Chad Finds a Source of Fresh Air : Firm Hopes New Medicare Provision Will Give It Room to Breathe

People visiting Chad Therapeutics in Chatsworth sometimes get the impression that the tiny company is down to its last nickel. They’re pretty close.

The health care company is so poor that it recently had to cram into a building with only three rooms--one for the computer equipment, one for the company’s president and one for absolutely everything else, including the company’s product and all its executives.

The company’s conference table doubles as a desk for founder Charlie Adams, so that when the board of directors meet, members pile into his small office. “We just pull the table out from the wall a little bit,� Adams said. “There is a total absence of frills.� Adams is the company’s highest-paid executive, and he only earned $21,000 last year.

Ever since it was founded six years ago, Chad has made a product that few people want. It manufactures devices that conserve the oxygen in tanks delivered to the homes of patients who suffer from respiratory problems.

The devices conserve oxygen because they provide bursts of oxygen when the patients need it, rather than having the oxygen move in a steady flow through tubes. As a result, the devices conserve oxygen that would be wasted while the patient is exhaling. Chad makes several devices and tries to sell or lease its products to oxygen dealers. The leased rate ranges between $12 and $60 a month.

The problem, however, is that oxygen conservation hasn’t been a big priority. There is an ample supply of oxygen. It is not very expensive--about $150 a month for a patient who requires it 24 hours a day. And more important, Medicare has had very few limits on the reimbursements it provides at-home oxygen dealers, who just keep filling up the tanks and getting paid for it.

Not surprisingly, Chad has never made a profit and has piled up nearly $3 million in losses since 1985 on less than $1 million in sales. And Earl Yager, vice president, expects the company to lose another $200,000 on sales of $400,000 for the 1988 fiscal year that ends Thursday. Meanwhile, its stock has sunk from an original July, 1983, offering price of $6 per share to a bid price of 50 cents last week.

The one ray of hope for the company appears to be a provision that President Reagan signed last December. It places a limit on how much dealers in oxygen can collect from Medicare.

Starting Jan. 1, 1989, Medicare will reimburse oxygen dealers with a flat fee. The more oxygen they save, the more of that fee the dealers will keep as profit. “Oxygen conservation is suddenly going to become very, very popular,� Adams said.

“It was always in the suppliers’ interest to have the beneficiary use as much oxygen as possible,� said William Long, a Medicare analyst. “All of a sudden it’s in the dealers interest to conserve oxygen.�

Whether the provision will save Chad still is up in the air.

Chad (an acronym for Charlie Adams) was started in 1982 because Adams thought Medicare would warm to the opportunity to trim its estimated $500 million in annual reimbursements for at-home oxygen care. “It just seemed a natural that anything that could reduce the costs of caring for home-oxygen patients had to be a winner sooner or later,� he said.

“We were fairly naive, I suppose, about how quickly the government would want to save money,� Adams said. “We thought they would welcome something that would reduce their costs. It doesn’t work that way.�

A year ago the company had spent all but $100,000 of $3.7 million raised in its offering, and its accountants questioned whether Chad could stay open. But Adams solved that problem in December by raising an additional $168,000 by selling preferred stock to some of the company’s original investors. Because Chad has no debt, executives say the company can keep going for at least another year, and the new legislation makes them supremely confident. “It’s going to work out. It’s just a question of how big,� Yager said.

Heavyweight Competition

Not everyone is so optimistic, however. Because most of Chad’s business so far has been with small, independent distributors, some industry watchers think the company could be bypassed because the oxygen industry is dominated by a couple of big chains.

The chains might choose to go with a bigger company like Puritan-Bennett Corp., a Kansas medical company that makes oxygen conservation devices, among other things, and does $150 million a year in sales.

Adams concedes, “There is competition and a great deal more in the works.�

Oxygen dealers also could simply start billing patients for the portion of expenses Medicare will no longer pay. “Most of our competitors are conglomerates with outlets all over the United States,� said Mark Grzeskowiak, manager of Best Care Medical Equipment in Costa Mesa, a Chad customer. “They have a lot of inventory they need to be using, and they’re not going to invest in new technologies. They’re going to continue to use the tanks and trucks they have and bill patients for the percentage Medicare won’t pay.�

Adams and his investors are betting otherwise. Whether they were right will be decided within the year, he said.

“It’s live or die,� Adams said.

CHAD THERAPEUTICS AT A GLANCE

Chad Therapeutics sells respiratory devices that conserve oxygen in home health care systems. The Chatsworth-based company has 7 employees and 1.4 million shares of common stock outstanding.