Medicare changes impact suppliers

Biotech drugmaker Amgen Inc. is among the companies that could see profits trimmed by a Congressional spending bill aimed at streamlining the Medicare program. On Friday Senate Finance Committee Chairman Max Baucus released a $20 billion bill that outlines Medicare spending through 2010. Roughly 44 million seniors U.S. receive health coverage through the program.

To avoid cutting payments to physicians who treat seniors, Baucus would shave government payments for dialysis drugs, home oxygen equipment and other health services. Wall Street analysts debated Monday which proposals would eventually become law, with Lehman Brothers analyst Tony Clapsis advising investors that “provisions that are ‘non-controversial’ or raise a lot of money are the most likely.”

One of the most significant proposals for investors would lower government spending on Amgen’s anemia drug Epogen, a $2.5 billion product used exclusively in kidney dialysis centers. Lawmakers have warned that Medicare’s current payment policy encourages doctors to overprescribe the drug to receive more government reimbursement. The Baucus bill would change that by lumping the costs of the drug into payments for all other dialysis-related services.

Dialysis center operators like Fresenius Medical Care AG and El Segundo, Calif.-based Davita Inc. would cut down on their use of Epogen to increase profits, Citigroup analyst Paul Heldman wrote in a note Monday. While the new payment system wouldn’t take effect until 2011, Heldman states it could reduce Epogen usage by 20 percent, lowering Thousand Oaks, Calif.-based Amgen’s earnings per share to $5.16 from $5.88.

Dialysis centers would fare better under the proposal, receiving bonus payments for meeting certain service requirements proposed by the new bill. Germany’s Fresenius is the world’s largest dialysis services company; Davita Inc. is the second-largest.

Companies that supply oxygen equipment to seniors with respiratory problems are also on Democrats’ proposed chopping block. The Medicare bill would freeze or lower payments for oxygen supplies with the goal of saving nearly $1 billion over five years.

Those cuts would have the largest impact on companies like Lincare Holdings Inc. and Apria Healthcare Group Inc., which deliver oxygen to seniors’ homes. However, Lehman’s Clapsis cautioned it could be difficult for Baucus to gain enough support in the Senate to pass such large pay cuts.

The Senate Finance Committee’s ranking Republican, Charles Grassley of Iowa, is expected to release his own Medicare spending proposal this week, triggering negotiations that could last until July.

One proposal that seems certain to become law is aimed at spurring the use of electronic prescribing software made by companies like Cerner Corp. and Allscripts Healthcare Solutions Inc. Both Democrats and Republicans have endorsed online prescribing as an effective way to avoid deadly medication errors and reduce spending on expensive medications.

Under Baucus’ bill, doctors in the government’s Medicare Help program would receive bonuses when they use the software.

Along with the software makers, increased electronic prescribing would benefit pharmacy benefit managers, like MedcoHealth Solutions Inc. and Express Scripts Inc. The software allows doctors to see detailed lists of medication options, including cheaper, generic drugs. If doctors increasingly switch to less-expensive medications, pharmacy-benefit managers will see their medication costs drop.

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