AWP cuts depress first quarter revenues

Monday, May 31, 2004

YARMOUTH, Maine - Respiratory medication providers in their first quarter earning statements reported the first, bruising blows of the 15% reimbursement reduction for drugs such as albuterol and ipratropium.

The reimbursement rate that took effect Jan. 1 whittled Lincare’s first quarter revenues by more than $12 million and cut Apria’s by $9 million, according to financial results released in April. Both providers, however, did declare an overall increase in revenues - 16% and 5%, respectively, when compared to the same quarter last year.

CMS cut reimbursement for inhalation drugs by 15% at the start of 2004. The cut, mandated by the Medicare Modernization Act, was determined by findings of a GAO/OIG report that estimated providers paid just 17% and 34% of the AWP for albuterol and ipratropium, respectively.

“We took a hit,” said Todd Christopher, CEO of privately held Home Care Supply. “We would have had a better first quarter obviously had we not been hit by the cuts, but the bigger concern is not these cuts but the uncertainly of 2005.”

Although this year’s cuts have taken their toll, providers consider 2005’s average sales price plus 6% reimbursement model Public Enemy No. 1. Lincare predicted in an annual report filed with the SEC that the ASP provision, if implemented, could result in an 80% cut in reimbursement from 2004 rates.

Home Care Supply will consider exiting the respiratory business if the ASP-plus-6% model takes effect, said Christopher. In its annual SEC report, Apria echoed this impulse, stating it would begin to withdraw from the business as early as the third quarter.

The ASP switch over is expected, however, to place greater stress on Lincare because of its high reliance on Medicare payments. Approximately 60% of Lincare’s business is through Medicare, and the combination of oxygen and drugs makes up 82% of its revenue, according to a Lincare financial analyst. In 2002, Lincare pharmacies generated nearly $230 million in claims for respiratory medications, according to the SADMERC.

Despite the setbacks of this year, Lincare considered the first quarter earning results a positive. Net earnings for the quarter were $62.9 million compared with $52.9 million in 2003, and the company’s shares climbed 9% after the report was released.

Christopher agreed. Despite the revenue reduction, Home Care Supply still saw a 9% growth rate while not completing any acquisitions. Lincare’s growth was 16%, due in part to acquisitions, and Apria’s rate was 5%.

“We just took the bullet and managed to still grow our overall business, so we had a good quarter,” Christopher said. “We’re pleased and proud.”