Invacare 2013 Annual Report Download - page 47

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
OUTLOOK
Throughout 2013, the Company continued to make progress on demonstrating its quality systems improvements to its third-
party expert auditor, and the Company received the FDA's acceptance of two of the three required third-party certification reports.
In addition, the third-party expert auditor re-commenced the third and final certification audit at the end of February 2014.
The consent decree covers the corporate and Taylor Street facilities in Elyria, Ohio. It requires a third-party expert to perform
three separate certification audits. In order to resume full operations, the expert certification audit reports must be submitted to the
FDA for review and acceptance. In the first two audits in 2013, the third-party expert certified that the Company's equipment and
process validation procedures and its design control systems were compliant with the FDA's Quality System Regulation (QSR).
The Company has received the FDA's acceptance of these first two reports. During the final expert certification audit, the auditor
indicated that some additional work was required primarily in the Company's updated complaint and risk review processes before
the final, and most comprehensive, certification report could be completed and provided to the FDA, as the Company discussed in
its December 23, 2013 press release. The Company has been executing its action plan relating to these comments, and the third-
party expert auditor returned at the end of February 2014 to re-commence the final certification audit.
The Company cannot predict the timing of the completion or the outcome of the third-party expert’s final certification report.
However, after the expert's certification report is completed and submitted to the FDA, along with the Company’s own report related
to its compliance status together with its responses to any observations in the certification report, the FDA is expected to inspect
the Company's corporate and Taylor Street facilities to determine whether they are in compliance with the FDA's QSR. The FDA
has the authority to inspect these facilities at any time. If the FDA is satisfied with the Company's compliance, the FDA will provide
written notification that the Company is permitted to resume full operations at the impacted facilities. The Company's top priority
is to resume full production at its Taylor Street wheelchair manufacturing facility in Elyria, Ohio.
In 2014, the Company expects continued pressure on its organic net sales, cash flow and operating profitability for at least
as long as the injunctive phase of the consent decrease is in place and related recovery period thereafter. The key drivers of these
pressures include the limited net sales of power wheelchairs impacted by the consent decree, ongoing quality systems remediation
costs, and the related diversion of resources, which has also impacted the Company’s ability to introduce new products. The net
sales decline of power wheelchairs is impacted by the FDA consent decree, which limits the manufacture and distribution of power
and manual wheelchairs at or from the Taylor Street manufacturing facility to products having properly completed verification of
medical necessity (VMN) documentation. The VMN is a signed document from a clinician, and in some instances a physician, that
certifies that the product is deemed medically necessary for a particular patient's condition, which cannot be adequately addressed
by another manufacturer's product or which is a replacement of a patient's existing product. The Company is focused on completing
its expert certification audits as quickly and efficiently as possible in order to resume full production at its Taylor Street wheelchair
manufacturing facility in Elyria, Ohio.
The Company also is facing external challenges within its North America/HME segment. In addition to customers coping
with prepayment reviews and post-payment audits of power mobility devices from Medicare and Medicaid, the Company continued
to closely monitor the roll-out of the second round of National Competitive Bidding (NCB), which became effective in 91 additional
metropolitan statistical areas (MSAs) on July 1, 2013. The Company estimates that, for the full year of 2013, approximately
$304,000,000 in net sales of its U.S. HME equipment business, the major division within the North America/HME segment, are
products sold to homecare providers that are included in the competitive bidding product categories. When the Company's products
are ordered by HME customers, the Company does not know if the products are then billed by the customer for Medicare, Medicaid
or private pay reimbursement or sold as cash sales. However, industry studies have shown historically that approximately 40% of
HME providers' revenues on average are from sales paid by Medicare. Additionally, it is estimated that round one and round two
of NCB, which include a total of 100 metropolitan statistical areas, account for approximately 75% of Medicare's spending on
durable medical equipment. Taking the $304,000,000 of U.S. HME net sales for the full year of 2013 of NCB bid categorized
product and applying the previously mentioned 40% and then the 75% estimates, the Company's revenues from products potentially
exposed to NCB could be approximately $91,000,000. This estimate does not include other potential pricing pressures that could
also impact HME providers from other payors. At this early stage of the NCB program, the impact of NCB on net sales is hard to
measure, as the Company does not have zip code level visibility into customers' sales, rental data or Medicare fulfillment data.
However, excluding a large customer order of HomeFill® oxygen systems in the year, the Company estimates that net sales in the
91 impacted MSAs were slightly weaker than outside areas due to continued uncertainty as the industry realigns and adjusts itself
to the small number of bid contracts awarded. The Company believes that the increase in sales of HomeFill® oxygen systems
indicates that providers are actively seeking opportunities to reduce costs and transform their business model. The Company