Home health care firms fret Medicare reform.

Drug companies love the Medicare reform bill. So do health plan providers.

But what about companies providing home health care services, such as Lake Forest-based Apria Healthcare Group Inc.? They're feeling a little bluer from the Medicare reform bill, which President Bush signed into law last month.

The downside for home health care providers: The bill cuts reimbursement on some drugs Apria and its rivals provide for their Medicare patients.

Shares of Apria fell as legislators worked out details of the bill. Apria rival Lincare Holdings Inc. in Clearwater, Fla., were also down during the same period.

Apria provides hospital beds and wheelchairs, as well as breathing therapy such as drug delivery, oxygen tanks and ventilators for use in patients' homes.

"It is a tremendous subsidy for the prescription drug business and the pharmaceutical companies and will cost us in the long run far more than the $400 billion that has been suggested," said Larry Higby, Apria's chief executive. "Basically Congress rewarded the hospitals so they wouldn't fight the bill by giving them increases."

The specific concern for home health providers is that the bill will cut reimbursement for respiratory therapy drugs that Apria, Lincare and others provide for the nation's 40 million elderly and disabled Medicare patients.

Apria is reimbursed for 95 percent of the average wholesale price of the respiratory therapy drugs it supplies. Under the new law, reimbursement on the drugs would be cut 15.8 percent in 2004, then another 66 percent in 2005.

Meanwhile, Medicare reimbursement on oxygen equipment, some wheelchairs, beds and other equipment is set for cuts in 2005. It's not clear by how much.

Competitive environment

What could have a bigger effect on Apria's equipment business is the introduction of competitive bidding on gear targeted by the Department of Health and Human Services starting in 2007.

Still, Higby doesn't seem too fazed, noting that the company's stock has bounced back from November's declines.

Investors, he said, recognize that Medicare reimbursement accounts for 28 percent of Apria's $1.2 billion in sales last year, with respiratory drugs making up just 6 percent of the total. Apria gets most of its revenue from patients in private managed care plans.

Analyst Jerry Doctrow of Legg Mason Inc. said he liked Apria shares in spite of the reimbursement cuts. He said Apria and other home health care operators should be able to offset any cuts by taking advantage of industry consolidation and cost reduction.

"We continue to believe that (Apria) is well positioned to absorb a cut because only 5 percent to 6 percent of its revenue comes from Medicare respiratory therapy drug reimbursement," Doctrow said in a November report.

Risk for Apria and other respiratory therapy companies "comes from uncertainty over possible calls for a market-based pricing mechanism or competitive bidding system that could result in further reimbursement reductions in further years, and the strength of legislative or regulatory language that may call for such a move," Doctrow said.

William Bonello, a Wachovia Securities health care analyst, was a little harder on the outlook for the company's shares.

"While Apria has a competitive business model in a growing, fragmented market, we believe that near-term appreciation may be limited due to potential changes in Medicare reimbursement," said Bonello, who has a "market perform" rating on the company's shares.