Wall Street analyst comments on NCB winners

A friend of HME News forwarded me this Deutsche Bank-Equity Research analysis of Medicare's competitive bidding winners, which CMS announced yesterday. It's not very encouraging. The most interesting parts of this analysis are paragraphs two and three. In particular, this statement: "We believe CMS has shut the door, for now, on  real progress to change bidding rules for Rd 2."

Here you go:

The news: CMS announces DMEPOS Rd 1 Competitive Bidding contract
winners. CMS received signed contracts by 356 discrete suppliers in
1,217 separate contracts across the 9 CBAs. According to CMS' press
call, 76% of the contracts are w/suppliers that have an existing
presence in the markets and 90% of contracts are w/suppliers that
have experience in the product categories they plan to supply in the
CBA. CMS indicated the return rate was 92% (based on 1,324 contract
offers) and 51% of suppliers are "small businesses." As expected,
CMS will move fwd w/Rd 1 on Jan. 1, 2011.

Based on our review of the list of contract winners, we make some
observations: (1) several of the national chains have contracts in
multiple markets including Apria (8 O2 / 7 CPAP), American Home
Patient (8 O2 / 9 CPAP), Pacific Pulmonary (3 O2 / 4 CPAP), and
Rotech (6 O2 / 3 CPAP). As previously disclosed, LNCR is in 2 oxygen
markets. (2) we see several "non-traditional" business models in
several CBAs such as Inogen (a Venture backed product co.) in 6 CBAs
for O2, US Med, Inc. (a mail-order supply co.) in all 9 CBAs for
CPAP and Open-Aire (a product/service co. in the portable market) in
7 CBAs for O2.

CMS comments on Rd 2. CMS indicated it has met w/some the critics of
the CB program (such as Univ. of MD academics), but CMS leadership
stated the agency is confident in its methodology and has no plans
to change for Rd 2. CMS noted that it would actively monitor Round 1
for problems. CMS leadership suggested that the 92% acceptance rate
of the contract offers may put to rest some of the criticism. We
found CMS to be slightly abrupt on its press CC, and we continue to
wonder what (if anything) will get CMS to reconsider the bidding
rules for Rd 2. We believe CMS has shut the door, for now, on
real progress to change bidding rules for Rd 2.

Regards,
Darren Lehrich
Deutsche Bank Equity Research

Mike Moran