Once Again, Buyers in Wait-and-See Mode

ATLANTA — With Round 1 rebid in full swing (and
the Nov. 21 covered document review deadline only days away),
experts say the HME mergers-and-acquisition environment is anything
but active in the first nine competitive bidding areas.

But with scheduled implementation still over a year away, Rick
Glass, president of Steven Richards & Assoc., Tarpon Springs,
Fla., said M&A activity may pick up later as potential buyers
and sellers wait to see if the program really happens this time
around. Glass confirmed that the situation is much the same for big
nationals buying within the Round 1 CBAs: Activity will probably
come later.

“If there was any inclination of winning bidders to sell in the
first go-round of bidding awards being announced, they put plans on
hold once the delay was announced [last year],” added Tim Pontius,
managing director at SRA. “We have seen a little consolidation
— small suppliers consolidating or being acquired by other
suppliers in their region — but no one has really postured
themselves to get into one of these markets in a big way as yet, at
least that we have heard of.”

Bob Leonard, managing director for Pittsburgh-based The Braff
Group, attributes the lack of activity to the sheer amount of
unknowns within the industry.

“We are not seeing much M&A activity at all in DME and
respiratory in Round 1 areas or otherwise,” said Leonard. “I think
most posturing, if any, took place prior to the original, later
withdrawn, bidding. Between the uncertainty of competitive bidding
as well as fear the oxygen cap period could be reduced — on
top of the price reductions and onset of capped oxygen which kicked
in Jan. 1, plus accreditation, bonds, etc. — small providers
looking to exit would find it difficult, and at reduced
valuations.

“In fact,” said Leonard, “many have simply stopped accepting
Medicare or closed their doors.”

As for subcontracting in the CBAs, just like last time around,
Pontius does not expect it to be a “bid deal,” citing lower
reimbursement rates that leave little room for multiple levels of
participation.

“Last time, there was a fairly high level of interest in the
possibility of becoming a subcontractor, and at least maintaining
some cash flow in the business,” he said. “Once the bid rates were
announced, it became painfully clear that the rates were going to
be so low that there was going to be no ‘win-win’ scenario for a
subcontract relationship. I was at the [Ohio Association of Medical
Equipment Services] meeting a few weeks ago, and I heard absolutely
no one talking about a strategy that included subcontracting.”

Glass agreed that some small providers are simply deciding to
exit the business. Values are down, he said, reflecting lower
reimbursements and reduced profitability along with uncertainty
over future reimbursements and regulatory changes.

“At the same time,” he said, “there remains a demand from other
providers that are remaining in the business and know that they
need to achieve larger scale in a time of shrinking
reimbursements.”