Business Context and Reporting Period
Inogen, Inc. filed this Form 8-K on March 17, 2016, to disclose the impact of the Centers for Medicare and Medicaid Services (CMS) Competitive Bidding Round 2 Re-compete announcement made on March 15, 2016. The new single payment reimbursement rates for respiratory equipment, including oxygen therapy, are effective from July 1, 2016, through December 31, 2018, covering 117 competitive bidding areas.
Key Financial Metrics and Guidance
The Company reaffirmed its 2016 financial guidance despite the CMS announcement. Key metrics include:
- Revenue: Expected to range from $187 million to $191 million.
- Adjusted EBITDA: Expected to be $37 million to $39 million.
- Adjusted Net Income: Expected to be $12 million to $14 million.
- Net Income: Expected to be $12 million to $14 million.
- Effective Tax Rate: Approximately 35%.
- Cash Flow: Net positive cash flow expected for 2016 with no additional equity capital required.
Medicare rental revenue as a percentage of total revenue has declined from 26.5% in 2014 to 21.0% in 2015 due to a strategic shift toward cash sales.
Material Changes and CMS Impact
The CMS announcement resulted in an estimated total revenue headwind of 3.5% to 4.0%, an increase from the previously anticipated 2.5% to 3.5%. Specific reimbursement changes include:
- Stationary Oxygen (E1390): Average billed amount declined 17.4% from $93.07 to $76.84 per month.
- Portable Oxygen Concentrators (E1392): Average billed amount declined 11.3% from $42.72 to $37.90 per month.
- Oxygen Tanks (E0431): Average billed amount declined 11.6% from $19.42 to $17.17 per month.
- Combined Impact: Average gross reimbursement for a typical ambulatory Medicare patient with a portable concentrator is expected to drop 15.5% (from $135.79 to $114.73 per month).
Inogen was offered respiratory contracts in 93 of the 117 competitive bidding areas. In non-contracted areas, the Company plans to grandfather existing patients at lower rates and focus on cash-pay and private insurance for new patients.
Outlook and Risks
Management believes the new rates will accelerate the adoption of non-delivery oxygen technology (portable concentrators) as providers seek operational efficiency. The reimbursement premium for portable concentrators over oxygen tanks is expected to increase, providing further incentive for this shift. Risks include the uncertainty of final contract awards, potential variability in patient population application of rates, and general market acceptance of products.
Investor Verification Checklist
- Verify the final list of contracted suppliers announced by CMS in the spring of 2016 to confirm Inogen's market share in the 117 bidding areas.
- Monitor the actual revenue mix between Medicare rentals and cash/private insurance sales to assess the effectiveness of the strategic shift.
- Track the adoption rate of portable oxygen concentrators versus oxygen tanks in the home healthcare provider channel post-July 2016.
- Review subsequent quarterly reports to confirm the realization of the 3.5% to 4.0% revenue headwind estimate.