Looks like Lake Forest-based Apria Healthcare Group Inc. dodged a bullet.
The home healthcare provider’s seeing a comeback on Wall Street after thwarting possible Medicare payment cuts last month.
Shares of Apria are about even for the year, though they’re up about 16% since October and 42% since July. Apria counted a recent market value of $1 billion.
Behind the comeback: an unexpected rise in federal payments for oxygen and other equipment and better than expected third-quarter earnings.
In November, the Centers for Medicare and Medicaid Services said payments that Apria and others would receive for equipment will slightly rise in 2007. Apria and a key competitor had been bracing for Medicare payment cuts.
The Centers also said it would keep the three-year rental cap on breathing gear before a patient can own it.
Back in September, Apria’s shares slumped 10% on news that the Office of Inspector General of the Department of Health and Human Services was urging that payments for breathing gear be limited to as few as 13 months, instead of three years.
The government oversight agency said Medicare, which has had financial difficulties, could save $3.2 billion in five years with a 13-month rental cap on equipment.
Apria officials stepped in, meeting with regulators and offering their input and recommendations.
“We are encouraged that CMS listened to the provider community,” said Lisa Getson, an Apria spokeswoman.
Delivering oxygen to patients with breathing trouble made up 68% of Apria’s third-quarter revenue. Overall sales were up 4% to $382.2 million from a year ago. Profit came in flat at $19.3 million.
That was enough for Wall Street,Apria beat expectations. Analysts had expected Apria sales of $380.7 million in the third quarter, with profit at $17.9 million.
About a third of the company’s revenue comes from Medicare patients, with private insurers making up the rest.
Medicare 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 don’t receive further equipment rental payments.
Regulators’ November ruling is “a relative improvement over the (earlier) proposed regulation,” said Larry Biegelsen, an analyst with Prudential Equity Group LLC.
The higher payments would encourage Apria and its competitors to provide portable and new, cost-effective technologies to patients, with the intention of eliminating the need for traditional oxygen machines, Biegelsen said.
“While payments for new technologies are offset by reduced payments to stationary technologies, the final rule reduces the rate of cuts for stationary equipment,” Biegelsen said in a report.
Regulators changed the proposed rules because of concerns that they didn’t achieve budget neutrality, and didn’t encourage new technologies, according to Biegelsen.
Apria and Clearwater, Fla.-based rival Lincare Holdings Inc. are the major oxygen suppliers affected by the rule. Lincare shares are up about 12% since October.
“We would expect a relief rally in both (Lincare and Apria) as concerns over a further rental period reduction should be at least temporarily allayed, payment rates for 2007 are better than expected and the final rule provides heightened reimbursement visibility,” said David MacDonald and Michael Mascaro, analysts with Atlanta-based investment bank SunTrust Robinson Humphrey.
After Apria reported third-quarter earnings in October, MacDonald said he remained neutral on the company’s stock and thought “reimbursement visibility is key to any meaningful share price appreciation.”
And while Apria is pleased with the ruling, the company still has some issues with it, Getson said.
“We still believe any sort of cap is flawed public policy,” she said.
Oxygen is used to treat people with chronic and severe breathing diseases, which are major causes of death, she said.
