Has bottom fallen out of neb-med business?

The fee cut for dispensing respiratory medications to Medicare beneficiaries is so deep that it seems impossible for providers to continue the business without losing money. Still, that doesn't necessarily mean a mass exodus from the marketplace, say industry pundits. On the surface, it appears that CMS's decision to drive down monthly reimbursement from an already substandard $57 to $33 will cause respiratory providers to finally pull the plug on a business that was tenuous at best. Yet, if history is any indication, resourceful providers will find a way to not only continue the business, but also manage to make it work, say industry watchers. Case in point: After reeling from the initial "sticker shock" of CMS's announcement, Wall Street showed confidence in Lincare by giving it a "buy" rating. As a result, the Dunedin, Fla.-based respiratory chain's stock rose from $40 to $44 a share the next day. And even though Lincare issued a statement estimating a potential $46 million in lost revenue for 2006, the prevailing opinion among brokers is that it remains well positioned in the marketplace. "Not that they're thrilled with the new fees, but Lincare and Apria can probably continue in the business," said Balaji Gandhi, an analyst with Boston-based Pacific Growth Equities. "If anything, they'll benefit from consolidated business because this will cause a lot of pain for the smaller companies." Bill Bonello, an analyst with Wachovia in Minneapolis, admits he's amazed at the market's resilience to the devastating news. "With a cut going deeper than anyone imagined, I expected the stock to go down," he said. "This shows many of us were wrong, and that there was a lot of pent-up demand for Lincare stock." Analysts speculated that the fee cut wouldn't have nearly the impact on Lake Forest, Calif.-based Apria, though estimates pegged the revenue loss at about $8 million. Although Apria issued no official statement about its future in dispensing respiratory medication in early November, the general consensus within investment circles is that it can easily withstand the hit. "Apria is much less affected by this because their payer mix is not as heavily skewed toward Medicare as Lincare," said Bob Leonard, managing director for the Pittsburgh-based Braff Group. "They don't do much with respiratory medications anyway." A bigger question mark is smaller independent providers. Can a modestly sized company with much shallower pockets absorb the cost impact of a near-50% fee reduction for this service? It appears that a lot more dust has to settle before that answer is known. Optimists are out there, however. Despite a development "that is definitely not good news for many providers," Mickey Letson is convinced that the respiratory medication business is there for the taking. "Our customers have been prepared for this type of cut for some time, so we have spent the last several months examining everything from their drug mix to overall operational efficiencies," said Letson, president of The Letco Companies in Decatur, Ala. "As a result, our customers will continue to offer this service and be profitable at it." There are various ways to successfully continue in the business, but discount pricing isn't one of them, Letson said. "Those who think the key to survival is lowering prices will find themselves out of business," he said. "Saving a penny here or there on drugs will not help you survive." Introspection with a magnifying glass is the only way to make a financially prudent decision on whether or not to keep the business, said Joe Lewarski, vice president of clinical and government affairs for Santa Barbara, Calif.-based Inogen. "Each company has to look at their cost of business and make a tough decision about what they can and can't do with a limited amount of money," he said. "It's a challenge we've faced a number of times over the years. We've traditionally bundled all these services into the cost of a HCPCS code, and each time there's a cut, we look internally to see what we can do within the existing business to get that cost out." In its now-infamous announcement, CMS stated unequivocally it would not pay for what it called "ancillary" services. But determining which services--if any--to eliminate is sure to be an agonizing decision for providers. The most commonly suggested targets for termination include 24/7 availability, same-day and overnight delivery, in-home clinical consultation and caregiver training. Can providers jettison those services in good conscience? Dan Fry, president of Windermere, Fla.-based Revlis Medical, a nebulizer manufacturer, hopes not. "CMS contends that there are too many uncovered services involved with respiratory meds, but come on--if you want good outcomes you need to do certain things," he said. "Compliance equals good outcomes and compliance doesn't just happen. If all providers did was drop ship meds to patients with no support system, their compliance levels would be terrible. Taking respiratory meds correctly is not as easy as taking a pill." Fry advised providers to seek help from drug manufacturers on purchasing. Offering lower pricing and looser terms could mean some indispensable wiggle room, he said. "Hopefully, the drug makers will see that their market is about to shrink tremendously and take a proactive stance to help the small guy out," Fry said. "If companies have the ability to negotiate better pricing with the brand name manufacturers, there may be a small light at the end of this long, dark tunnel."