Providers should think outside the box
by Bradley Smith

The DME/HME market has experienced a great deal of consolidation due directly to Medicare reimbursement cuts from competitive bidding. Further cuts in 
2014 are expected from managed care/private insurance payers along with possible cuts in noncompetitive bid areas under Medicare’s inheritable reasonableness rule. This ultimately raises the minimum economies of scale that DME/HME providers will need to be profitable. Most small companies are being squeezed out, flooding the marketplace with 
lower middle-market companies for sale, which in turn lowers overall prices for DME providers and makes it an excellent time to buy. However, some niche products are commanding premium pricing such as urology, vents, hospice/B2B rentals, complex rehab, O&P and PAP therapy. Home Health Care—Home health care transactions slowed in 2013. This was due mainly to the Bush-era tax cuts that ended in December 2012. Since then, transaction levels have resumed in anticipation of the 2014 Medicare cuts 
of 1.05 percent. In contrast to Medicare cuts, Medicaid reimbursement (on 
average) and patient census are both increasing. Home Health Associations (HHAs) dealing in Medicare are now consolidating to better handle the increased scale needed to stay profitable, and the Medicaid and private duty services are becoming more fragmented. In light of this, most home health care agencies are selling between three and four times EBITDA. Hospice—Unlike the home health market deal flow, the hospice market remains strong and will continue to show vigor throughout 2014. Medicare per diem reimbursement rates for hospices will increase by 1 percent, or roughly $160 million, in fiscal year 2014 according to a final rule issued by CMS. In a post-
sequestration, deficient-reduction environment, any increase is noteworthy. Retail Pharmacy—Sales in the retail pharmacy market also remain strong. With the upcoming changes in Medicare Part D and Obamacare, more independent owners are looking to retire for fear of the unknown. There are still approximately 23,000 independent retail stores in the U.S. as margins continue to shrink due to more independent owners looking at different revenue streams (i.e., sterile and non-sterile compounding, specialty drugs and disease management). Stores are still selling between 17 and 27 percent of gross revenue. Specialty Pharmacy—Specialty pharmacy continues to be the darling of the pharmacy industry. With more specialty drugs in the pipeline, this area has the largest growth due to the high cost of such drugs. Both private equity and venture capital companies want to become more involved in this space. Depending on how many states in which the pharmacy is licensed and which chronic diseases they focus on can determine a better multiple in a sale. Specialty compounding pharmacies are selling at 1 times revenue due to their small DSO and cash business. Behavior Health—Behavioral health has been dominated by nonprofit providers also increasingly looking to acquire other entities as part of their strategic development, which has increased seller options. Many opportunities for growth and acquisition are available in the in-home child/adolescent intervention and adult/child foster care markets, where there is strong interest from national companies. While specialized treatment programs (i.e., eating disorders, substance abuse) may attract buyers interested in third-party funding (including private health insurance), the strongest demand exists for modest-size psychiatric facilities (75-125 beds) in almost every U.S. region. Private psychological/counseling practices receive only local interest unless they have Medicaid-type programs that can be grown by a new owner. These trends are likely to continue through 2014 with newer intensive treatment alternatives to inpatient hospitalization gaining an increased marketplace share. Urgent Care—Urgent care has been rapidly growing as our nation’s new ER and primary care center. With fuel added from the ACA, urgent care is where the U.S. health care model is evolving. As a result, many large players and most hospital systems are leading us into this new frontier. A small segment of entrepreneurs has been creating their own urgent care centers. When these entrepreneurs exit the market, they are seeing prices of four to eight times EBITDA. Look for continued growth in this segment and a new niche of specialty providers to emerge.