LAKE FOREST, Calif. and CLEARWATER, Fla.-- According to earnings reports released last week by two of the HME industry's largest providers, both Apria Healthcare and Lincare Holdings saw revenue growth and substantial acquisition activity last year--but also felt the effects of Medicare respiratory drug cuts to 80 percent of AWP (Average Wholesale Price).

Apria, Lake Forest, Calif., ended the year with $1.45 billion in revenue, a 5.1 percent increase from 2003 revenues of $1.38 billion. The company's net income fell by $2 million, to $114 million. According to a company statement, earnings were affected by respiratory medication cuts, which cost the company $15.2 million for the year.

Meanwhile, Lincare, Clearwater, Fla., reported 2004 net income at $273.4 million, compared to $232.1 million for the prior year--a 16 percent increase. Revenue now stands at $1.27 billion, an 11 percent increase. The drop in respiratory drug pricing last year, however, reduced the year's revenues by $14.3 million, the company said.

While Apria acquired 27 companies worth more than $148.7 million last year, Lincare acquired 26 companies with annual revenues of $49 million. Those numbers encompass numerous New England acquisitions, including Lincare's buy of the medial gas division of Charlestown, N.H.-based Merriam-Graves and Apria's purchase of Raymond, N.H.-based LifePlus.

The acquisitions are part of an industry consolidation that's been occurring for the last quarter-century, according to Bob Leonard, managing director at Pittsburgh-based merger and acquisition firm The Braff Group. Both Apria and Lincare "have the money and the wherewithal and the need to buy more than others," he said. "They're truly national in scope and well-capitalized."

Apria serves customers through approximately 475 branches in 50 states. Lincare has 804 locations serving customers in 47 states.

Apria closed another deal at the end of last month, acquiring Knoll Medical Supply, Topeka, Kan., owned by former AAHomecare Chairman Steven Knoll. While "it's been quite a healthy business," Knoll said in an interview with Topeka's Capital-Journal, one reason he decided to sell is because Medicare policy is pushing out small providers and making it too risky to do business. "The paperwork can trap you," he told the newspaper. "Medicare can ask for its money back."

But Braff's Leonard said he feels there will always be a place for small players in HME, despite the tightening reimbursement climate. "Even though there's been nonstop acquisition, it's never going to be a monopolistic business," Leonard said. "The business is inherently local. Aggressive local guys can out-service a big bureaucratic company and establish a nice niche for themselves."