Home Health & Hospice Week

Company will exit respiratory business if ASP pricing system takes effect as planned.

Customers soon may be able to pick up one more thing when they go shopping at Wal-Mart -- a piece of durable medical equipment.

Apria Healthcare Inc. had two stores up and operating within Wal-Marts as of May 5, and expected to have two more going by the end of this month, Apria CFO Amin Khalifa said at the Deutsche Bank Securities 29th Annual Health Care Conference in Baltimore.

The company is piloting the Wal-Mart program to see if it wants to expand to "several hundred stores" with the discount retailer nationwide, Khalifa said.

Lake Forest, CA-based Apria expects the stores, which do a mixture of cash-and-carry and Medicare business for DME, lift chairs and scooters, to generate a half million dollars in revenues per year.

Medicare Outlook Grim

There are nothing but more cuts on the Medicare horizon, Khalifa warned. Worst of all will be the slashes to respiratory drugs' payment rates.

The cut to 80 percent of average wholesale price (AWP) will cost Apria $14 to $15 million this year. But if the changeover to average sales price (ASP) plus 6 percent occurs, it would cost the company $56 million of its $80 million business next year, Khalifa said.

"The business will become unprofitable by any measure," he said. "We would exit the business."

American HomePatient Inc. recently warned of a similar exit strategy if ASP takes effect (see Eli's HCW, Vol. XIII, No. 15).

Apria is still waiting to find out exactly how much the Federal Employee Health Benefit Plan cuts will cost it. In the Medicare Modernization Act signed last December, Congress ordered rates for certain DME items cut to the level paid by FEHBP (see Eli's HCW, Vol. XII, No. 43).

But apparently that is harder to figure out than the feds expected. FEHBP "ended up not being a monolithic plan but 150 diverse plans with very, very different reimbursement rates," Khalifa noted. "It's become a much more complex process for the government than originally contemplated."

Apria estimates the FEHBP cuts, which may be announced by July, will total about 10 percent and cost the company $30 million in revenues next year.

Consolidation Eases The Pain

Apria's exposure to Medicare cuts isn't as bad as some companies', since its payor mix includes 64 percent of revenues from managed care organizations, Khalifa noted. But the company is taking cost-cutting measures that will compensate for some of the expected decreases.

Apria plans to consolidate its billing activities from 59 billing centers to 12 within two years, Khalifa said. And it will whittle its regional warehouses from 15 to five within 12 to 18 months. "We really are trying to have the local branches do three things and three things only," he explained. "One is to do great customer service, another one is to get referrals, and the third is to take care of patients as well as they can."

Apria expects the billing consolidation to improve collections and chip away at its days sales outstanding, which stood at 53 days in the first quarter, Khalifa noted. Another boon to DSO will be implementation of the electronic certificate of medical necessity.

For physicians who use the eCMN, which will be offered to them free, Apria expects billing to drop from 60 days to 30 days, Khalifa claimed. "Oftentimes, we are faxing those forms back and forth to a doc up to four times," he said. "This could be a very significant improvement in our DSOs, as much as three to four days." Apria started using the eCMN in April.

Finally, Apria is getting into diabetic supplies in a big way, following its purchase of diabetic supplier Star Medical Rx of Kansas City last quarter (see Eli's HCW, Vol. XIII, No. 16).

"We are acquiring patients at the rate of well over 1,000 a week," Khalifa said. He predicts $5 million to $10 million in diabetic supply revenues next year.