Home Health & Hospice Week

36-month cap on oxygen rental means hard work ahead for HME.

Lower sales and reduced Medicare reimbursement caused a drop in revenue for HME giant Apria Healthcare Group Inc. at the end of 2005--a trend that could spell trouble for the industry.

The Lake Forest, CA-based company, which provides home respiratory therapy, home infusion therapy and home medical equipment in 50 states, reported $19.5 million in net income on $359.7 million in revenues for the quarter ended Dec. 31, 2005. That's compared to a $27.3 million profit on $376.4 million in revenues for the same period in 2004.

Medicare reimbursement reductions for respiratory medications and certain home medical and oxygen equipment contributed to the sharp earnings decrease, Apria says in a release. The shortfall in the fourth quarter was primarily in the home medical equipment, infusion therapy and respiratory drug product lines.

At press time, Apria's stock was trading at about $23.44 per share, down from a high of $24.76 this month. HME cuts in President Bush's proposed Medicare budget for 2007 and concern over reimbursement may impact shares in the near term, analysts at the Baltimore-based brokerage firm Stifel Nicolaus caution in a release.

Proposed Caps Should Prompt Education

The HME industry took a hit with the recently passed Deficit Reduction Act (S.1932) and its 36-month cap on oxygen equipment rental, followed quickly by the President's proposed 2007 budget which intends to push the cap back further to 13 months.

In an election year and given the current political climate, chances of passing a budget that includes Medicare cuts are slim, predicted Apria CEO Lawrence Higby during a Feb. 8 conference call to discuss the company's earnings.

The 13-month cap on oxygen equipment rental "is probably not going to be an issue" this year, Higby said. Congress recently rejected a proposed 18-month cap, raising it to the current 36, he noted.

Watch out: But oxygen suppliers aren't out of the woods yet. Even with the 36-month cap, Higby says the industry has work to do to educate politicians about the impact capped rental will have on beneficiaries.

The White House, the Office of Management and Budget and some members of Congress have a misperception that "an oxygen concentrator is no different than a bed pan or a walker," said Higby.

Nothing could be further from the truth, said Higby. People on oxygen are in a progressive disease state, and capped rental abandons these people "at the time they probably need intensified care and oversight."

And the argument that there will be a fee for ongoing repair and maintenance doesn't wash, protested Higby. No one will maintain a repair network when there's only a minor chance someone might call, he said. "If you only had to pay the police department or the fire department if they showed up at your house, you would never have a police or fire department in existence."

"If I had to pick one industry that can't seem to get a break out of the government, it would be yours," opined an analyst from Pittsburgh-based Quaker Capital Management Corp. during the call.

Competitive Bidding Bogs Down

In answer to a question about when the industry could expect a proposed rule on competitive bidding, which was due in 2005, Higby offered an update. Several issues are slowing down progress on the proposed rule, said Higby, including:

• The Centers for Medicare & Medicaid Services must create extensive service, financial and accred-itation requirements for bidding involvement.

• Establishing bidding demonstration markets in 10 of the largest metropolitan statistical areas in 2007 as set forth in the Medicare Modernization Act may not be the most effective way to test processes.

• CMS staffers involved in bidding have been spending their time on issues surrounding Part D.

The bigger question with bidding is whether it will produce real savings--or even just cover administrative costs of the program, observed Higby.   Higby sits on CMS' Program Advisory Oversight Committee (PAOC) for competitive bidding. The PAOC should meet some time in the first quarter of 2006, he added.