From HME Business 06/25/2009

Oxygen: A Game of Last Man Standing?

Investor reports forecast stiff O2 cuts that leave Lincare as the sole survivor.

  • Jun 25, 2009

Several investor reports from Wall Street analysts surfaced this week suggesting that the Senate Finance Committee is looking at additional oxygen cuts, and forecasting that Lincare might be one of the few providers strong enough to survive should those cuts make their way into public policy.

Specifically, reports from Deutsche Bank, Suntrust Robinson Humphrey, Soleil and Pomeroy all hint at cuts being incorporated into Senate healthcare reforms that are so pronounced as to leave only an extremely large player such as Lincare standing. Some highlights from the reports:

Suntrust Robinson Humphreysaid that, in a survey of more than 50 oxygen suppliers on the impact of 2009 Medicare cuts, only 40 percent of providers expected to be profitable in 2009, and 60 percent said they would close up shop if further cuts were implemented. (78 percent said they were small providers with annual revenues of less than $6.5 million).

TheSuntrust Robinson Humphrey’s report went on to say that competitive bidding would likely put Lincare in a stong position. “Our 2Q and full-year estimates are likely overly conservative as they assume no acceleration in organic growth despite industry wreckage which should benefit Lincare,” the report said. “We view the 2011 start of comp bidding as a positive and think the risk of incremental draconian cuts is overly discounted.”

A report on Lincare from Deutsche Bank said that, based on its current understanding of the health reform framework being considered in the Senate Finance Committee regarding oxygen cuts, Medicare oxygen reimbursement could be altered in three ways: elimination of the 36-month rental cap (which would add $86 million to Lincare’s EBITDA); reducing monthly oxygen concentrator rates by approximately $80; and increasing the monthly portable oxygen rates by roughly $20.

“We don't believe the remaining public companies would be able to withstand a 30 percent plus cut without extreme duress; smaller mom and pop entities (45percent of market share) would likely fare even worse — thus leaving Lincare to ‘sop up’ a tremendous amount of market share given its 1000-branch national network,” the Deutsche Bank report stated. “In our view, it is possible that Lincare would be the only respiratory service provider capable of surviving the 30 percent-plus cut being contemplated in Senate Finance Committee.”

A report from Soleil said that there have been discussions of reducing monthly payments for stationary concentrators from $176 to $105 and extending the cap to 60 months to create a budget neutral benefit that lasts five years. It also said that increasing the add-on payment for portable oxygen concentrators to $77 could help offset the impact of any reductions in stationary oxygen benefits.

Soleil said that while this might be under discussion, the window of opportunity to accomplish any changes in the benefit is closing as competitive bidding looms. And once again, the house puts Lincare in the most advantageous position given such a scenario, saying that it would be at a serious advantage in a consolidating marketplace for oxygen services.

Pomeroy’s report echoed Soleil regarding discussion over reducing payment for stationary concentrators while extending the rental cap to 60 months and increases for portable benefits.

“If all patients lived to 60 months, such a change would be budget-neutral over the five years, but would in fact spread the payments over the full five years rather than the first three,” the report said. “Congress is also said to be considering increasing the add-on payment for portable oxygen to $77 from $32 currently. Since approximately 60 percent of beneficiaries receive both stationary and portable oxygen, the increase in the portable add-on payment should help to partially offset the adverse impact of the near-term reduction to payment for the stationary equipment.”

Pomeroy also noted that the rental cap will cost Lincare roughly $130 million to $145 million in lost revenue this year.