Home Infusion Could Use A Shot In The ArmMark Maremont
Considering the runaway cost of medical care, any company that promises to save up to 50% of hospital charges should be wildly successful, right?
For a while, that was true of the numerous home infusion providers that sprang up during the 1980s. Intravenous drug infusions used to be confined to hospitals. But development of smaller, more sophisticated drug pumps has allowed companies to offer IV injections of everything from antibiotics to AIDS treatments in a patient's home. Providers supply drugs, train patients to administer them, and often arrange for nursing care. Without high overheads, they could undercut hospital costs while enjoying healthy margins. The industry's sales have tripled since 1988, to an estimated $3.7 billion, and by early this year investors had bid up the shares of leading players to astronomical levels.
PLUNGING STOCKS. But now, the bubble has burst. Worried about spiraling costs, insurers have been aggressively demanding big discounts in recent months. The No.2 infusion player, Medical Care America Inc., shocked investors on Sept. 25 by warning that its third-quarter earnings, due out in late October, will be flat. The industry has also been rocked by investigations of the common practice of paying doctors for referrals. Stock prices have plunged (chart), and a shakeout looms. "I foresee a period of absolute chaos and a lot of consolidation," says Patrick S. Smith, Medical Care's chairman. "The little guys will get beaten to death, and three or four big players will emerge at the end."
Even the biggest players are getting walloped. Take Baxter International Inc., which plans a November spin-off to shareholders of its Caremark International Inc. unit, the industry leader. Baxter announced the spin-off in April, when the industry's price-earnings ratios averaged more than 25. A Caremark spokesman insists that the deal is still on. But analyst Neal C. Bradsher of Alex. Brown & Sons Inc. figures that the unit could now achieve a p-e of about 15, valuing it at about $1 billion. Baxter bought Caremark for 55 times earnings in 1987.
In part, home infusion is a victim of its own success. Its fat operating margins--about 15% on average, vs. 5% at hospitals--have attracted hundreds of new operators. Now, the crowded field has given insurers the upper hand. "Since January, the larger companies have been very aggressive in offering us attractive rates," says Lawrence Goelman, CEO of Cost Care Inc., of Newport Beach, Calif. The company helps insurers contain costs.
GOUGING. Home infusion also has come under fire for price gouging. "We've seen companies charging $82 for a $20 injecting device and $15 for hydrogen peroxide you could buy at a drugstore for 89 ," says Jacqueline Lewis, a registered nurse who helps set home infusion reimbursement policy at Prudential Insurance Co. Lawrence A. Ross, assistant vice-president for institutional provider relations at Blue Cross & Blue Shield of Rhode Island, adds that his company has sometimes been billed "$8,000 to $10,000 a week for a patient, as much as a hospital stay might cost." To cut expenses, the company set up a so-called managed-care network last January. Bidding among providers for the seven slots in the network led to 25% to 30% savings, Ross estimates.
Infusion company executives contend that their prices are reasonable, given the 24-hour coverage and high level of nursing care many patients need. They also warn that too much cost-cutting could hurt the quality of care. "As prices come down, some companies will compromise," says Donald R. Kiepert, CEO of Chartwell Home Therapies in Waltham, Mass. "Saving $15 a day doesn't work if the patient ends up being rehospitalized at $500 a day."
Such talk worries patients. Steven Raffin, 37, a graphic artist from Somerville, Mass., has been receiving antiviral IV treatment at his apartment since early this year. Then, a few weeks ago, his insurer cut costs by switching to a managed-care network and Raffin had to choose a new IV provider. It has been generally fine, he says, but it is under pressure to keep costs down. So, his nurse from the Visiting Nurse Association of Boston Inc. is now limited to one visit a week, rather than coming whenever he requires help. Raffin worries that if his condition worsens, "I won't be able to call on the services I need."
Insurers insist that home infusion companies can still assure good quality. But the squeeze has come very swiftly for some. In July, Atlanta-based Home Nutritional Services Inc., a 68%-owned subsidiary of Healthdyne Inc., reported a 16% decline in second-quarter earnings, to $2.3 million. It blames the dip on its decision late last year to aggressively seek discounted, managed-care business. And a shakeout is starting among smaller operators. Medical Care's Smith says 15 to 20 small companies have called him in recent months, seeking a buyer.
Into this maelstrom add the impact of the investigations into fees for doctors who refer patients. Many companies have used such fees as marketing tools, arguing that doctors are paid when patients are in the hospital, but not when they are treated at home. Trouble is, various state and federal laws limit or prohibit such practices in order to avoid conflicts of interest in referrals.
INVESTIGATION. Baxter's Caremark unit is the target of a federal probe seeking to determine if it violated laws prohibiting referral fees for medicare and medicaid patients. Baxter says it revised its practices for those patients in October, 1991, and a spokesman says "we've always operated within the law." Still, the company could face a hefty fine.
Another major player, T Medical Inc. of Alpharetta, Ga., disclosed in June that it was the subject of a federal grand jury investigation. T indicated in an SEC filing that the secret probe may involve the controversial strategy that has helped fuel T's growth since 1987. Typically, T helps a group of doctors set up a home infusion practice, manages it for a fee, then buys the practice mainly with T stock once it is generating sufficient income. A source involved in the probe says the government is investigating whether T's tactics are illegal: "You can't offer anything in cash or kind to get referrals. That's the law." T's general counsel Jeffrey S. Muir counters that "we are totally in compliance with all the laws." Even so, the company's stock plunged on the disclosure of the investigation to 19 now, vs. a high of 67 3/4 in January.
Despite such travails, home infusion has a bright future--for some companies. The market seems sure to keep growing, as cost pressures force more AIDS and other patients to rely on home care. And some companies are keeping earnings up by adding new services, such as home care for bone-marrow transplant patients and premature infants. Providers that continue such innovations will prosper. But many others will fail--or become low-margin businesses. Just as hospitals are.
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