ORLANDO, Fla. — Rotech Healthcare CEO Steve Linehan is feeling pretty good these days: You can hear it in his voice. "I believe there is a great future here," Linehan told HME News last month, just weeks after Rotech emerged from Chapter 11 bankruptcy as a separate company from its former parent, Integrated Health Solutions.
Linehan's not the only one who believes in the future. As part of the plan to spring Rotech from Chapter 11, Integrated's creditors were paid $500 million in cash and received equity in Rotech valued at another $500 million.
Most gratifying, Linehan said, was that more creditors wanted equity than cash, attesting to the potential investors see in Rotech and the home medical equipment industry.
Here's what the CEO had to say about Rotech's plan going forward:
As part of its exit from Chapter 11, Rotech secured a five-year $75-million line of revolving credit. But don't look for the company, which made only one acquisition while in bankruptcy, to go on a buying spree. The preferred strategy is to focus on service and grow existing branches, filling in with strategic acquisitions where appropriate. A perfect example, Linehan said, would be to acquire a company that has a large oxygen patient base but doesn't do nebulizer medications. Joining that company with a Rotech branch that operates a pharmacy is the kind of synergy Linehan desires.
"Over that past two years we developed discipline and we are not going to let that discipline fade and tell people to run out and buy their competitors rather than go out and beat them in the market place," Linehan said.
Rotech also will continue to key on non-urban markets where most of its 650 branches are located. These markets often come with lower labor costs and less managed care penetration.
While in bankruptcy, Rotech focused on boosting its respiratory and nebulizer medication businesses. Last year, the company grew its nebulizer med business by almost 40%, and its oxygen patient base from about 75,000 to 106,000. Rotech views DME as a "worthwhile add on," but home respiratory therapy allows it to better measure patient improvement. The margins are also better. Rotech derives about 75% of its revenue from home respiratory services, compared to about 60% prior to entering bankruptcy, Linehan said.
About 53% of Rotech's business is reimbursed by Medicare.
" Just about whatever is needed, we'll supply," Linehan said. "But we want to maintain our focus on oxygen patients and oxygen concentrator growth, nebulizer med growth and DME rental items. We'll downplay any of the other things, except as required to meet a patient, doctor or community need."
Over the next five years, Rotech will operate under a corporate integrity agreement as part of a $17 million settlement with the government. Two years ago, Rotech's compliance department included two to three employees. Today, that number sits at 25.
"That's one of the things (branches) don't have any latitude on," Linehan said. "We define compliance; we measure it; we conduct audits and then we have an outside review organization that reviews our audits. We would continue to do these things even without a corporate integrity agreement because we think it is good business — and protection — going forward to make sure we are operating within government laws and regs."
"We are generating positive cash flow from operations even after debt service," Linehan said. "So there is a scenario where we never have to draw on that $75 million revolver, because we have enough money from operating our business to do all but the largest acquisitions." HME