Here we go again.
Lake Forest-based home healthcare provider Apria Healthcare Group Inc. is staring down another proposed cut in reimbursement for delivering breathing treatments to Medicare patients.
Late last month, the Centers for Medicare and Medicaid Services proposed cutting monthly payments for oxygen gear by 11%, to an average of $177, starting in January.
Regulators now are taking comments on the rule.
If the cut is adopted, Wall Street thinks Apria and others could feel the sting next year.
“We estimate that the changes could reduce total Medicare oxygen payments by up to 10% in 2007,” said William Bonello, a Wachovia Securities analyst who follows Apria and Clearwater, Fla.-based competitor Lincare Holdings Inc.
Delivering oxygen to patients with breathing trouble made up 68% of Apria’s $376 million in second-quarter revenue. The company gets about a third of its revenue from Medicare patients. Private insurers make up the rest.
Medicare now pays for oxygen tanks and equipment through a monthly rental fee, which is capped at three years. After that, the equipment goes to the patient, and Apria and other suppliers no longer receive equipment rental payments.
“We believe the rule is materially adverse for (Apria’s) earnings power,” wrote Gary Taylor, healthcare facilities analyst with Banc of America Securities.
The regulation eventually would slice payments from $156 to $55 for the majority of Apria’s Medicare oxygen patients once the new 36-month rental cap is reached, Taylor said. He estimates Apria would take a 20% to 30% earnings hit from 2009 to 2011.
Because of that, Taylor lowered his price target for Apria from $18 to $16. Apria’s stock traded just under $19 as of late last week, giving the company a market value of $800 million.
Chief Executive Lawrence Higby and some of his competitors blasted the idea of making Medicare home health patients own their own equipment earlier this year.
Higby’s said that owning oxygen gear is likely to be a burden to seniors, many of whom are too frail to negotiate the savings that the Bush administration envisions.
“The cornerstone of the misunderstanding is that all we are doing is providing the equipment,” Higby said. “We maintain a 24-hour hotline. We have drivers named in wills.”
Apria’s been here before. Medicare cuts have whacked the company through the years, particularly in the late 1990s.
A more recent cut showed up in Apria’s second-quarter results, which otherwise were greeted warmly on Wall Street.
Apria is trying to offset the Medicare cuts, including with a three-year contract it signed with Cigna Health Corp.
“A significant portion of our revenue growth in the (second) quarter was due to the efforts of our sales and operations teams to rapidly and successfully convert Cigna patients to Apria patients from other providers,” Higby said during Apria’s second-quarter conference call.
Apria also signed or amended more than 200 contracts during the quarter, “and believes that momentum should continue to build in this area over the second half of the year,” Higby said.
“Overall, the trend is promising but I’m still not satisfied with our organic growth rates,” he said.
The company has said it expects sales to grow 3% in 2006.
Apria credited cost-controlling efforts as a reason why its second-quarter profit was dramatically higher this year.
The company earned $18.5 million in the quarter, up from $3 million a year earlier, when profits were slammed by a $20 million settlement of a federal lawsuit over Medicare billing.
Revenue rose less than 1% to $376 million.
Internal growth will be a critical measure to watch, said David McDonald, a SunTrust Robinson Humphrey analyst who has a “neutral” rating on the home health provider.
“Organic sales trends were a bit shy of our expectation and management guided full-year sales growth down to 3%,” McDonald said. “Despite a strong ramp in Cigna revenue, overall organic growth continues to lag.”
Separately, former Apria chief financial officer Amin Khalifa has a new job, at San Diego-based Leap Wireless International Inc. as its chief financial officer.
“My move comes at a time when Apria is on the rebound with tighter operations, favorable cash flow and building sales momentum,” Khalifa said on the call.
“I’m making this change for only one reason,a unique opportunity in a growth company in the telecommunications industry,” he said.
Alicia Price, Apria’s controller, is serving as acting chief financial officer until a successor is named. A search is under way for Khalifa’s replacement.
