Good but not great

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Thursday, February 28, 2002

What's good money in the DMEPOS business? And what's great money? As a Medicare provider, are you obliged to earn good money and not great money? That's what Tom Scully thinks. In his remarks at Medtrade last fall, the CMS Administrator told his audience that he believed Medicare providers should earn good money. But we don't want you to earn great money, he said.

He's right. Medicare is funded by taxpayer dollars, and no taxpayer wants any government contractor to make 'great money' on his contribution to the common weal. Moreover, HME provider profits are derived from health care, for the elderly, and not only the elderly but the sickest elderly. Reputable HME providers understand this. Those that don't wind up on Sixty Minutes, in court or in the clutch of the OIG.

That's why I don't understand the Bush Administration's proposal to launch a nationwide competitive bidding program (See article). Yes, it's nothing new. Every year, the proposal makes it into the president's budget. But this year is different. DHHS Secretary Tommy Thompson has a reputation as a reformer. And as the sun sets on the Polk County competitive bidding demonstration project, its boosters are hailing it as a success.

But there's a big 'but' here. HME providers don't make great money. The good one's make good money, but no one's making great money. Not even Lincare. Its profit margins came in at a little better than 15% last quarter. Pretty good. But great? In some eyes maybe, but consider the following.

Companies on the S&P 500 index throw roughly a 14% profit margin. That means a little less than half are doing better than Lincare and a little more than half are doing worse. Remember too that Lincare is a rarity. Most HMEs don't throw like Lincare, maybe because most companies don't have Lincare's executive team, which has a stellar reputation among analysts.

Last fall, in a study commissioned by AAHomecare, the Lewin Group surveyed the financials of more than 20 home respiratory companies that supplied nebulizer medications and found an average profit margin of 9.2%. Good money, but not great money.

So where has administration after administration gotten the idea that HME providers are making great money? The best and the brightest are making good money, which is what taxpayers should want of the providers who take care of seniors. HME

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