A Winning Game Plan

It’s not too late to change your game plan for competitive bidding. The reality of competitive bidding is now upon us. Despite a lack of perceptible change from June 29 to July 1, the world of medical supplies has in fact dramatically changed. Are you prepared to handle the challenges that lie ahead? What is your strategic plan? It’s not too late to define, change or augment your plan no matter what it looks like. Below are some lessons I have learned from Round 1 and some strategic approaches you can follow.

Got a Bid? Great!

There is significantly less competition in Round 2 of competitive bidding than in Round 1. Given the field of Medicare bid winners, this seems highly likely. By a “back of the napkin” calculation there is an average of 20 winners for most items in a competitive bidding area (CBA). Of these winners, there are five local companies who are actively distributing this product throughout their CBA and another five national providers that are active or that will be active competitors for that product in the CBA. In addition, there are 10 companies (or about half of the field) that bid in the CBA with no active presence, product knowledge or desire to service the Medicare beneficiaries within the CBA. Ultimately this means that in any given CBA for a product there is an average of 10 legitimate competitors, which gives a distinct advantage to the remaining DMEs.

In looking at the first 10 CBAs, I have noticed that in several of them there are a significant number of companies (upward to a quarter) that are no longer in business or have been rolled up into a larger national company. This is another likely scenario that will play out within Round 2, further diminishing the competition.

Strategies for Growth: The name of the game is scale. Depending on your product mix, one of the only ways to capitalize on a bid is to grow your market share so large that your vendors are practically giving the product to you. Combined with the massive amount of products you are distributing, you should hit a positive cash flow at some point.

Acquisitions will also need to be a part of your growth strategy. Bid winners will have several opportunities to acquire smaller DMEs within their CBA that are not able to weather the storm. Many of these companies will be forced to sell for pennies on the dollar. Most of these acquisition opportunities will be realized through asset sales, where the buyer simply acquires attractive assets and leaves any liability with the owner.

Didn’t Get a Bid?

Honestly, you are probably better off. I’m not saying that the life of your business will be filled with sunshine and roses, but lucky for you, you don’t have to be part of the latest CMS disaster.

Strategies for Growth: Play to your strengths. You know what you do well and what you do not. You know what you enjoy doing and what you do only because you have to. Focus on that! There are many profitable niches that you can provide excellent service for, and odds are that you are already doing them. Trim the fat within your organization (if you haven’t already) and aggressively pressure these niches. Many of these fields are now being pursued by larger entities seeking to acquire them. The fields most attractive to buyers in the current market are complex rehab, CPAP (private and cash pay), urological, disposables, ostomy, pediatrics, hospice DME, facility business, online retail and many more.

A strategic partner is also an excellent option, if you can find one and if you are willing to play nice. Now is a good time to look to your competition and surmise whether by joining together you can deleverage fixed expenses and have synergies that will result in revenue growth. Don’t just look within your CBA or state. You should expand your search regionally or nationwide if you are comfortable with that. 

Tired of the Circus?

There are many companies looking to buy your assets, albeit at a greatly reduced price. The valuations I have been completing for DMEs with over 60 percent Medicare revenues within any CBAs have been lousy. However, exiting for less money than you want is far better than going out of business owing money, which unfortunately happens far too often.

This new post-apocalyptic Medicare landscape will not be fully defined until mid-2013, but I firmly believe that our market is cyclical and in a few years it will turn and be profitable again. That is, if you can survive in the near future. Remember, the sooner you choose a path to follow, the better chance you have at succeeding.