We all know the story of how one acorn dropping from a tree onto the head of Chicken Little created the paralyzing belief that the sky is falling. While the world of durable medical equipment (DME) has experienced more than one random acorn via competitive bidding, RAC audits, Medicare cuts and related market turbulence, there remains tremendous opportunity for those who can see beyond self-imposed despair and stop jumping to false conclusions. Below are five points to consider as you look for potential DME investments.
1. The DME market has experienced rapid "disruptive innovation," spurred by competitive bidding and Medicare cuts. Very simply, new and more affordable products and marketing approaches, along with competitive bidding, have fed the market's demand for accessibility, efficiency and cost-effectiveness. DME entrepreneurs who embrace these factors are very successful, and they are growing.
2. Smaller DME companies (<$1 million in revenue) are either repositioning themselves into unique niches with a stronger cash component in their mix or, if they are heavily dependent on Medicare, they are prey for absorption at basement-bottom prices. In either case, there are opportunities for acquisition by entrepreneurs who want to leapfrog the competition.
3. Buy low, sell high. This is basic investing 101. Most people will agree that we are at or near the bottom of the market. Only hindsight can confirm the exact bottom mark, but we can base our decisions on the current facts. They are:
- DME valuations are at an all-time low.
- The most significant risk is the uncertainty of reimbursement futures; primarily Medicare round three.
- The demand for products and services will remain consistent and is growing in parallel with an aging society full of baby boomers.
4. Bigger DME companies are rapidly growing. They are diversifying their revenue bases while recognizing that Americans are now more willing to pay out of pocket for health care spending than at any other time in our nation's history. This is an increasing phenomenon for baby boomers who are living longer than previous generations, and this positively affects the DME marketplace.
5. Private equity groups (PEGs) have entered the DME space at an increasing rate during the past couple of years despite competitive bidding. Why? Because they buy at the bottom of the market and sell at the top. They have done their analyses, convinced lenders and investors of the opportunities and are now actively participating in the consolidation. They are also taking a condensed approach and focus on products with high reimbursement or good recurring revenue such as NIV, CPAP, catheters and others. The fear of the unknown has (mostly) passed. In 2009, we had no idea what to expect from competitive bidding. However, it is now understood what level of cuts to expect from further competitive bidding rounds, what impact the Affordable Care Act will have, what audits to expect, etc. Once someone can get past the "what ifs," planning and developing a strategy becomes much easier. There are many versions of "the sky is falling" folktale, and my favorite is the one where the king congratulates Chicken Little on his journey of courage. You may not know that this story was adapted by our government during WWII to help everyone understand the disastrous effect of fearmongering at a time when clear thinking and courage were necessary. While not as cataclysmic, the lesson can be easily applied to the DME marketplace—if you can see the inevitable opportunities and act intelligently amidst the turmoil, you can reap a significant reward.