Although the final announcement in late March did not influence the first quarter, it will most certainly have an impact on future results. For home oxygen therapy, Medicare (acting through the Centers for Medicare and Medicaid Services and the Office of the Inspector General) implemented cuts on a state-by-state basis that average out to about an 8.6% overall cut.
That result is not as bad as some feared -- the high end of the range was in the low teens -- but many investors had seemingly talked themselves into believing that a lower cut was likely. In any event, since the cuts are on a state-by-state basis, the impact to individual companies like Lincare, Apria Healthcare
That's not to say that the previous Medicare cuts didn't bite into Lincare's first quarter. Revenue was down 1% to about $305 million, and net income fell to about $54.6 million. According to company management, operating income, which was reported at $90 million, was hurt by $43 million because of changes in Medicare, with about $34 million in lost revenue and an additional $9 million in extra costs.
During the quarter, the company did manage to post nearly $108 million in operating cash flow and repurchased 1.6 million shares for nearly $67 million, in addition to recording $23.7 million in capital expenditures and $29.8 million spent on business acquisitions.
Lincare also added 21 centers during the first quarter (10 acquired, 11 de novo), bringing the total to 825 at the end of the quarter.
With respect to the new Medicare announcement, Lincare management believes that it will cost the company $15 million to $16 million in lost revenue, starting with the second quarter. What's more, there is still a risk that Medicare could cut the nebulizer-drug dispensing fee that currently stands at $57 per patient per month, though such a cut probably wouldn't come until 2006.
This bad news for Lincare will make profit growth difficult for some time to come. That said, Lincare has been through this before and still emerged as a growth company once management adjusted to the new realities.
Given the considerably fragmented nature of the business, and considering that these new cuts will make it even more difficult for smaller operators, Lincare will no doubt continue to pursue acquisitions as a central growth strategy. Although future Medicare cuts are still possible, investors have likely seen the worst of the storm for now. After all, lowering reimbursements beyond a level where companies like Lincare could still profit would only harm patients in the end.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).