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In December of 2003 — the same month that competitive bidding was signed
into law — HomeCare published our Forecast Survey of
providers for 2004. In that year, aggregate results showed just
over 40 percent of HME companies' revenue was generated from
Medicare (40.8 percent to be exact).
Based on results of the magazine's surveys in the years since,
the needle has moved only slightly. Published in January, the
Forecast Survey for 2010 showed providers dependent on Medicare for
just under 40 percent of their revenues (at 38.3 percent). And
while the numbers in our most recent Web poll on the subject are
unscientific, we think they're a pretty good indicator of where
providers' revenues stand today, only weeks out of the go-live date
for competitive bidding on Jan. 1, 2011.
According to the October poll results, a whopping 71 percent of
HME companies still look to Medicare for 40 percent or more of
their revenues, with half of those into the government program for
75 percent — or more. Only 14 percent of providers who took
the survey depend on Medicare for 20 percent or less of their
income.
What does that mean in the big scheme of things HME? I called up
The Braff Group's Bob Leonard to ask, because after all the talk
about diversification and moving away from Medicare, especially in
light of events this year, I was disappointed that more providers
don't seem to have done it. But Bob, who wasn't surprised at the
numbers, pointed out the obvious: "While people have talked about
it and tried to find other payer sources, most DME has been and
will probably continue to be Medicare," he said. Some respiratory
companies may be even more dependent on the government program at
80 to 90 percent of income (again obvious, since so many oxygen
patients are Medicare beneficiaries).
"That's why people are in such a bind, particularly now with
competitive bidding," Bob continued. "Not only is the pricing
abysmal but you can be cut out of a segment — not just a
slice — of business."
The thing is, he said, "you can't not do Medicare."
I called Weeks Group's Wallace Weeks, too. He wasn't surprised,
either, that it looks like many providers haven't done much to
diversify payers, and he agreed the squeeze is definitely on. In a
hypothetical numbers-crunching scenario, Wallace figures that at an
average 32 percent hit to Medicare reimbursements under bidding,
net profit margins for Round 1 "winners" — should they win
contracts in all nine product categories — could sink from +7
percent territory to the wrong side of the bottom line at -2
percent.
For any company that wins a contract, he noted, the mix of its
Medicare business will increase no matter what it was prior to the
contract. At this point, he said, unless all companies in Rounds 1
or 2 that currently count on a good chunk of Medicare change have
made moves to mitigate their risk, the outlook is grim.
"It reminds me of that country song," Wallace said: "'I ain't
broke but I'm badly bent.' Those companies with a lot of Medicare
exposure are going to be badly bent."
Even merger-and-acquisition activity in the competitive bidding
areas is quiet versus in the original Round 1 (2008) when
aggressive buyers were clamoring after bid winners. This time
around it's different, Bob said. Although there could be an M&A
spike when bid winners are known, "At the end of the day, contract
pricing is so low that at some point it's simply not worth paying a
huge price in exchange for an opportunity to lose money or barely
break even."
Can companies caught in the bind come out of it? Probably not,
Bob said, particularly if they are in Round 1. "If they are in a
bidding area and didn't get a contract, they are in serious
trouble," he said. "But who knows how it will all come to pass? It
hasn't followed the script yet, ever."
I'm keeping my fingers crossed he's right about that.
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