MMA contains provisions that would reduce payment amounts, beginning in 2005, for oxygen equipment, standard wheelchairs (including standard power wheelchairs), nebulizers, diabetic supplies consisting of lancets and testing strips, hospital beds and air mattresses to the median prices paid under the Federal Employee Health Plan (“FEHP”). The legislative text of MMA references comparative pricing data included in testimony of the Office of Inspector General (“OIG”) as the source data for FEHP pricing. However, the referenced table does not include applicable payment amounts for oxygen. It is expected that the OIG will issue a subsequent report during 2004 that will establish pricing for oxygen based on the median FEHP payment amount. Until the report is issued, the Medicare payment amount for oxygen furnished in 2005 will not be known. Median FEHP prices for the items included on the table referenced in the OIG testimony range between 4 percent and 22 percent below comparable Medicare fee schedule amounts. The OIG may also undertake to revise the FEHP pricing data and corresponding Medicare reimbursement rates for these items in its subsequent report. We can not predict the outcome of the OIG report or the Medicare payment rates that will be in effect in 2005 for these items. MMA also freezes payment amounts for other covered DME items from 2004 to 2007. Such payment reductions, when implemented in 2005, could have a material adverse effect on our financial position and operating results.

A SIGNIFICANT PERCENTAGE OF OUR BUSINESS IS DERIVED FROM THE SALE OF MEDICARE-COVERED RESPIRATORY MEDICATIONS, AND RECENT LEGISLATION IMPOSES SIGNIFICANT REDUCTIONS IN MEDICARE REIMBURSEMENT FOR SUCH INHALATION DRUGS.

          Historically, prescription drug coverage under Medicare has been limited to drugs furnished incident to a physician’s services and certain self-administered drugs, including inhalation drug therapies. Prior to MMA, Medicare reimbursement for covered Part B drugs, including inhalation drugs that we provide, has been limited to 95 percent of the published average wholesale price (“AWP”) for the drug. MMA establishes new payment limits and procedures for drugs reimbursed under Medicare Part B. Payments for inhalation drugs furnished during 2004 declined to 80 percent of the AWP in effect as of April 1, 2003, a reduction of approximately 15 percent. If the provisions of MMA are fully implemented, beginning in 2005, inhalation drugs furnished to Medicare beneficiaries would be reimbursed at 106 percent of the volume-weighted average selling price (“ASP”) of the drug, as determined from data to be provided by drug manufacturers under a specific formula described in the legislative text. While the net payment amounts for inhalation drugs under the ASP methodology have not yet been finalized, preliminary estimates released by the Centers for Medicare and Medicaid Services (“CMS”) indicate a reduction in payment amounts in 2005 of up to 90 percent lower than 2004.

          On July 27, 2004, CMS issued a proposed rule, CMS-1429-P, which, among other things, describes the proposed implementation of the MMA provisions affecting payment for inhalation drugs.  Comments on the proposed rule will be accepted by CMS until September 24, 2004.  CMS plans to publish the final rule by November 1, 2004, with an effective date of January 1, 2005.  We are evaluating the impact of the proposed rule on reimbursement rates for inhalation drugs and will closely monitor the development of the final regulation.

          CMS proposes to establish a separate dispensing fee that will be paid in addition to the payment amount for the drug.  CMS is seeking comments that would assist the agency in setting an appropriate dispensing fee that reflects the costs of the shipping, handling, compounding and other pharmacy activities required to furnish inhalation drug therapy to Medicare beneficiaries.  We do not believe that the ASP provisions contained in MMA and as described in CMS’s proposed rule, in the absence of a meaningful dispensing fee, would adequately compensate home care providers for inhalation drug therapies and, if implemented, would completely eliminate the supply of these critical respiratory medications by home care providers, such as Lincare, to more than one million patients across the United States.  The General Accounting Office (“GAO”) is directed under MMA to conduct a study to examine the adequacy of reimbursement for inhalation drug therapy under the Medicare program and submit the results of the study in a report to Congress no later than December 8, 2004. We can not predict the outcome of the GAO study or its potential impact on the implementation of the ASP provisions in 2005. Medicare-covered inhalation drugs account for approximately one quarter of our net revenues. Such payment adjustments could have a material and adverse effect on our financial position and operating results.

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