Invacare 2007 Annual Report Download - page 22

During 2007, the U.S. House of Representatives and U.S. Senate each drafted Medicare provisions that were
not passed into law. The House package included a proposal to reduce the home oxygen rental cap to 18 months,
with an exemption for new technology such as Invacare’s Homefill system and portable oxygen
concentrators. The Senate package would have made payment cuts to traditional home oxygen equipment, but
would have retained current payment levels for new oxygen technology such as the Homefill system and portable
oxygen concentrators. While it is unclear whether Congress will pass a Medicare bill this year, we expect
Congress to continue consideration of these proposals in 2008. The uncertainty created by these announcements
may negatively impact the home oxygen equipment market.
Similar trends and concerns are occurring in state Medicaid programs. These recent changes to
reimbursement policies, and any additional unfavorable reimbursement policies or budgetary cuts that may be
adopted, could adversely affect the demand for the company’s products by customers who depend on
reimbursement by the government-funded programs. The percentage of the company’s overall sales that are
dependent on Medicare or other insurance programs may increase as the portion of the U.S. population over
age 65 continues to grow, making the company more vulnerable to reimbursement level reductions by these
organizations. Reduced government reimbursement levels also could result in reduced private payor
reimbursement levels because some third-party payors may index their reimbursement schedules to Medicare fee
schedules. Reductions in reimbursement levels also may affect the profitability of the company’s customers and
ultimately force some customers without strong financial resources to go out of business. The reductions
announced recently may be so dramatic that some of the company’s customers may not be able to adapt quickly
enough to survive. The company is the industry’s largest creditor and an increase in bankruptcies in the
company’s customer base could have an adverse effect on the company’s financial results.
Medicare will institute a new competitive bidding program for various items in ten large metropolitan areas
beginning July 1, 2008. This program is designed to reduce Medicare payment levels for items that the Medicare
program spends the most money on under the home medical equipment benefit, including oxygen and power
wheelchairs. This new program will eliminate some providers from the competitive bidding markets, because
only those providers who are chosen to participate (based largely on price) will be able to provide beneficiaries
with items included in the bid. Medicare will be expanding the program to an additional 70 metropolitan areas in
2009. In addition, in 2009, Medicare has the authority to apply bid rates from bidding areas in non-bid areas. The
competitive bidding program will result in reduced payment levels, that will vary by product category and by
metropolitan area, and will depend in large part upon the level of bids the company’s customers submit in an
effort to ensure they become approved contract suppliers. It is difficult to predict the specific reductions in
payment levels that will result from this process.
Outside the United States, reimbursement systems vary significantly by country. Many foreign markets have
government-managed health care systems that govern reimbursement for new home health care products. The
ability of hospitals and other providers supported by such systems to purchase the company’s products is
dependent, in part, upon public budgetary constraints. Canada and Germany and other European countries, for
example, have tightened reimbursement rates and other countries may follow. If adequate levels of
reimbursement from third-party payors outside of the United States are not obtained, international sales of the
company’s products may decline, which could adversely affect the company’s net sales and would have a
material adverse effect on the company’s business, financial condition and results of operations.
The impact of all the changes discussed above is uncertain and could have a material adverse effect on the
company’s business, financial condition and results of operations.
The consolidation of health care customers and the company’s competitors could result in a loss of
customers or in additional competitive pricing pressures.
Numerous initiatives and reforms instituted by legislators, regulators and third-party payors to reduce home
medical equipment costs have resulted in a consolidation trend in the home medical equipment industry as well
as among the company’s customers, including home health care providers. Some of the company’s competitors
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