Credit squeeze: ‘You’ve got to react’

Thursday, July 31, 2008

As providers grapple with competitive bidding’s 26% average cut-or the alternative 9.5% nationwide reduction-they’ll face increasing scrutiny when it comes to borrowing money, say industry watchers.

“Cash is the most important issue you have to focus on when you know your margins and pricing are declining,” says Bill Corcoran, vice president of financial services for Invacare, the industry’s largest creditor. “You’ve got to react. You just can’t do the same-old-same-old.”

Stating a basic “capitalistic law,” Corcoran said it doesn’t matter if you’re an HME provider generating a million dollars a year or a multi-billion dollar airline, you only get the chance to run out of cash once.

At one time, providers could have a so-so credit rating and still borrow money to finance growth, but those days are gone, or just about gone. With tightening in the general credit market coupled with large reimbursement cuts, lenders want to know more than ever that companies are viable and can pay their bills. This means HMEs must demonstrate that they’ve improved their balance sheets by reducing expenses and increasing earnings, say industry watchers.

“You have to have a plan,” Corcoran said. “You’ve got to understand the dynamics of your business-at least a year or two years out-so you can appreciate and understand how you are going to handle that business at a reduced rate.”

For providers seeking credit, especially those in competitive bidding areas, a business plan is essential, agreed Jim Phillips, senior vice president and general manager of VGM Financial Services.

“If you are in those areas, we now ask, ‘Did you bid? How is this going to affect you?’” he said. “It’s got to affect them. A lot of HMEs are doing more retail or sleep, which today is not a big Medicare or Medicaid issue or they are targeting a different market.”

Said Kirsten Delay, a senior vice president at Pride Mobility Products: “We want to know how long a company has been in business; what their financials look like; what their payment status is with other vendors-and that they look like a stable company.”

Debt to equity ratio

To help assess a company’s financial health, consultant Wallace Weeks said, determine its debt-to-equity ratio. In the HME industry, the average ratio is about 2 to 1. That means a company has $2 worth of debt for every dollar of equity. If that ratio increases to 2.5 to 1, “it’s a sign that cash flow is probably going to be in the crapper pretty soon,” Weeks said.

“If you grow too fast, you’ll run your debt to equity ratio up too high and credit becomes no longer available,” he said. “That generally is the start of massive cash flow problems.”