The year 2001 won't go down in anyone's book as a happy time for the U.S. economy. It will be remembered as the year in which the boom of the '90s and the post-Cold War peace both ended — one in a relentless slowdown, the other on the morning of Sept. 11.

But if you had to be in business somewhere, there were worse places to be than home health care. While high-tech stars were losing their luster, slow-but-steady industries such as home medical equipment were holding their own and even seeing some revenue growth.

For once, businesses that have had their share of trouble with third-party payers and politicians had reason to be thankful they weren't something else, like dot-coms.

Policy and Politics

“From an economic standpoint, the health care industry had a very good year,” says David Savitsky, chairman of the American Association for Homecare and vice chairman of Tender Loving Care, a provider in Lake Success, N.Y. But 2001 also was a good year on the policy front, he says.

Home medical equipment providers got a full cost-of-living adjustment in their Medicare reimbursement, although oxygen providers still are waiting for a comparable boost.

The oxygen hike of 0.3 percent may have fallen well short of a cost-of-living increase, says Dexter Braff, a merger and acquisitions advisor based in Pittsburgh, Pa., but it was politically meaningful. “Even a small increase is significant because it makes subsequent cuts that much more difficult to justify,” he says.

Providers still face the prospect of rules that require periodic tests and recertification for oxygen patients. Another open issue is nebulizer drug reimbursement. A report by the General Accounting Office to Congress found that some providers were buying nebulizer drugs for far below the average wholesale price on which Medicare reimbursement is based. This suggests that the AWP may end up being lowered in some cases.

But all in all, Braff concludes, “the market has probably been as benign as it has been in a long time from a reimbursement standpoint.”

Indeed, home health is also enjoying something of a honeymoon with the recently renamed Centers for Medicaid and Medicare Services, the former Health Care Financing Administration. CMS has made some decisions favorable to providers and manufacturers, such as allowing Medicare patients to upgrade HME products.

Savitsky applauds what he sees as a less-hostile attitude from CMS. “Tom Scully is a refreshing change from what we experienced before,” Savitsky says of the new CMS chief. “To have a CMS administrator say he would trust the providers to do the right thing is really remarkable, because we never heard that before.”

Medicare payment policies set the tone for the entire home health industry. And Washington's kinder, gentler approach has assured home health a steady source of revenue and renewed attention from Wall Street.

Market Performance

The two leading publicly traded companies in HME and oxygen, Clearwater, Fla.-based Lincare Holdings and Costa Mesa, Calif.-based Apria Healthcare, saw their sales and profits grow during the year.

For the nine months ended Sept. 30, 2001 (the latest figures available), Lincare's revenue rose 16 percent from the same period in 2000, and its per-share income rose 22 percent. Apria's revenue rose 14 percent, and its income, before an extraordinary debt restructuring charge, increased 25 percent.

Meanwhile, the general market, as measured by the S&P 500, had slumped by about 18 percent during the same period.

“In terms of operating performance, 2001 has been an excellent year for Lincare and Apria,” says Andrew May, a managing director at investment banker Jefferies & Co. He credits “relative stability in pricing from Medicare and private payers.”

Looking beyond the most visible industry leaders, the record of companies in HME and other home health services was more mixed, with pockets of strength and weakness. For example, Brentwood, Tenn.-based American HomePatient, once one of the major HME players, continued to struggle with a heavy bank debt.

Generally speaking, respiratory firms have been “doing very well,” says Marc Rose, president of Paragon Ventures, an M&A firm in Philadelphia. This is primarily because “reimbursement has been consistent and more reliable” for the respiratory sector than it has for some other sectors. “That's why companies like Apria and Lincare have been acquiring these types of companies,” he says. “The investment community has recognized [respiratory firms' strength].”

Revenue from third-party payment is “somewhat insulated” from the downturn, Rose notes, but home health can't avoid the chill entirely. “The economy is going to have an effect on the availability of new investment capital,” he says, although he notes that the right company still can find backers.

“There is very definitely smart money out there for a targeted investment,” Rose says. “As the technology bubbles burst, people are looking for solid places to invest, and they've identified certain areas of off-site health care as good places to invest.”

Clear or Cloudy?

Looking back on the past several years, observers describe an HME industry that has seen some thinning in its ranks because of the reimbursement cuts of the late '90s, but it has also stabilized.

It's not clear how long this business climate or the era of good feeling in Washington will continue. Along with the storm clouds looming over respiratory reimbursement, there's the overriding uncertainty of the war on terror and its possible effect on public spending.

After home care took its body-blow from the 1997 Balanced Budget Act, swelling federal surpluses took the pressure off Congress to hold down health spending. HME providers have reaped the benefits of that trend through more stable payments and favorable rules.

But the combined effects of war and the sagging economy already may have wiped out the budget surpluses. Soon, Congress could face deficits again. Will Washington be friendly to home care then or should the industry get ready for more criticism, charges of over-billing and reimbursement cuts?

Of course, clouds are nothing new on the HME horizon. Asked about the future, Rose says not much really changes: “I've been in this industry for 25 years,” he says. “You could ask me that question every year, and I could give you the same answer: ‘Hopefully, things will stay the same or get better.’”

Buyer One, Two, Three

Acquisitions in the home medical equipment industry are driven by buyers in three groups, says Dexter Braff, a mergers and acquisitions advisor based in Pittsburgh. And this three-way capital market “has been fairly consistent during the past two or three years.”

The first consists of large, publicly traded companies such as Apria, Lincare and the industrial-gases giant Praxair, which entered the HME market this year.

The second is a group of privately-held regional firms, such as Beaumont, Texas-based Homecare Supply; Conshohocken, Pa.-based American Homecare Supply; and O2 Sciences of Tempe, Ariz.

Braff says the third source of capital is new money. Often, the funds are raised by “an executive with a skill set and a cadre who taps into investment capital to fund the roll-up and acquisition of small competitors to create the next regional company” — like veteran HME executive Bob Cucuel did in 1999 when he started American Homecare Supply.
— T.G.