Lincare Holdings (NASDAQ:LNCR) knew it was coming and so did investors, but the severity of the new Medicare Bill has left them breathless! The November 2003 passing of the bill contained provisions that, if implemented, would severely cut revenues and net profit margins.
Principally hit in the bill is the amount of money that Medicare will reimburse for oxygen and drugs which are provided to the homes of 480,000 Lincare clients suffering from Chronic Obstructive Pulmonary Disorder (COPD). For 2004, Medicare reimbursements on the company's therapeutic drugs will be reduced by an estimated 15% to 20%. In 2005, Medicare will reduce reimbursements by an estimated 10% for oxygen.
Approximately 60% of Lincare's business is Medicare funded, so this is a serious blow. The combination of oxygen and drugs makes up 82% of revenue. If these were the only provisions in the Bill, Lincare could recover in a year or two. After all, it's seen this before, when Medicare reimbursements for oxygen were reduced in 1997.
However, in 2005 Medicare will begin to use a new reimbursement formula which could reduce the payments for the company's drugs by as much as 70% from today's levels. No one can say with certainty the actual percentage reduction, but whatever the level, Lincare will be hit very hard as it is unlikely that clients on Medicare assistance can afford to make up the difference. Management put out a wait-and-see press release in November, and its recent fourth quarter earnings release gave no further guidance.
It is this uncertainty that has Lincare's shares at $32.00 as of yesterday's close, 28% below its 52-week high of $43.98. Its major competitor, Apria Healthcare (NYSE:AHG), experienced a similar share price drop but has since recovered, as it is not as reliant on Medicare patients.
The market is still expecting earnings growth for Lincare in 2004. But for 2005, earnings estimates have been almost cut in half from an average of $3.08 per share 90 days ago to $1.73 per share today.
The reality is that no one can come close to an accurate prediction of the earnings decline for 2005. Given that, I'm following the company's lead here, and am waiting to get a clearer picture of the effects these Medicare changes will have on the business next year.
Motley Fool contributor Philip Durell, otherwise known as admiraltroll on the Fool discussion boards, owns no shares of Lincare and welcomes your feedback via email.
