Badly Bent

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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