Home Health Market Rides Choppy Seas The forecast for investors and companies in the home health industry doesn't bode well, according to recently released analyses of second-quarter earnings reports. In fact, it may be termed downright dismal.

"If I were giving a weather forecast on the current state and outlook for the industry, I would say it was cloudy with some storms on the horizon," said John Cumming, managing director of HealthCare Markets Group, Hilton Head Island, S.C., which released its fiscal 1999 second-quarter results for the health care industry, including home health care, in late September. "There's just not enough positive news to say this is going to change, either. In a broad-brush statement, the industry is in trouble."

Cumming cited cuts to Medicare reimbursement as one factor contributing to the lackluster financial performance. Provisions in the Balanced Budget Act of 1997, which reduced Medicare payments for oxygen, oxygen equipment, drugs and biologicals, significantly affected home health quarterly revenues, he said.

Since there were losses in both the second quarter of fiscal 1999 and that of fiscal 1998, adjusted earnings were not calculable on a 5.8 percent increase in revenue, according to the report. But it did note that adjusted earnin gs have declined for the last four quarters.

Clearwater, Fla.-based Lincare Holdings was the sole bright spot in the market, posting second-quarter revenues of $143 million, up 20 percent over the same quarter for the previous year, while adjusted earnings were $24.8 million, up 19.7 percent. Cumming attributed the respiratory company's success to quality management of its acquisitions. Conversely, poor acquisition management has been the downfall of numerous companies, he said.

A report issued in late September by Prudential Securities, which mirrored the HealthCare Markets Group findings, echoed Cumming's statements, saying it saw "potential ... for certain well-managed HME providers." The report estimated a 5 percent to 8 percent growth for the market.

The Prudential report also showed the respiratory market as the highest-margin sector within home health care. Despite reimbursement cuts, home respiratory care has maintained a solid profit margin. Respiratory adjusted earnings increased 19.1 percent on a 9.7 percent increase in revenue, according to the Prudential report. Segment leader Respironics Inc., Pittsburgh, had quarterly revenues of $90.1 million, up 5.6 percent, while adjusted earnings were $5.6 million and flat.

Cumming said that the poor showing overall in the home health industry has consequently affected other segments, including durable medical equipment. "It's a challenging time for the DME market," he said. "The poor performance in the home health market has had a domino effect on the DME and other markets."

DME adjusted earnings for the second quarter increased 12.5 percent on a 1.2 percent decline in revenue, according to the HealthCare Markets Group study. Segment leader Invacare Corp., Elyria, Ohio, reported second-quarter 1999 revenues of $202.2 million and flat, while posting record adjusted earnings of $11.9 million, up 8.1 percent over the same quarter the previous year.