Industry Blossoms : Homing In on High Health Costs

Tethered to 50 feet of plastic tubing that supplies oxygen to his tiny nostrils, 16-month-old Travis Brown resembles many infants hospitalized with hyaline membrane disease--a life-threatening lung ailment.

Beside his bed is a cluster of machinery that sustains Travis, who was born three months premature: a suction machine to remove secretions, a medication compensator, a heart and lung monitor and a large oxygen tank--devices to be found in any well-equipped hospital.

Except Travis is not recuperating in a hospital; he lives at home in Tarzana. And the equipment that keeps him alive is rented for about $900 a month from Beverly Hills-based American Medical International.

“He was in (the Medical Center of) Tarzana for his first nine months,” said Cheryl Brown, Travis’ mother. He was later transferred to another hospital before being discharged three months ago. Mrs. Brown says her son now “seems much happier that I am playing nurse and doctor.”

Burgeoning Industry

Travis’ extensively equipped bedroom is graphic evidence of the burgeoning, $6-billion-a-year home health care industry, which has blossomed within the last five years as private insurers and state and federal governments combat skyrocketing medical costs by encouraging hospitals to send patients home earlier.

With new technology giving entrepreneurs the ability to transform any home into a makeshift hospital, the home health care industry is expected to triple by 1990 to $18.3 billion, according to Frost & Sullivan, a New York-based market researcher. At the same time, it is expected to play a growing role in helping to trim the medical bills of thousands of patients like Travis who otherwise would remain hospitalized at an average daily rate of about $450.

The turning point for the industry came in 1983, when the federal government began a “prospective payment” system under which hospitals were reimbursed a flat fee to treat a specific illness regardless of the actual cost of care. That spurred the early discharge of patients from hospitals, which gobble the biggest chunk of the nation’s $400-billion-a-year health care bill--about $166 billion in 1984, according to the American Hospital Assn. in Chicago.

Second Thoughts

Yet the federal government is beginning to have second thoughts about the industry. Under pressure to cut the nation’s $200-billion budget deficit, some officials are concerned that the alleged cost-saving benefits of home health care may not be so clear cut.

“Home health care can be less (costly) . . . if, in fact, it is provided to a patient who would otherwise be in an institution,” said Dennis Siebert, a spokesman for the federal Health Care Financing Administration, which administers the Medicare program and oversees the medical industry.

But “what tends to happen,” Siebert said, “is the population that would otherwise be taken care of by their own families or other resources” also seeks help. “We are concerned about that (because) we’re the ones who pay the bills. If you don’t have controls, things can get out of hand.”

While the percentage of government funds spent for hospital care has been dropping in the last 10 years, home care reimbursements have been growing at an 18% annual rate, according to HCFA. Home care is expected to consume $2.2 billion of Medicare’s $70 billion in fiscal 1985 expenditures, up from $767 million of $33.9 billion in fiscal 1980, the agency says.

What’s more, a 1981 General Accounting Office report found that 27% of home health claims compensated by the government were for unnecessary services or services that did not qualify for reimbursement. Another GAO study cited during testimony before the Senate Finance subcommittee on health in November, 1983, found that “home health care services have not conclusively reduced either institutionalization or total (medical) service costs.”

“Our experience has been that the GAO reports are absolutely accurate,” said Beth Giebelhaus, director of the Health Care Financing Administration’s division of legislative reference and coordination.

Not Replacement

Added David Durenberger, chairman of the Senate Finance subcommittee on health: “In so many cases, it (home care) isn’t a replacement (for hospital care), but something people do in addition to going to a hospital.”

Though Durenberger said he believes that home care generally “makes sense and saves money,” he favors extending federal cost controls to home care by establishing a single Medicare reimbursement that would cover medical costs inside and outside of the hospital. “The money,” he said, “would go to the (attending) physician, and he would make a decision about the appropriate medical care. That way we don’t have to worry about” excessive costs.

Many private insurers are more enthusiastic about home care, partly because their patient population is younger and thus less likely to require intensive care. But Blue Shield of California, the state’s third-largest health insurer, takes the middle ground:

“In a general sense, home health care, appropriately administered, is cost effective,” said Charles Parcell, a vice president at Blue Shield of California. But, “we think some types of (home) care need better guidelines,” said Parcell, indicating that some home custodial care could be done by family members rather than expensive professional personnel.

There is little equivocation on the issue among hospitals, which have begun turning to home health care as a means not only for cutting costs, but also to ensure control over patients’ recovery. Travis, who was treated in AMI’s Tarzana hospital, was directed to an AMI home health care center in Van Nuys--one of six AMI outlets that rents or sells some 400 different kinds of medical equipment, ranging from a $5 walking cane to $7,000 heart and lung monitors.

“Where hospitals may be losing money on hospital admissions, they are trying to gain some of those revenues back through home health care,” said Linda K. Duval, an assistant vice president at Olsten Corp., a Westbury, N.Y., company that generated sales of $219 million and net income of $6 million last year by supplying nurses, therapists and aides to hospitals and to patients recuperating at home.

Indeed, for almost any medical condition short of surgery there are home health care companies providing everything from kidney dialysis and cancer chemotherapy to intravenous feeding and traction units.

At one time, many patients with diseases that obstructed their throats or intestines were confined to hospitals. Today, with the help of a trained nurse, they can get treatment at home through an intravenous system that works while the patient sleeps.

Heart, Lung Monitors

Perhaps the most popular home health devices are infant heart and lung monitors. These machines detect breathing abnormalities in a sleeping baby and help alert parents who fear that their children might succumb to sudden infant death syndrome. The machine rents for about $100 a month or can be purchased for about $5,000.

Although most experts agree that these devices can reduce health care costs, utilization can sometimes run amok.

Patients with severe kidney problems, for example, once had to go to a hospital three times a week to be hooked up to a dialysis machine that would draw out and filter their blood.

In 1979 Chicago-based Baxter Travenol Laboratories introduced kidney dialysis solutions, which use the abdominal cavity to perform the cleansing function of a normal kidney. The two-liter bottle of liquid, delivered to a patient’s door several times a week, proved popular because it reduced the high cost and inconvenience of hospital dialysis.

“We have over 10,000 people using it now,” said John Kehl, Travenol’s director of financial relations. “The system frees patients from hospital dialysis machines and has made home dialysis practical for the first time.”

Kidney treatment was also costing the federal government more than $200 million annually. To stem the rise, created in part by pent-up demand for hospital kidney dialysis units, reimbursement limits were set in 1983 for all forms of kidney dialysis, including the home units--the only such home medical care now under a federal cap. The limits vary according to region but average about $20,000 a year, said Kehl.

Federal officials have also begun to more closely monitor the rental of medical equipment.

Between December, 1981, and July, 1984, Medicare reimbursed a Texas patient $576 to rent a rigid walker that could be purchased for $61.20, according to the Inspector General’s Office. The agency is now reviewing claims to ensure compliance with a recent government edict requiring that patients buy rather than rent durable medical equipment.

Since November, 1979, for example, one Arkansas patient recuperating at home has received $1,885 in Medicare reimbursements to rent a trapeze bar that sells for $145. The Inspector General is looking into the case and may recommend legal action, said an official who did not want to be named.

Although Medicare and private insurance carriers may incur high bills paying for some forms of home health care, it doesn’t take much money to start a home health care company. Health care professionals such as nurses have started companies as have entrepreneurs without a day’s background in the field.

Out of Homes

“I’ve seen people start working out of their dens and living rooms,” David Parish, a district manager for DeVilbiss Home Health Care of Somerset, Pa., who markets the company’s line of medical equipment to about 200 home health care businesses in California. “They are usually ex-pharmacists, nurses and respiratory therapists . . . (but) I’ve also heard stories about bartenders getting into the business.”

Competition, however, is hurting some, Parish and other experts report.

Richard Teperson found out how stiff the competition was when he launched Spinal Home Health Services in Tarzana two years ago with about $140,000.

Teperson’s company sought to fill a niche by supplying spinal traction units for the home at less than half the cost of such care in a hospital. However, the company never had more than four patients at a time, Teperson said, and six months ago it closed.

“The problem was that the insurance companies were schizophrenic,” said Teperson, an orthopedic surgeon who has returned to private practice in Woodland Hills. “Insurance executives loved the idea.” But when it came time to pay, “the insurance companies would treat us like a criminal trying to rip them off.”

Large Corporations

Even large corporations have had problems: Johnson & Johnson’s Home Health Care, a subsidiary of the giant Johnson & Johnson pharmaceutical concern of New Brunswick, N.J., sold out to Hospital Corp. of America last year after only 15 months in the home care business.

The tough odds are perhaps best illustrated by Newport Beach-based Home Health Care of America, which changed its name to Caremark Inc. last April.

Impressed by home antibiotic infusion therapy and chemotherapy offerings the company introduced in 1983, Wall Street valued Home Health Care at 100 times anticipated earnings, and its stock was trading at $30 a share in July, 1983.

But the over-the-counter market crumbled, company growth slowed, and Home Health Care announced a $4-million write-off in late 1983 for government reimbursement that never materialized. The stock plummeted from its 1983 high to under $8 a year later. It has since recovered.

“Home Health Care of America is back on track after a difficult fiscal year ended June, 1984,” reported Hambrecht & Quist, a San Francisco-based investment house. “Patient revenue is clipping along at an impressive rate” and improved operations have boosted profit margins, the investment house said.

Back Into Doldrums

Still, analysts caution, further government cost cutting could send companies such as Home Health Care, which derives about 40% of its revenue from Medicare, back into the financial doldrums.

In February, the government began requiring patients recuperating at home to purchase rather than rent certain types of durable medical equipment such as wheel chairs and the like, claiming the policy would save Medicare about $50 million annually. The government also now limits the length of time patients can receive nursing care at home.

While the long-term outlook for the industry remains guarded, the doctors and patients who depend on the home health care industry are hopeful.

“With the growth of home health care, instead of keeping a baby in the hospital just to give him oxygen, we can send him home to his family,” said Sami Georgie, little Travis Brown’s treating physician. And the Browns recently started using a machine to monitor Travis’ heart and lungs so that doctors can determine whether he can be taken off his breathing apparatus.

“He’s a real fighter,” said Cheryl Brown. A year ago, she said, “we never thought we’d see him sit up and do anything.”