PITTSBURGH--A recent report from merger-and-acquisition specialist The Braff Group reflects the effects of both competitive bidding and the Deficit Reduction Act's 36-month oxygen rental cap on the HME market.
The annual transaction activity record, which tallies M&A deals in the home health, infusion, specialty pharmacy, hospice, health care staffing and HME sectors, found that total deal volume from 2006 remained steady in 2007. But despite that finding, according to the report, “no other sector … has experienced such a dramatic rise and fall in merger-and-acquisition activity over the past seven years as home medical equipment.”
Between 2004 and 2005, HME saw 95 transactions, but that number fell by 37 percent to 60 the following year. In 2007, the number dropped another 28 percent, reflecting only 43 deals for the year. While concern about competitive bidding is one reason for the decline, uncertainty surrounding implementation of the 36-month rental cap on home oxygen is even more unsettling, according to the report.
“Shortly after the 36-month cap was introduced, the president and Congress began introducing legislation to pare the cap down to as few as 13 months, creating extraordinary risk 'overhang' that dwarfs the somewhat predictable reimbursement declines likely to come from [national competitive bidding],” the report said.
While round one competitive bidding rates average 26 percent reductions in reimbursement, Braff said the aftermath could trigger more activity this year: “We may see an up-tick in activity in the initial 10 bid areas as losing bidders try to make up for their loss by acquiring a winning player, or simply decide to divest.”
In terms of year-over-year deal volume growth, infusion therapy lead all sectors with 25 recorded transactions, a 32 percent increase over 2006, with five of Braff's top 10 deals of 2007 in the infusion segment. Notable among them were Walgreen's $850 million purchase of Option Care (HomeCare Monday, July 9, 2007) and Apria's $350 million acquisition of Coram (HomeCare Monday, Oct. 22, 2007).
In other sectors, the home health industry recorded a record-setting 107 transactions, up 14 percent from last year's 94, making this sector the first to top the 100-deal mark since the inception of Braff's report in 1991.
Activity in specialty pharmacy services remained constant, despite the fact that of 17 transactions in 2007, nine were completed by one buyer--Triad Isotopes, a private equity-sponsored consolidator.
The hospice sector saw a “particularly slow year” with only 10 transactions, down 33 percent from 15 a year ago. The report noted, however, that with a surge in hospice spending now estimated at about $10 billion and a spike in new for-profit hospices entering the market, Braff expects a “slow but steady increase in new acquisition candidates as these start-ups begin to mature and seek an exit strategy.”