Like many health care professionals working in the HME industry, I came to the industry with little real business experience. Although I had previously held numerous supervisory and management positions, including hospital department director, I had never been truly profit and loss accountable.

My academic training for respiratory therapy was primarily science-focused and clinical. In fact, I cannot recall taking a single business or accounting course to earn my first degree.

At that time, few of us working in medicine understood or believed that health care was a business. The issues of money, cost of goods, profit, etc, weren’t even items we discussed. We were trained for a clinical specialty focused on providing patient care—not to analyze financial statements and calculate return on investment (ROI).

Unfortunately, this left me unprepared for some of the business challenges I would face as an owner/operator of a growing HME company during some of the most changing and turbulent years known to health care.

Like health care professions, business has its own set of rules and education and competency requirements. To better meet this challenge, I returned to college to earn a second degree in business administration. It was there that I came to appreciate accounting and operations management concepts that had long been applied to other industries but seemed to elude many of us in health care.

Some management accounting classes focused on an area of accounting known as activity based costing (ABC). For the first time in my life, accounting seemed to make sense, having applications that extended far beyond ledgers and spreadsheets. Accounting was helping me make operational decisions.

What ABC Means
ABC is an accounting methodology that assigns a cost or expense contribution for every action associated with the operation. It really unbundles all of the costs and expenses and accounts for them individually.

Previous to this idea, many of us placed cost into one of two areas: cost of goods sold (COGS) or the black hole of fixed costs. ABC requires one to analyze and assign an appropriate cost for every activity the business encounters as part of doing business. It assumes very few fixed costs and really classifies most costs into variable costs.

This is very different from the basic accounting practices I was taught to use to determine the potential profitability of a line of business. Before moving to a cost-based accounting model, I worked off very basic principles that really focused on two areas: COGS and payment. This was perpetuated by manufacturers that helped set up lease and payment programs designed to give the illusion of rapid payback on goods and quick cash flow/profit.

A good example is the approach many of us took with oxygen concentrators. I was trained to seek a 3- or 4-month maximum payback of revenue over COGS and pushed my sales representatives hard for concentrator prices that fit this model. We actually thought that you paid off the total cost of the item with a 3- or 4-month rental and then it was almost straight profit after that. Many lease and purchase options included a 90-day skip for the first payment suggesting that you could actually pay off the cost of the concentrator before you made your first payment.

If this worked, how could providers lose money in the oxygen business? I think it is because we are, and have been for a long time, really in the service business, not the rental business. Unfortunately, many of us were unprepared for measuring and understanding the cost of the services we provide. We tried to bundle all of the service into the fee we were being paid for the rental of the item—and why not? You can pay it off in 3 to 4 months!

New Thinking
Making the transition from an equipment provider to a health care service provider and acknowledging this publicly is still being debated in our industry. Despite this, many of us provide extensive levels of service associated with the provision of HME and incur significant operational costs to get there. This is especially true in markets where operational costs have risen dramatically in the last 10 years. This includes the rising cost of labor, shipping, and fuel, not to mention the costs associated with compliance with regulatory agencies and third-party accrediting bodies. The monthly rental fee or the purchase price of the device is now spread very thin over numerous cost centers, including the COGS.

Because oxygen is such a large portion of the HME industry, I will use it as an example of the ABC challenge. The average cost of an oxygen concentrator, cylinder, regulator, etc, has stabilized over the last few years, and for the average provider with decent purchasing power, the amortized cost of oxygen equipment accounts for about 12% to 15% of monthly revenue. (Note: This varies based on your amortization schedule and actual cost.) So if COGS consumes only a modest percentage of revenue, how is it possible that many companies struggle with profit when providing home oxygen service? I think the answer is that of the myriad products we provide, home oxygen is really more of a service than most.

The Case of Home Oxygen Therapy
We provide 24-hour-per-day, 7-day per week, uninterrupted oxygen therapy in the customer’s residence. We collect no money up front and essentially assume all of the financial risk for the customer, agreeing to chase their physician for documents, prepare and submit insurance claims, and fight the bureaucracy of the insurance industry to seek payment. We provide free, often unlimited, home delivery and 24-hour emergency service. Many of us offer clinical oversight, providing respiratory therapy assessment, home therapy education, and physician extender duties all as part of the rental payment. Besides the therapy-specific services, we must all manage the general business challenges from this same pool of revenue, many of which have become more complex with tighter state and federal human-resource mandates, growing payroll, rising employee health care costs, and all other sales, general, and administration (SG&A) expenses.

Using ABC, you work to identify how many of the aforementioned costs are broken down per service line and per occurrence. This is complicated and takes time and a lot of data. However, I always remind our management team that you can’t manage what you can’t measure. Once you start to break your work down to the lowest level, you begin to see how each of the components of the overall services you provide contributes to the cost of operation.

As you study your costs, you will see how each phone call, each order keyed, each order picked, each claim submitted, and so on has a specific cost. This data then allows you to analyze the actual work and services you provide to determine your true operational cost against revenue. This is where the light bulb goes on. The home oxygen patient getting two deliveries per week that are covered under a Medicare HMO plan paying below the Medicare allowable may actually be causing you to lose money (and most likely is). Although you may still elect to service this customer, it gives you data to make more educated business decisions. It also helps you to appreciate how little COGS impacts profit in the population.

For me, these exercises taught me to focus more on operational efficiency and quality management. I look to the new technologies for answers in reducing my operational expenses versus just pushing for the least expensive device.

One article about ABC is not going to teach you the concepts or change your business. There are consultants who specialize in operations management and ABC implementation and I encourage seeking some outside advice if this is new for you. I also think it is important to continue to reinforce the idea that this is no longer an industry of rental companies, this is a health care service profession delivering complex and long-term home therapies.

Joseph Lewarski, RRT, is president of Hytech Homecare, Hytech Pharmacy, and Hytech Medical Supply in Mentor, Ohio. He has worked in health care for 19 years and in HME for 11 years.

Respiratory Insider Through colorful and engaging characters featured in a storybook, coloring book, and parent companion workbook, Respironics Inc’s Zoey™ Asthma Management Programs aim to help parents and health care providers provide meaningful asthma education and management to children. Dealer/Provider checked in with Susan Lloyd, vice president of the company’s Asthma & Allergy Division in Cedar Grove, NJ, about the division’s current focus on pediatric asthma care. Through a licensing agreement with ZOEY LP, San Antonio, children’s book stars Zoey™, a car who has asthma, and his sidekick Light Buddy™, a traffic light, are featured on Respironics’ key asthma care products. How has the industry responded? Response to the Zoey programs has been incredibly positive. It obviously meets an unmet need. Zoey and Light Buddy are adorable, friendly characters who deliver asthma education in an entertaining, nonthreatening manner. Kids learn that their disease is manageable and that it should not stop them from taking part in their favorite activities. The education material is powerful and credible and was developed by respiratory clinicians dealing with asthma in their professional and personal lives. The program is marketed to health care professionals by Respironics. Zoey characters are now featured on key pediatric asthma management products, such as peak flow meters, spacers, and nebulizers, closing the loop of education and recognition from books to products. What other Respironics initiatives address the needs in pediatric asthma care? We have just launched our new Pediatric Mask for use with our OptiChamber® Valved Holding Chamber for metered-dose inhalers. These masks conform to fit different facial features while providing an effective seal, and the built-in reinforcements help keep the mask from collapsing when parents need to maintain a seal to the child’s face while administering medications. We designed this mask for reduced “dead space.” Our designs were tested using water displacement with a pediatric anatomical model. In addition, the masks are detachable, so a single chamber adapts to a growing patient’s needs. We have also introduced the Ventstream® Reusable High-Efficiency Nebulizer, which provides fast, targeted delivery of aerosol medications. Ventstream delivers more drug to the lungs than a leading breath-enhanced nebulizer, according to a University of Bradford, United Kingdom, study, presented at an international symposium—Drug Delivery to the Lungs V. Eighty percent of Ventstream’s aerosol output falls below 5.0 microns, providing better on-target drug delivery to the lungs. Its jet design produces a high-quality aerosol with a mass median aerodynamic diameter of 3.0 microns. Ventstream’s “active venturi” design responds to a patient’s breathing pattern, delivering more drug on inspiration with minimal drug wastage on expiration. What do you envision for the future of the pediatric asthma care market? The Environmental Protection Agency just reported that the US pediatric asthma patient population has increased to 6.3 million children. Respironics will continue to strive to meet the evolving needs of these patients and their parents in order to provide them with products designed specifically to help children better comply with their asthma action plans.