billing. McLaren Healthcare has opened 11 DME locations, including respiratory and home infusion programs, in mid-Michigan to complement its five hospitals. It is also poised to open a retail location in a Wal-Mart. Each of these locations offers a full-line of medical equipment. "Around here, a lot of the DMEs were specializing in only the more profitable items, like respiratory, and some of the patients were having difficulty finding supplies," said Hunt. The challenge facing hospital-based DMEs, however, is the same as an independent store -- gaining the trust and referrals of physicians and case managers. Hunt said he has marketing people in the field talking to case managers to generate all the referrals they can. "If I said I didn't enjoy a natural advantage, I wouldn't be totally honest with you, but we don't take this for granted," he said. "This is a matter of a lot of discussion, and I know a lot of hospital DMEs are the same way. We sometimes get frustrated because we feel like we should be able to get more of the internal business than we do." "Just because the hospital is the DME business, doesn't mean they can take good care of patients," said Evans. "But hospitals realize this trend is happening and many of them are doing an excellent job."