The Balanced Budget Act of 1997 is creating a survival-of-the-fattest scenario in the home-care industry.
The law, which went into effect Jan. 1, is already whetting the appetites of larger home-care companies for smaller operations that will be unable to post the surety bonds required.
Each year home-care businesses must post surety bonds equal to 15% of their Medicare revenues, according to the law. There wasn't a previous requirement for existing home-care businesses, although new ones had to post $50,000 bonds.
The minimum bond is $50,000, but because many home-care operators rely on Medicare for more than 40% of their revenues, most bonds will be substantially higher. At the same time, surety bond firms are making it difficult for smaller firms to obtain the necessary bonds by requiring collateral and personal guarantees of repayment.
"This business is going to change from a margin business to a business that is going to depend on large-scale operations and volume," says Lawrence Higby, president and chief executive officer at Apria Healthcare Group, based in Costa Mesa, Calif.
Larger home-care companies like Apria get a bit of a break because HCFA has placed a $3 million cap on the bonds. Apria provides services at 350 locations nationwide and has $1.2 billion in annual revenues.
The new rules are likely to eliminate many small mom-and-pop type home-care businesses, observers predict. The bond requirements are among the toughest challenges smaller home-care agencies face, says Brian Annulis, an attorney with Katten Muchin & Zavis in Chicago.
"The government's clear intention was to get rid of the fly-by-night operators," Annulis says.
Provisions of the balanced-budget act were designed to put the brakes on healthcare fraud and runaway home-care spending, which the Congressional Budget Office projected will reach $18.2 billion in federal fiscal 1998, which will end Sept. 30. Before passage of the law last summer, the CBO projected home health spending would reach $21.1 billion in fiscal 1998.
The National Association of Home Care in Washington is fighting the new law, calling it too onerous.
"The issue of paying a bond is a problem," says Margo Gillman, spokeswoman for the NAHC. "A lot of (companies) could be forced out of business."
For larger companies like Apria and Brentwood, Tenn.-based American HomePatient, the surety bond is mostly a nuisance.
"This is just an extra thing we have to deal with," says Kathey Palmer, senior vice president of marketing and investor relations at American HomePatient. "I'm sure some (companies) may sell."
American HomePatient, which projects Medicare revenues of about $159 million, or 44% of its $360 million 1997 revenues, expects to post the maximum surety bond of $3 million. With more than 300 centers in 35 states, American HomePatient's services include respiratory care, infusion therapy, medical equipment and supplies for home-care use.
For small and even some medium-sized operations, posting the bonds means more than just an annoyance.
"This is just a big enough percentage to be painful for the agencies with between $5 million and $10 million in (annual) revenues," says Francis "Biff" Shea, president and CEO at Miami Lakes, Fla.-based Flagship Healthcare. Flagship, founded in 1996, includes subsidiaries that operate durable medical equipment businesses and home health agencies. It projects revenues of $65 million in 1997, including $40 million in Medicare revenues.
Companies aren't actually posting the full bond amount. Instead, they're working with firms in the surety industry to obtain bonds, which allows them to post only a percentage of the bond.
"We're hearing it's about 3% to 5% for this industry," says Mark Hobratschk, associate director for government relations for the Health Industry Distributors Association, based in Alexandria, Va.
Thus, 5% of the maximum $3 million surety bond would cost $150,000 annually. Although the minimum $50,000 bond might cost a small operator only about $2,500, the restrictive requirements of the bond agreements will keep some smaller operators from qualifying with surety and insurance firms.
"The regulations include provisions that the surety industry specifically told HCFA would create difficulties for many providers in obtaining the required bonds," according to a Jan. 12 letter sent to HCFA from the Surety Association of America and the American Insurance Association.
Surety bond firms are being cautious because they contend the government could penalize home-care providers for activities prior to the bond issuance.
"Bond (companies) are looking for home health agencies that have a positive bottom line and have assets they can use as collateral," says William Dombi, vice president for law at the NAHC. Most of the agencies that qualify are hospital-based home health agencies or other diversified providers with other operations.
Average annual revenues of home health firms are about $1.2 million. "If 15% of that is required for the bond, bond companies are asking for two and three times that as collateral," Dombi says. "Many bond firms are also asking for personal guarantees."
For home health agencies, bonds must be posted by Feb. 27. HCFA hasn't yet set a deadline for DME*suppliers.
The law could end up making smaller home-care businesses available at fire-sale prices.
"It will absolutely drive down the price of acquisitions in a very fragmented industry," Shea says. "I've already had two phone calls from mid-sized companies saying they're in a pickle and don't know what they're going to do."