Infusystems ($INFU) and the Round 1 Recompete Analysis

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I’ve noticed a few more SeekingAlpha articles (here and here)  discussing the investment in $INFU, including discussions about the result of the CMS Round 1 Recompete.  If you would like to read more about the Recompete process, you can visit the CMS website.  In a nutshell, the Durable Medical Equipment  suppliers for patients using Medicare and Medicaid were included in the new Recompete (competitive bidding) process.  The goal of the bidding process is to finalize a price for services and equipment that for reimbursement by the government.  Each item category includes items listed in a Healthcare Common Procedure Coding System (HCPCS).  So, the new Recompete included the HCPCS codes for external infusion pumps and supplies, thus including Infusystem.  The end goal of the competitive bidding process is for the government to set an exact price on services and equipment and to lower those costs through the bidding process.  Overall CMS’ goal was to lower their reimbursement costs by 32%.

So, let’s take a look at the information that INFU has provided us recently, and then dig into some numbers to see what the impact on INFU will be going forward.  Remember, CMS reimbursements make up ~30% of INFU’s revenue, so that’s a large percentage of revenue.

From the latest 10-Q:

On October 3, 2013, we issued a Current Report on Form 8-K that we had received offers to provide external infusion pumps and supplies in all nine of the Metropolitan Statistical Areas (“MSAs”) put out to bid by CMS as part of the announced timetable for Competitive Bidding Round 1 Recompete (“RD1RC”) from August 16, 2012. Since October 3, 2013, we have entered into contracts with CMS for these respective MSAs effective January 1, 2014. The impact of the reduced contract price from the current rates in these nine MSAs approximates $250,000 annually based on current volume in those respective MSAs.

From these statements we can see that 9 of the MSAs were included in the bidding process, for which will have an impact of $250,000 annually to INFU’s revenue starting in January 1, 2014.  Also, we know that Infusystem was successful in receiving contracts to all 9 MSAs.

From the latest Conference Call transcript:

The weighted average cut for our external infusion pump category is equal to 21%, which is less than other categories.

From the CMS Press Release by Infusystem:

While these nine MSAs selected by CMS only represent approximately 1% of our Companys current revenues…

So, according to Infusystem the 9 MSAs represented ~1% of the company’s current revenues and the average price cut was 21%.  The 10-Q stated that the revenue hit was going to be $250,000 but 1% of the company’s current revenue is ~$600,000 (~$60m revenue) and if you use the 21% average cut number that is provided, the hit to $INFU should be ~$126,000.  If we use the $250,000 number provided, and use that as a percentage of the 9 MSAs revenue, you would come out at an average cut of 41-42%.  Somewhere there is a mismatch in information that has been provided.  The 41% average cut would seem to be higher than the goal of CMS to reduce costs by 32%.

Let’s do some digging

First we need to figure out the HCPCS codes that are used for reimbursement by Infusystem.  It takes a little digging to figure out that the codes are E0781 for the infusion pump and I believe A4222 is the supply HCPCS code.  I’m going to use the Eo781 code for the analysis since I’m more certain on that code for now.  For some more information about the InfuAdvantage program, which outlines the reimbursement process for Infusion Pump rentals visit the InfuAdvantage webpage.  I used the CPT codes provided from InfuSystem and used the information here to deduce that E0781 was the appropriate HCPCS code to use.

The results of the new Single Payment Amounts (SPA), which are the new reimbursement rates, are available in PDF and XLS format here.

HCPCS – E0781 AMBULATORY INFUSION PUMP, SINGLE OR MULTIPLE CHANNELS, ELECTRIC OR BATTERY
OPERATED, W ITH ADMINISTRATIVE EQUIPMENT, WORN BY PATIENT
MSA SPA
Charlotte-Gastonia-Rock Hill, NC-SC  $229.57
Cincinnati-Middletown, OH-KY-IN  $192.01
Cleveland-Elyria-Mentor, OH  $226.18
Dallas-Fort Worth-Arlington, TX  $227.60
Kansas City, MO-KS  $206.26
Miami-Fort Lauderdale-Pompano Beach, FL  $172.94
Orlando-Kissimmee-Sanford, FL  $218.68
Pittsburgh, PA  $220.00
Riverside-San Bernardino-Ontario, CA  $203.56

 

Now we have the exact prices that will take effect starting January 1st, 2014.  But we need to compare these new prices to that of the current prices to determine what the cut will be going forward for InfuSystem.  I was not successful in finding exact pricing for the MSAs (if someone has this information, or knows where to find it, please let me know), but I was able to dig up 2012 Durable Medical Equpment (DME) fees for 2012 by state.  I think this is a fairly good proxy, but it lends itself to errors as the prices are by state and not MSA.  I downloaded the spreadsheet from here.

 

HCPCS – E0781 AMBULATORY INFUSION PUMP, SINGLE OR MULTIPLE CHANNELS, ELECTRIC OR BATTERY
OPERATED, W ITH ADMINISTRATIVE EQUIPMENT, WORN BY PATIENT
MSA State Fee
Charlotte-Gastonia-Rock Hill, NC-SC  $284.50
Cincinnati-Middletown, OH-KY-IN  $284.50
Cleveland-Elyria-Mentor, OH  $284.50
Dallas-Fort Worth-Arlington, TX  $284.50
Kansas City, MO-KS  $284.50
Miami-Fort Lauderdale-Pompano Beach, FL  $260.43
Orlando-Kissimmee-Sanford, FL  $260.43
Pittsburgh, PA  $241.83
Riverside-San Bernardino-Ontario, CA  $284.50

 

Now that we have some data to use to do an analysis of pricing, we can try to determine the cuts per MSA and an average cut to revenue for InfuSystem.

 

HCPCS – E0781 AMBULATORY INFUSION PUMP, SINGLE OR MULTIPLE CHANNELS, ELECTRIC OR BATTERY
OPERATED, W ITH ADMINISTRATIVE EQUIPMENT, WORN BY PATIENT
MSA SPA State Fee Discount
Charlotte-Gastonia-Rock Hill, NC-SC $229.57  $284.50 19.3%
Cincinnati-Middletown, OH-KY-IN $192.01  $284.50 32.5%
Cleveland-Elyria-Mentor, OH $226.18  $284.50 20.5%
Dallas-Fort Worth-Arlington, TX $227.60  $284.50 20.0%
Kansas City, MO-KS $206.26  $284.50 27.5%
Miami-Fort Lauderdale-Pompano Beach, FL $172.94  $260.43 33.6%
Orlando-Kissimmee-Sanford, FL $218.68  $260.43 16.0%
Pittsburgh, PA $220.00  $241.83 9.0%
Riverside-San Bernardino-Ontario, CA $203.56  $284.50 28.5%
Average 23.0%

 

It appears that the largest cuts will happen in the Cincinnati and Miami MSAs with discounts averaging 33%, with the lowest being in Pittsburgh with only a 9% discount.  Just doing a simple average of the discount rates in the 9 regions results in an average cut of 23% which is in-line with the stated 21% number that was provided in the last conference call.  I don’t have enough data to determine the amount of revenue that is received from each MSA.  More data would allow for better results (obviously) so that the exact discount of revenue could be applied, but for now, it seems reasonable to estimate a 21% cut to revenue from the new pricing.  I do not know how to rectify the statements centered around the 1% of revenue being affected and then the published hit to revenue of $250,000.  By all calculations the anticipated discount should be around $150-160k annually.

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  • Zimmer

    Very nice work.

    It could be that when $INFU said that the 9 MSAs represented 1% of revenues, it was really closer to 1.5% and they rounded down. That would put the previous revenues at closer to $900,000, and would drop the $250,000 revenue hit down to around 27%.

    Do you think it is reasonable to extrapolate this level of revenue reduction to their overall business, and if so, what does that do to their profitability?

    • http://raybonneau.com/ Ray Bonneau

      I’m not really sure how to reconcile the revenue hit numbers at this point. Maybe I will send an email to IR to get a little more clarity.

      I wanted to dig into the numbers because I think long term that we will see a hit to the CMS reimbursement rates in the other MSAs. It’s a stated goal of the government to reduce the healthcare costs and they are targeting a reduction in the billing reimbursements. This leaves a couple of questions that are hard to answer 1) when will this occur 2) what is the overall reduction rate. Since CMS represents >30% of the company’s revenue, it could be a factor going forward. What we do know is that it will not occur in the next few years. During this time the company should still be generating strong EBITDA and paying down debt and increasing equity.

      • Sam

        well it will take effect on Jan 1,2016 for all MSAs. Also on the previous conference call they stated approximately 1% of revenue. But yes you are right that the math still would not add. If they said 2% then you would $1.2 million, which 21% cut would come out to be $250k. So def need to clarify that with IR when you can. Thanks in advance

        • http://raybonneau.com/ Ray Bonneau

          Sam,

          So I contacted IR to try and get a little more guidance. The $250k discount number is for 2014 not for 2013. It also appeared (like we thought) that the 1% was an approximation so there is some wiggle room. They did indicate that the CMS revenue has increased so the 1% number is likely higher now. The 21% number was also the given average discount for the group that INFU is included in by CMS. So the 21% was not calculated by INFU, but given to the company by CMS. From my investigation I feel that it is a good number to use (21%-23%).

          • Sam

            let’s use 25% on the safe side and assume no growth in revenue ($16 mil) for 2016. So the EBITDA should be around 16 – (30%*16 * 25%) = $13 mil. By that time, they would have paid off the debt given the strong uninterrupted business for 2 years. so you are looking a business in 2016 with today’s market’s cap of 50 mil with no debt and generating $13 mil of EBITDA on a longer term. So that’s like 3.5X EBITDA. Do you think that’s reasonable assumption?

          • http://raybonneau.com/ Ray Bonneau

            That’s why I have purchased a good sized position before the recent run up in price.I’m not sure if they will pay off all of their debt by 2016, but should be able to drastically reduce and then hopefully be able to refinance the remaining at a lower rate than current.

          • Sam

            yeah, me too, i bought around 1.4, but now thinking about increasing my position. With all the info out esp the CMS and recent earring release, i just think it’s still cheap by its EBITDA and safer because the business is much clearer for at least 2 years.