Medicare’s a business worth staying in, even with recent government reimbursement cutbacks.
So says Lawrence Higby, chief executive of Lake Forest-based Apria Healthcare Group Inc.
“We still are bullish on Medicare,” Higby said last week.
The comments came after Apria reported that first-quarter operating profit fell 18% to $41 million, versus a year earlier, on a 6% rise in revenue to $372 million.
Apria blamed the mediocre results on cuts in Medicare reimbursement that went into effect Jan. 1, along with the non-renewal of a contract with Gentiva Health Services Inc., which provides home nursing care.
The company expects sales to grow 5% to 6% this year.
Apria provides breath-ing treatments, such as oxygen tanks, ventilators and drugs for use in patients’ homes. It also supplies hospital beds and wheelchairs for home use. Many of its customers are covered by Medicare.
Higby’s optimistic on a couple of fronts:
After industry lobbying, the government agreed to pay Apria and others a fee to give drugs covered under Medicare.
A proposed oxygen reimbursement cut, “at the strong urging of the industry,” was whittled down to about 8%. The cut initially was expected to be 15% to 20%.
“Both of those did two things for us,” Higby said. “First of all, the cuts didn’t hurt us as bad as we thought, and secondarily, they made Medicare a business worth staying in. We know what reimbursement is going to be for the next few years and we are on our way to a pretty stable future.”
Higby’s always embraced Medicare. When it was clear that 2003’s Medicare Prescription Drug, Improvement and Modernization Act would cut into its revenue by lowering reimbursement, Higby saw a market ripe for shakeout and consolidation.
Apria spent about $28 million to buy seven companies during the first quarter. Higby said about 60% of the industry is made up of mom-and-pop companies,good acquisition targets for Apria.
Medicare accounts for about 31% of Apria’s revenue, up from 27% in 2002. The company gets the bulk of its $1.4 billion in annual sales from managed care health plan operators and private insurance companies.
Apria’s “well positioned to benefit from expanding Medicare managed care programs in 2006 and beyond,” said Eric Gommel and Jerry Doctrow, analysts with Legg Mason Wood Walker Inc., in a report.
Higby said Medicare reform is pushing more patients into managed care plans.
“We’re already far and away the leader in managed care,” Higby said.
Cypress-based PacifiCare Health Systems Inc. is a customer.
Apria shares have been in a holding pattern since President Bush OK’d Medicare reform two years ago. Despite last month’s soft first-quarter results and 2005 outlook, shares held at about $30,where they were prior to the results.
Higby said that’s because the market understands that the cuts were “much less severe than what was originally projected. Actually, the stock probably has priced into it much more severe cuts than what occurred, so the stock reacted very mildly.”
As home health providers cope with less government reimbursement, they’re looking to become leaner.
“We have to become more efficient if we’re going to be able to maintain margins,” Higby said.
Overall, though, Higby said he sees 2005 “as a year that we’ll struggle to really keep our costs under control so that we’re continuing to improve margins, given the reductions that took place this year. But beyond 2005, our future is very solid.”
Apria’s cost cutting includes a UPS routing and scheduling system that hasn’t panned out as expected yet.
“The system works fine,” Higby said. “The level of training that we needed to do to make sure people understand the system is more extensive than we originally projected, and that’s what put us behind some of the cost-savings efforts that we wanted to do in transportation. The rest of the cost-saving efforts are pretty much on track.”
