Wall Street didn’t blink when Apria Healthcare Group Inc. lost potential profits from a cut in Medicare funding.
The home healthcare provider made a big acquisition last year and diversified its offerings for health plan operators,moves the company thinks will help it withstand Medicare changes.
The Centers for Medicare and Medicaid Services said last month it would cut how much it pays some home healthcare providers by an average of 26% by requiring a competitive bidding process.
Reimbursement for breathing treatments and oxygen equipment,a core Apria offering that analysts refer to as the home healthcare industry’s “cash cow”,will be cut 30%.
The federal government says competitive bidding is intended to prevent overcharging and fraud in Medicare, which serves about 43 million elderly and disabled Americans. The government hopes to save more than $1 billion a year when competitive bidding fully comes into place.
Ten metropolitan areas, including Riverside, will immediately fall under the new process. Orange County will be affected in 2009.
Apria doesn’t seem worried.
The company says December’s $350 million buy of Denver’s Coram Inc., a provider of intravenous tube feeding, antibiotic treatments and other services, helps buffer it from Medicare cuts.
Having Coram “lessens our reliance on respiratory therapy and government reimbursement,” Chief Executive Larry Higby said during a recent conference call.
Coram’s infusion treatments aren’t part of the Medicare cuts.
Some 30% of Apria’s $1.6 billion in revenue last year came from Medicare.
Apria also said at a Lehman Brothers healthcare conference that the first 10 areas affected by the cut represented less than 10% of the company’s revenue last year.
Investors don’t seem overly concerned. Apria’s shares are up slightly since the cuts were announced on March 20 with a market value of $840 million last week.
Shares of Lincare Holdings Inc., one of Apria’s competitors out of Florida, have been flat with a market value of $2 billion since the news of the cut.
Puzzling Reaction
Wall Street’s reaction puzzled some analysts.
“We would expect the stocks to trade down on the more negative headline,” wrote Eric Gommel of Stifel Nicolaus & Co. in a research note.
Gommel said he estimated that the government would save an average of 15% in his earnings model for Apria.
“However, we are maintaining our hold ratings because we believe the market had expected the announcement from competitive bidding as the stocks have traded down recently and we believe it may have already priced in the more negative results from competitive bidding,” Gommel said.
Apria and Lincare, according to Gommel, should benefit from competitive bidding because they can take market share through acquisitions and their own growth at the expense of smaller providers.
Apria, in a Securities and Exchange Commission filing, acknowledged that Medicare cuts could have a wider impact over time as private insurers follow suit.
“In addition, there is a risk that the new competitive bidding prices will become a new benchmark for reimbursement from private (payers),” Apria said in the filing. “As competitive bidding is phased in across the country, we and most (durable medical equipment) suppliers will likely experience a substantial reduction in reimbursement.”
Skeptic
Darren Lehrich of Deutsche Bank is guarded about the cuts’ impacts.
“This is certainly worse than expected,” he was quoted in a Reuters story.
In earlier reports, Lehrich downgraded Apria because he believed Medicare reimbursement would be reset “substantially lower” because of the competitive contract bidding.
But competitive bidding, Stifel Nicolaus & Co.’s Gommel wrote, could act as a catalyst for industry consolidation for Apria and Lincare, which “have a track record of making acquisitions.”
Earlier this decade, Apria was an aggressive buyer of smaller home health providers and integrated them under a process called “Apriatization.”
Apria later moved to growing on its own. It jumped back into the big deal market late last year by buying Coram.
