Ventilator-Assisted Living©

Spring 2001, Vol. 15, No. 1

ISSN 1066-534X

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Read selected articles from this issue ...

Assistance Dogs for Children with CCHS
Linda Thompson

Home Mechanical Equipment Company Profits:
Dispelling the Myth

Joseph Lewarski, BS, RRT

Respiratory Study with SCI Ventilator Users
Millennium Man Bill Miller, Florida

Breaths of Life
Mark Horan

A Petition to President George W. Bush and Congress ... in support of David Jayne and the National Coalition to Amend the Medicare Homebound Restriction for Americans with Significant Chronic Illness

Equipment News

Camps for Ventilator-Assisted Children


Home Medical Equipment Company Profits: Dispelling the Myth

Joseph Lewarski, BS, RRT

For many years, the media and lay communities have pointed a finger at the health care industry with suggestions of over-billing, inflated charges, and significant profits. This line of thinking developed during an era (1960s through early 1980s) that did not include complicated business barriers such as Medicare DRGs and prospective payment systems, managed care, and rapid (and expensive) technological medical advances. During this same period, consumers came to appreciate the benefits of employer-paid health insurance, Medicare Part A & B programs, and a growing Medicaid system. Health care evolved into a series of “entitlement” or “entitlement-like” programs, with everyone demanding only the best.

However, the health care industry is a business, although to say this in public often evokes cries of horror. Regardless of one's opinion or position, health care companies require a positive cash flow stream and net profits. Without profit, the business will fail. This explains why hospitals are closing or merging with larger systems. This explains why there are fewer corner drug stores, and “mom and pop” health care businesses are disappearing.

If you follow some of the publicly traded home care companies, you will have observed recent years of record financial losses, bankruptcies, removals from the public trade listings, major reorganizations, consolidations, and closings.

Despite these facts, most media and consumers perpetuate the myth that all health care providers, especially home medical equipment (HME) providers, reap huge profits. I believe two key misconceptions fuel this myth.

First, there is the assumption that health care providers actually control the prices they charge for goods and services. False. Over the last 10 years, HME providers have faced declining payments for the products and services they provide. The Balanced Budget Act of 1997 was one of the most severe, reducing home oxygen payments by over 30%. Medicare and most Medicaid programs employ a fee-for-service payment system for HME. Each item is assigned a code that is associated with a price schedule determined by Medicare or Medicaid. They set the price, not the HME provider. The price is referred to as the “allowed amount.”

Under Medicare Part B, Medicare agrees to pay 80% of the “allowed amount” for a medically necessary HME item (which is determined by the insurance plan based on their internal policy and procedures). Most private insurance companies have followed this example and negotiate similar rates and policy for HME goods and services. In some cases, large insurance companies, able to leverage because of their size, have set pricing so low that many HME providers cannot service their clients. This is because the proposed payments are at or below the provider's cost of goods.

Second, there is the assumption that providers of health care goods and services, including physicians, hospitals, home medical equipment dealers, etc., are in the same sector of the business as that of the insurance and pharmaceutical industries (and therefore have similar profits). False. We are customers, too. Health care providers have little influence over drug prices and insurance contracting. Too often, the ball is in their court; insurance companies own lives and drug companies own patents. This power and economy of scale often gives them the ability to dictate price and policy. This is in complete contrast to the HME providers.

At the last annual conference of respiratory therapists, I presented a lecture on activity-based accounting for the HME provider. I discussed the total costs associated with the delivery of HME products and services and compared those to the standard payments received from the different insurance systems, including Medicare and Medicaid.

In determining total cost, one must account for the HME provider's cost of the product, as well as the cost of warehousing, shipping/delivery, billing, 24-hour service, general overhead, and the cost of money while waiting to be paid (it is not uncommon for HME providers to wait as long as 4-6 months to receive payment).

I provided numerous “real life” examples of insurance payments for HME products and services that are equal to or below the typical HME provider's cost, such as home mechanical ventilation services and nasal CPAP devices and masks.

In a review of the average HME provider's cost of goods and services, I provided evidence of insurance allowables for CPAP masks that were lower than the provider's cost of the product on nearly 80% of the masks avail-able on the market. This analysis did not even take into account the cost of inventory, shipping, billing, etc. In addition, insurance companies often refuse to pay for more than one mask at the time of the set-up of the equipment and often allow for only one to three replacements per year.

In reviewing the cost of providing home mechanical ventilation services, I presented examples of cases demonstrating that the HME provider was consistently providing home mechanical ventilation services at a loss, once the total cost was calculated.

The point of this article is not to seek sympathy for the HME provider, but rather to provide a more accurate picture of this complicated and important component of the health care industry. As we move forward into this new millennium, more health care will be delivered in the patient's home or other non-traditional sites, and it is important for consumers to know the issues they and their health care providers are facing. I strongly believe that most HME providers are trying their best to provide the best care and service possible in the face of many complex obstacles. However, there is a cost in being the best and this cost is covered through the profits earned on the goods and services we provide.

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