(Update below)

Or perhaps, why has it taken so long.

The homecare market has several business segments, ranging from care services to ambulatory home dialysis, lower value home patient aids, wheelchairs as well as higher margin and faster growing segments like respiratory and diabetic care.

One of these segments is sleep therapy. Sleep apnea is being increasingly diagnosed (and increasingly easier to be diagnosed) in larger numbers of patients. The principle treatment is a CPAP (and variations) machine which essentially minimizes periods of apnea during sleep - a syndrome that not only effects a persons ability to function 100% during the day but also has been clearly shown to increase the risk of heart disease and premature death.

Some companies that sell respiratory products into the home, segment their business according to oxygen therapy and sleep therapy. CPAP falling into the later category.

Oxygen therapy (oxygen concentrators, liquid oxygen) is slower growing and tends to follow population growth while sleep therapy is fast growing.

At the end of 2007 Phillips acquired Respironics - a leading full line respiratory products company - to enter the homecare space. This provided them the opportunity of entering the homecare medical business at the higher value end. Speculation immediately followed as to how long it would take for Resmed, Respironics prime competitor in the sleep business to be snapped up.

According to this press report out of Australia (the home of Resmed founder - Peter Farrell), Linde, German gasses multinational is rumored to be in talks to acquire Resmed.

Synergies are clear - combine the medical gasses business with the high growth and margin medical homecare segment and strengthen their homecare presence.

If this one does not happen another one will - soon.

Update July 1, 2008:

Resmed have reacted to the market rumor by issuing the following statement on on the Australian stock Exchange:

“ResMed notes the comments in the Age and Australian Financial Review newspapers published today, 1 July 2008 to the effect that the company “is being stalked by German industrial and medical gases giant the Linde Group” (Age) and to “rumours of an agreed
cash bid” (AFR) under the headline “Sceptics doubt ResMed rumour”.The company confirms that it is not aware of any information that would require disclosure to the ASX in terms of listing rule 3.1.

Further, the company has a policy of not commenting on market rumours.”

The market likes the rumor anyway??

Resmed is trading at $38.34 up 7.7% at time of writing July 1, 2008

http://finance.yahoo.com/q?s=RMD

Blackstone group has bid a 33% premium to take homecare services and distribution company Apria private. The Blackstone investment is $920 million which is big in the homecare industry although relatively modest in Blackstone terms.

All this despite the homecare industry cries of Medicare foul over the what is clearly the biggest pressure on pricing and reimbursement in recent history - especially through the much hated new National Competitive Bidding program.

This investment is clearly good for the industry (however there must be some lawmakers and lobbyists scratching their heads as to how to explain why such a supposedly handicapped industry is attracting investors like Blackstone).

Of course the argument will be made about unlocking the value in Apria which has suffered from some self inflicted wounds in recent years - true - but it also makes great strategic sense as well.

About two years ago I blogged about the coming changes in the industry “(Why) Would You Invest In The Home Healthcare Industry?”

It’s a fairly lengthy analysis however one of the key take aways was that National Competitive Bidding and the future environment would benefit distribution owned groups (like Apria) - looks like Blackstone might be in agreement.

As always the market tells the story. We note that in smaller private deals investors are paying 4 to 6 times multiples for manufacturing companies while distribution companies are fetching double digit multiples today.

In the above analysis the summary takeaway applies even more today than it did then.

Just to be upfront the recommendation is going to be to invest in “change”. Identify what the change will be and buy into it. Divest companies (or management) that believe “nothing much will change”. It is not a place for the faint hearted. It is certainly not business as usual. Past performance is definitely not a reliable indicator in the homecare business today - or rather tomorrow.

Just a few days ago we referenced and commented on the changing face of the distribution channel in the homecare industry in the US and Europe.

In that article we highlighted by way of example Merits (a general homecare manufacturer) and Shoprider (predominantly a scooter manufacturer).

Kymco, a motor cycle manufacturer based out of Taiwan has now established Kymco Healthcare in the UK where they will now have a direct local presence - in fact they are busy recruiting a sales organization.

From OEM product introduction to direct in about 3 years or so. Not bad.

So what? Well it is just another example of where an OEM relationship established by healthcare companies that have shared their product and market expertize has led to a direct market entrance by the Asian manufacturer.

Innovate in the distribution channel or else.

After all the trauma of the recent deep reimbursement cuts by Medicare, the Office of Inspector General in the United States has found that Medicare, in certain cases pays 35% to 45% more than internet advertised prices for certain power wheelchairs.

The industry is quick to protest and will argue “the higher bar” that Medicare providers have to attain accounts for the difference in cost.

Nevertheless - here is the recommendation of the Office of Inspector General.

RECOMMENDATION
We found that consumers could have purchased most power wheelchairs over the Internet at prices lower than the Medicare fee schedule amounts. We recommend that CMS: Consider performing additional reviews to determine whether the current Medicare power wheelchair fee schedule amounts for certain groups and procedure codes are appropriate.

And Medicare agrees:

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL
RESPONSE
CMS concurred with our recommendation. In addition, CMS noted that, in mid-2008, Medicare payment amounts for power wheelchairs in 10 large metropolitan statistical areas will be based on power wheelchair suppliers’ competitive bids. CMS further noted that it has the authority in future years to use payment information from the competitive bidding program to adjust payments in areas not included in the program. OIG work is continuing in this area. We plan to conduct further evaluations to compare Medicare fee schedule amounts to actual prices paid by suppliers.

The report goes on to estimate a total saving to Medicare and consumers of close to $40 million in the first quarter of 2007.

Again there will be a counter argument from the industry which will point to the extra regulatory and service hurdles that Medicare imposes.

The fact of the matter is that - pricing (and reimbursement) on Power mobility products is under strong review (again). CMS is looking to their newly established national competitive bidding process to lower prices - and it, together with other measures it will take, will again reduce the price of power wheelchairs to the government and consumers.

The full OIG (smallish pdf download) report can be found here.

Following shortly on the heels of Sunrise CEO Mike Hammes statement that Sunrise was focusing resources elsewhere in terms of the traditional Medtrade “Spring” show, significant rumor abounds in Europe this week that some “big” companies are seriously considering their options to exhibit at Rehacare - traditionally the largest rehab exhibition outside of the US.

Last year (2006) especially, as far as I can see, was the year where industry heavyweights invested heavily in Medtrade hoping to gain a competitive advantage in the looming reimbursement and NCB challenged marketplace. An additional observation however is that most of the companies chose to address the typical “new improved product” strategy instead of addressing the needs of the new order marketplace. There were of course some notable exceptions.

Then came RehaCare - same thing, except US companies flocked to the show either for the first time or with bigger exhibition booths, hoping for geographic sales (and profits..) expansion - not understanding that the rules of engagement in Europe have also changed. In fact the biggest market outside the US, Germany has announced changes that make the new order US look like a Sunday school picnic.

There are still great opportunities for the homecare / mobility /rehab industry - just don’t look at what has always worked in the past.

Invacare, struggling, like several of its competitors with reimbursement, Asian sourcing pressure and cost issues has just announced that it has appointed General James L. Jones, United States Marine Corps (ret.) to its board. General Jones has recently retired as Supreme Allied Commander of NATO (North Atlantic Treaty Organization) and Commander of the United States European Command.

This should raise the profile of the company and perhaps the industry as it goes about restructuring and aligning with the new order healthcare environment.

Mal Mixon, CEO at Invacare, also served as an officer in the US Marines.

Press Release

Hundreds of millions of dollars (euros) are about to be shaved off the homecare market as new government heathcare restructuring is implemented in arguably the worlds largest and most profitable homecare countries - the United States and Germany. Several other countries also have programs to restructure (read save money) largely at the expense of industry.

Having come shortly in the heals of power chair cuts and the respiratory quagmire - most readers here are aware of the confusion surrounding the implementation of National Competitive Bidding (NCB) in the US. What is not confusing is that it is going to happen - starting in the next several months. Don’t fool yourself NCB means just what it says. Your bid is going to have to be a lot more competitive - and that means prices down and in some cases - service up - or more simply put, margin squeeze. Here is todays update from HME NewsWire.

The following is the view of a homecare company executive in Germany, who comments on the hot off the press heathcare reforms in his country.

News from the German Healthcare -System…

Last weekend the new healthcare laws passed the “Bundesrat”, which means that the changes will be valid from April 1, 2007.

What does it mean?

• Homecare Dealers No Longer Require Accreditation

From the dealers point of view there will be a higher level of competition than it is even today, because everybody (who wants) can go and make contracts with Health-Insurances. There is no longer permission needed that approves a dealer as “Sanitätshaus”.
This opens the door for any company in the distribution and logistics business. They are perfectly in place to work all over Germany and provide the health insurance customers with e.g. all standard Patient aids, which are simple to use.

• Tenders For All Standard Patient Aids

Another fact is that the health insurance industry is forced to have tenders for all standard patient aids. So if this comes true, it will be very difficult for any dealer with a small location (stock) to stay in business. It is not yet clear if the insurance companies will have German wide or regional tenders. However a dealer has to have a huge stock when he wants to provide the insurance with products and service - and the price better be right.

• What Does This Mean For All The Buying Groups?

The winners are… Ergoh, Ortheg, Nowecor, TOP and all the others which have stock and members in their region or all over Germany. These buying groups can make offers for the tenders and they have, as members, a very good service and logistics structure.
Also winners are the two or three bigger independent dealers, that work already German wide.

So then -

What about Reha Team and Reha Vital? These are the biggest and most influent buying groups in Germany. In the moment it seems that they loose the game, but they have Germanys biggest dealers as members and they are well accepted by the insurance industry. So they will probably have one or more logistic centres in Germany and will also take part in tender business. But only if they understand what the new healthcare system means.

• Small Dealer In Trouble

Fact is that every small, local, independent dealer will be in trouble latest in 2008, when the “old” status of all dealers from today is not longer valid.

• What Does It mean For The Industry?

Lucky are all companies that do not deal with standard products (Congratulations to the Specialists etc.).

For all the others it means even faster price decreases, less market for every company that is not a good friend of the buying group or dealer that wins tenders.

Maybe some of the big companies will try to get more in special businesses which would mean that also in these segments the prices will decrease (Sorry to the Specialists.)

• Who Is The Customer?

The others will do what they always tried: be aggressive and manage their customer relation in a way they think it´s right. But who is the most important customer in future?

Will it be the dealer, the health insurance or the end user?

In the end it´s an open race, that’s been already started, which can only be won by the fastest – not the biggest…
…. To be continued

Oh - I nearly forgot to mention - the same Asian companies that have been supplying manufacturers and distributors in Germany are now making their own contracts with the health insurance companies - even by passing the dealer.