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7/9/2002

CMS Examines Finances of Home Health Industry

Kate Traynor

Large respiratory- and infusion-therapy service companies have mostly recovered from the fiscal shocks delivered by the Balanced Budget Act of 1997, according to a report (PDF) from the Centers for Medicare & Medicaid Services (CMS).

Although the entire home health industry struggled after the act's passage, the report claims that the government's current prospective-pricing system appears to have improved companies' cash flow by encouraging health care providers to "streamline operations and efficiently deliver services."

But the report, which CMS compiled from research done by major investment firms, acknowledges that the small respiratory- and infusion-service companies that constitute the bulk of the industry continue to struggle financially. CMS predicted that the trend toward consolidation of companies will continue in the industry, with the larger respiratory and infusion businesses acquiring the smaller companies.

CMS found that, on average, the stock prices of five major, publicly traded respiratory- and infusion-service companies fared poorly beginning in early 1999 but then outperformed the Standard & Poor's 500-stock index two years later. But an analyst quoted in the report declared that only two companies in the respiratory- and infusion-services industry—Apria Healthcare Group Inc. and Lincare Holdings Inc.—should be considered "financially sound."

Two of the companies used for the stock-price analysis, Coram Healthcare Corp. and American HomePatient Inc., have stock that currently trades at less than a dollar per share. Coram filed for bankruptcy protection in 2000. According to an April 30 statement from American HomePatient, the company's auditors have expressed "substantial doubt" about whether the company will "continue as a going concern."

According to the CMS report, respiratory therapy services generate higher profits than infusion therapy services. CMS described the Medicare-reimbursed portion of home infusion services as "significantly less profitable than the home respiratory Medicare business."

The report estimates that labor, which includes pharmacists' services, accounts for 60–70 percent of operating costs for respiratory-service companies. The largest operating expense for infusion-service providers is "products/drugs," which account for about 41 percent of revenue. Labor costs are the next largest expense for infusion-service providers.

According to CMS Administrator Tom Scully, this report is part of a series of health care industry market updates that the agency is using to analyze the financial status of industries affected by CMS policies. Other reports in the continuing series have examined the finances of acute care hospitals, nursing homes, and health maintenance organizations.