Overview

• Early O2 and HME payments afforded high labor and service intensity with excellent profit

• Over the last 20+ years oxygen and other HME payments have been significantly decreased

• Operational costs have increased steadily in the same 20 year period, with particular increases in delivery & delivery related costs

• Modern O2 users are more stable, active and ambulatory…and more demanding

Overview

Demand for home O2 therapy is increasing, as is the demand for ambulatory systems

National Competitive Bidding (NCB) and other payment reduction initiatives continue to push reimbursement lower

The HME industry is relatively immature with few standardized process and accurate benchmarks

Technology offers cost shifting and total cost reductions without compromising service and care

Hypothesis

• Despite the changing reimbursement and continued operational cost challenges, home O2 can be provided in a clinically sound, patient focused, operationally efficient and cost beneficial manner

Competitive Bidding Metropolitan Statistical Areas (MSA’s) - Round 1.2

Charlotte, NC$122.12

Cincinnati, OH$106.60

Cleveland, OH$103.00

Dallas, TX$123.00

Miami, FL$125.00

Orlando, FL$115.00

Pittsburg, PA$102.84

Riverside, CA$122.90

Kansas City, MO$125.00

Stationary Concentrator (E1390): $175.79 $116.16 (- 33%)

Portable Oxygen (E0431): $28.77 $20.81 (- 27%)

O2 Generating Portable Equip. (K0738): $51.63 $41.88 (- 18%)

Key Operational Cost Metrics

Wages Over a 10 years period, average wages have increased

approximately 35%1

Fuel prices have more than doubled over the last decade Peaked in 2008 but increasing again in 2012 as crude

prices are rising Health insurance premiums have nearly tripled

over the last decade2

Vehicle maintenance expenses have increased Maintenance & repair

Freight services (UPS, FedEx) have increased

1Social Security Agency; national wage index 20102Kaiser Family Foundation 2010 Annual Summary of Employer Health Benefits

Valued Added or Non-Value Added?

• Non-value added (NVA) can be defined as:

– An activity that generates zero or negative return on an investment of resources that can be eliminated without impairing the process

• Simplified

– If you stop doing it, no one cares and nothing changes…it is NVA

– Example:

• Monthly or quarterly concentrator purity checks

NVA: The Enemy of Efficiency

• Home oxygen service is plagued with expensive NVA activities

• Many of the “services” grew from marketing strategies and sales related behaviors

– Not based in science or outcomes

– Cultural beliefs

• Most of the process related to portable gas delivery (of any type) are NVA

– Don’t mistake delivery for care and service

The Cascade of O2 Delivery Associated Events

Customer Service Order intake Keystroke work order

Order processing Pick & pull, staging for delivery Lot & serialized tracking

Loaded & routed Call family, schedule delivery

Delivery to home Signed delivery ticket, pick up empty cylinders

Return to warehouse/stock Dirty equipment returns; cylinders staged for refilling

Order confirmation System confirmation of delivery, lot & serial numbers and logistical

management of returned cylinders Cylinder refilling process Internal or external

Filled cylinders staged, ready for use

Cost of Providing Home O21

Delivery

21%

Preparation and

Return,

Disposables, and

Scheduled

Maintenance

12%

Other Operating

and Overhead

Costs

21%

Patient

Assessment,

Training, Education

and Monitoring

9%

Intake and

Customer Service

6%

Unscheduled

Repairs and

Maintenance

3%

System Acquisition

28%

1Morrison Informatics. A Comprehensive Cost Study of Medicare Home Oxygen. June 2006

Delivery is Not Care

• Elimination of routine O2 delivery is not the elimination of care & service

– Reallocation of technician & clinician time

• Identify value-added processes

– Clinical interventions that produce improved outcomes. Ex: disease management that drive compliance to therapy, reduced readmissions, etc.

– Clinician supported marketing & sales efforts

• Local conferences, CEU programs

Financial Model

Cost Assumptions:• Concentrator cost = $450/36 = $12.50/month• Cylinder cost = $24/cylinder x 16 = $384/36 = $10.66/month• HomeFill Oxygen System cost = $1,999/33 = $60.58/month• Oxygen contents cost

$3.00/cylinder Average patient uses 8 cylinders/month Oxygen content = $24/month

• Cost per delivery = $60Reimbursement Assumptions (NCB round 1 rates):• E1390 Concentrator = $103.00• E0431 Cylinder delivery = $20.00• K0738 OGPE = $40.00• Cylinder delivery monthly total = $123.00• OGPE monthly total = $143.00

Financial Model

Cylinder Delivery OGPE

Reimbursement $123.00 $143.00

Concentrator/OGPE Cost $12.50 $60.58

Cylinder Cost $10.66 $0.00

Content Cost $24.00 $0.00

Delivery Cost $60.00 $5.001

Total Cost $107.16 $65.58

Monthly Profit $15.84 $77.42

1. Assumes initial set up visit and annual visits afterwards

Summary

Home oxygen therapy is a mature but steadily growing business

Despite reimbursement and other regulatory pressures, demand for ambulatory O2 systems is growing

Change is a constant in the health care industry Eliminating NVA activities and getting lean is

essential in any maturing industry OGPE technologies offer operationally efficient

and clinically sound options and are the key to surviving and thriving today and in the future