Author Topic: Reducing the Cost  (Read 1896 times)

pvtbiller

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Reducing the Cost
« on: March 04, 2013, 04:48:36 PM »
Good Afternoon Everyone,
I have a question that may come across as strange but I am at my wits end and don't know where to go with it.  We are a DME supplier who originally had our device at a high price point with alot of components in the first shipment that we sent to out patients.  We then had the reoccurring monthly supplies ship - again at a high price point.  Traditional Medicare has only paid for the device twice at the high price point with all the components and we have had about 30 claims paid by private insurances the same.  I think the price point of the System is too much and that there are too many components of the System give to a patient up front. I am finding that at this high price point - insurances would rather pay for a surgery to fix the issue.   

The device is a pump that has a warranty on it for 1 year and the components to the pump (urinary) are designed to last up to 30 days, some patients may need additional components depending on heir usage.  I need to reduce the cost significantly to have the insurance carriers understand that it is cost effective with having a legal issue like fraud.  Is it as simple as reducing the cost of each component?  Should I reduce the number of components in the initial delivery?  Will this cause ramifications with having insurances pay for it now at a lower price then asking to recoup the higher price they paid before?

We already have an issue with the first generation of the device in that the consultant (at that time) advise my company to go to PDAC and they gave us E1399 then 1 year PDAC did a review and gave us the A9270 (non covered code) and to this day Will not cover the second generation of the product.  What can we do to get more of the devices out there to the patients who really need it at a good price without raising a red flag?  I was brought in to increase the volume of sales but how do I do it without reducing the cost?  Please help!

RichardP

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Re: Reducing the Cost
« Reply #1 on: March 06, 2013, 11:35:37 AM »
This is a business development question, not a billing question.

I was brought in to increase the volume of sales ...

A business must bring a product to market at a price point low enough that people will actually purchase the product and high enough that the company can cover it's costs to make the product and can make a profit as well.  Because fixed costs remain constant whether you make one item or 200,000 items, the cost to make the item goes down as the number of items made goes up.    Thus, the more you sell, the less you can charge and still make the same profit.  The fewer you sell, the more you must charge to cover your costs.  If you only sell one item, its price must be high enough to cover all fixed costs, plus the variable cost of making that one item.  If you sell 200,000, the price of all 200,000 must be high enough to cover that same fixed cost, plus the variable cost of making each item.  If you have your fixed costs spread over 200,000 items instead of only one, you can see that the price for the 200,000 can be significantly lower than the price for the one.

To continue this example, large companies will introduce a new product priced as though they are going to sell 200,000 items.  They will lose money on the first few sales.  But as the sales approach 200,000, the company will begin to recoup all of its costs and begin to make a profit.  They subsidize the early losses on the new product with profits that they make from more mature products - where the cost of production is much lower than the price, so profits on the mature product are relatively high.  And note that pricing a product is as much art as science.  There is no book written anywhere that will tell you at what price point any given item will sell the most units.  Companies experiment with pricing until they find a price that gives them an acceptable profit.  If they cannot find that sweet spot, they often abandon the product.

Small businesses / startups generally don't have the other products throwing off cash that can subsidize a period of losses until the product catches on (remember, the new product must be priced low enough that people will actually buy it).  That is why they turn to venture capitalists or financial angels to provide the working capital to subsidize the product until sales are high enough to start generating a profit.

What resources has your company given you to move sales of the product past one and towards the 200,000?  In order to increase sales, you need a marketing budget you can use to increase demand for the product.  You also need a price low enough to attract actual buyers, along with a fund that will cover the loss on the sales until unit sales pass a pre-determined benchmark.

The fact that you are here asking questions about how to increase sales for a new product tells me that you could use the help of a good Certified Public Accountant.  They should either know how to implement what I've stated here, or know someone to refer you to that can help you with this.  Good luck.


PMRNC

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Re: Reducing the Cost
« Reply #2 on: March 06, 2013, 11:38:03 AM »
Quote
This is a business development question, not a billing question.

I agree with Richard but also should add a tip.. if you are involved in the marketing or development in any way you want to stay completely away from the billing as it could lead to violating the anti-kickback statutes.
Linda Walker
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www.billerswebsite.com

pvtbiller

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Re: Reducing the Cost
« Reply #3 on: March 06, 2013, 02:46:38 PM »
Thank you both for the responses.  I don't believe that the Anti-kick back statute come into play here or a CPA at this point though.  The question I think was too long winded for me to be clear so let me try it again.

We were billing a device for lets say $3000.00 which is too high for Medicare to see value in and too high for patient to pay out of pocket but we have had some patients pay and some insurances pay (including traditional medicare-twice).  I do oversee the billing here and what I have advised is that the benefit catergory that we are in (urological) this cost appears to high to compete (even though it may be cost effective in the long run when other treatment methods have failed).  I have suggested to reduce the cost of the product to increase the volume in sales (which we may lose money at first but will make up with it in volume) and maybe medicare may recognize payment for the device. I am concerned however that if we haven't made any technical changes in the product at all, can we just reduce the cost that simply without an issue with medicare?  At one time we were supplying patient with 4 of one component a month and now they would only get one.  This will drive the cost down as well as flat out making the cost of the component from $100.00 to 56.00.  They may need more than one a month but the component is built to last up to 30 days.  We will be at less of a margin but at least we would be selling them. 

Do you see a billing issue in doing this?  Can this raise a red glad with medicare being that they have been billed $3000 for the same exact device that they paid on and now we will only be billing them $1000?  Is the worst that can happen is that they take the money back or does this come across as fraud? 

Please let me be clear that no physician are given kickback to prescribe our products.  Thank you again for your help.  I truly do value your expertise.

RichardP

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Re: Reducing the Cost
« Reply #4 on: March 06, 2013, 04:01:52 PM »
I don't know DME, so someone else can speak to that issue.  However, with regular medical care, Medicare pays based on whether they consider the test or treatment medically necessary.  The doctor can charge whatever he wishes.  He can change his prices as often as he wants, up or down.  That will have no affect whatsoever on Medicare.  If the charge is not considered medically necessary, Medicare will not pay.  If they do label the charge medically necessary, they will pay what they have determined in advance that they will pay.  The fee charged by the doctor has no bearing on what Medicare will pay.

Does Medicare use this same logic for DME devices?  Someone else needs to answer that question.  But, if they do - then the price you are charging has no bearing on whether Medicare pays or not.  If Medicare decided to pay for the device, you would only receive in payment what they decided to give you, and you would not be able to charge the patient for the rest.  You would have to write off the rest.  Your hypothetical fee of $3,000, or any amount, would be irrelevant to that process.  You will receive only what they decide to give you.

So, a more-focused question would be this:  assume the insurance carriers and Medicare decided that your device is medically necessary and that they will pay some set amount of money; will your company be able to make a profit off of whatever amount the carriers decide they will pay?

DMK

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Re: Reducing the Cost
« Reply #5 on: March 06, 2013, 04:05:20 PM »
Brilliant verbiage, RichardP!

RichardP

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Re: Reducing the Cost
« Reply #6 on: March 06, 2013, 09:56:35 PM »
Brilliant verbiage, RichardP!

Thank you.