Invacare 2015 Annual Report Download - page 25

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in significant costs to the company in the future, and these actions could have a material adverse effect on the company’s business.
As an example, the company recorded incremental warranty expense of $11,493,000 and $7,264,000 in 2014 and 2013, respectively,
as a result of three product recalls as well as warranty expense reversals of $2,325,000 in 2015. The company will continue to
review the adequacy of its recall accruals as the recalls progress as its warranty reserves are subject to adjustment in future periods
as new developments can impact the company's estimate of the cost of these matters.
Changes in government and other third-party payor reimbursement levels and practices have negatively impacted and could
continue to negatively impact the company’s revenues and profitability.
The company’s products are sold primarily through a network of medical equipment and home health care providers, extended
care facilities and other providers. In addition, the company sells directly to various government providers throughout the world.
Many of these providers (the company’s customers) are reimbursed for the products and services provided to their customers and
patients by third-party payors, such as government programs, including Medicare and Medicaid, private insurance plans and
managed care programs. Most of these programs set maximum reimbursement levels for some of the products sold by the company
in the United States and abroad. If third-party payors deny coverage, make the reimbursement process or documentation
requirements more uncertain or further reduce their current levels of reimbursement (i.e., beyond the reductions described below),
or if the company’s costs of production do not decrease to keep pace with decreases in reimbursement levels, the company may
be unable to sell the affected product(s) through its distribution channels on a profitable basis.
Reduced government reimbursement levels and changes in reimbursement policies have in the past added, and could continue
to add, significant pressure to the company’s revenues and profitability. For example, in 100 metropolitan areas, the Centers for
Medicare and Medicaid Services (CMS) introduced a National Competitive Bidding program (NCB) which set new, lower payment
rates for medical equipment and supplies. Round one of NCB for nine metropolitan areas in the U.S. went into effect in January
2011. The reimbursement rates for nine product categories were reduced by an average of 32 percent in these nine metropolitan
areas. Effective July 2013, CMS commenced round two of the NCB program, which was expanded to include an additional 91
metropolitan areas. In January 2016, CMS began expanding NCB to 100% of the Medicare population, with half of the
reimbursement cuts effective January 1, 2016 and another cut expected in July 2016. CMS announced that Medicare reimbursement
rates were cut an average of 45 percent for those providers participating in the round two of the NCB program. CMS announced
that the NCB program has resulted in $202.1 million in savings in its first year of implementation in the nine metropolitan areas
with significant savings primarily in oxygen and oxygen supplies, mail-order diabetic supplies and standard power wheelchairs.
The CMS Office of the Actuary estimates that this NCB program will save Medicare an estimated $25.8 billion, and beneficiaries
an estimated $17.2 billion, over the next ten years.
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 in the future, could adversely affect the
demand for the company’s products by customers who depend on reimbursement from 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 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 become unable to pay their bills as they come due or go out of business. The reimbursement reductions may prove
to be so dramatic that some of the company’s customers may not be able to adapt quickly enough to survive. The company is one
of the industry’s largest creditors and an increase in bankruptcies or financial weakness in the company’s customer base could
have an adverse effect on the company’s financial results.
Outside the United States, reimbursement systems vary significantly by country. Many foreign markets have government-
managed health care systems that govern reimbursement for 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. Various
countries 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.
The impact of all the changes discussed above is uncertain and could have a material adverse effect on the company’s
business, financial condition, liquidity and results of operations.