Braff Group: 2008 Nose Dive for HME M&A Activity

PITTSBURGH — The Braff Group said earlier this month that
even amid a worldwide recession, there were a record number of
mergers and acquisitions in some sectors of home health in 2008.
Home medical equipment, however, was not one of them.

In its fourth quarter report for 2008, the investment
banking company, which handles mergers and acquisitions involving
HME, home health agencies, hospice, staffing, infusion therapy and
specialty pharmacy, said the home health sector did not “escape the
malaise that has settled over the merger and acquisition
environment.”

Still, health care M&A activity for the year was off only 7
percent from 2007, compared to the 37 percent plunge the U.S.
recorded in total M&A activity for 2008. Altogether, there were
224 health care service transactions last year compared to 240 in
2007.

Three sectors — home health, hospice and staffing —
actually posted increases, according to the company. There were a
record 119 total HHA deals, a 3.5 percent increase over 2007’s 115.
Hospice activity spiked 36.4 percent, from 11 deals to 15, and
staffing increased 4.3 percent from 23 to 24.

HME, on the other hand, ended the year with 34 deals, a 29.2
percent drop from 48 in 2007. Infusion therapy dropped from 27
deals to 19, 29.6 percent less than in 2007, and specialty pharmacy
fell 18.8 percent, from 16 deals to 13 in 2008.

In describing HME’s M&A activity for the year, the Braff
report pointed to Congress’ delay of competitive bidding, “a delay
that was financed by a 9.5 percent cut in reimbursement. With
competitive bid pricing in the first 10 MSAs averaging about 26
percent below then-current Medicare rates — and with many
believing that momentum is gaining to eliminate competitive bidding
entirely in exchange for less draconian reimbursement concessions
— from a financial perspective, this could be viewed as a big
win for the industry. But from an M&A perspective, it is
not.

“In our view,” the report continued, “the driving force behind
the plunge in deal volume from a peak of 97 and 95 in 2004 and 2005
respectively to 34 transactions in 2008 is due to the 36-month cap
on oxygen reimbursement. A cap, we might add, that many wish to
ratchet down further to 13-18 months. Absent a complete elimination
of cap language (a revision that, considering the delay in
competitive bidding, will be that much more challenging to
negotiate) we don’t anticipate any significant uptick in HME
consolidation activity.”

Among other notable M&A events last year, Braff included
Blackstone Group’s acquisition of Apria on its Top 10 list. “While this may appear to be a
home medical equipment event, we believe it is far more noteworthy
from an infusion therapy perspective,” the report said. It noted
that Apria’s 2007 acquisition of Coram, one of the nation’s largest
home infusion companies, offered Blackstone a “back-door” entry
into the field.

Additional events shaping health care service M&A activity
in 2008, according to Braff (in no particular order):

• Barack Obama wins the presidency and the Democrats hold
  majorities in Congress. Because Democrats “lean more favorably to
  Medicare, and … are generally less inclined to support
  privatization initiatives,” this bodes well for Medicare-funded
  health care services.
• The credit crunch limits private equity’s access to debt.
• The recessionary economy has contributed to substantial state
  budget shortfalls. That has a trickle-down effect to virtually all
  health care services.
• Home Health Prospective Payment System reforms are initiated.
  “Our read is that, for the most part, providers feel that the
  revisions better match revenues and resource utilization, a
  positive iteration to the PPS model.”
• Publicly traded home health care providers soar while the broad
  markets plunge. Record growth, favorable PPS reforms and other
  factors could ultimately translate into more investment dollars and
  perhaps credit for the home health care arena.
• CMS begins collecting additional detailed information on
  hospice. This could indicate that CMS is planning to reform hospice
  payments.
• Returns on Treasury bills go negative. This “signaled an
  extraordinary crisis of confidence, a crisis that may give even the
  most confident of executives, in sound businesses, reason to pause
  when it comes to pulling the trigger on merger and acquisition
  fueled growth initiatives.”
• MedPAC considers going beyond recommending a freeze to the
  Medicare home health update. This prompted the industry’s risk
  profile to definitely tick upward.