HomeCare Poll: Majority of HME Providers Want Out

ATLANTA — A shocking 60 percent of the participants in
HomeCare’s March Web poll said they are trying to sell or
close their HME businesses before Round 2 of competitive bidding.

Of 477 votes in the poll — which asked the question, “Will
you bid in Round 2 of competitive bidding?” — here’s how the
responses broke out:

• Yes: 13%
• No: 10%
• Haven’t decided: 4%
• Audits may put me out of business before Round 2 is
  implemented: 13%
• I’m trying to sell/close my business before I have to: 60%

But these days, selling out won’t be so easy, say
merger-and-acquisition experts. The very reason those in the home
medical equipment sector want out — competitive bidding and
the resulting reimbursement nosedive — is also the reason few
buyers want in.

“Sadly, there is a rumble of people heading toward the exit. But
the doors aren’t as wide as they once were,” said Bob Leonard of
Pittsburgh, Pa.-based The Braff Group. “Supply and demand has
certainly tilted in favor of the buyer. And the other thing is, it
is all about risk and return. [Buyers] know the risk, and the
returns are diminishing.”

Richard Glass, president of Steven Richards & Assoc., Tarpon
Springs, Fla., said he believes providers are getting worn down.
While his company hasn’t seen as much seller movement as in 2008
when the first Round 1 was implemented, he said, “I certainly sense
every day in my work frustration on the part of many
providers.”

The market for sellers “is not as robust as it was years ago,”
Glass said. “We have buyers … we probably sold seven or eight
HME companies last year and some this year, but there are certainly
not as many buyers as there were.”

Leonard said Braff also has completed sales in the HME sector
and there are more in the works, but he is seeing few outside
investors. “Most of what we are seeing is buyers who are already in
the business, who already have an infrastructure in place so they
can pick up a patient base without the cost of putting that in
place,” he said.

Provider Todd Tyson, president of HiTech Healthcare in Norcross,
Ga. (a suburb of Atlanta, which is included in Round 2), said he
has gotten calls from other providers who are closing their doors
and are trying to find service for their patients. He recently
heard from a neighboring provider looking for a company to take its
200 oxygen patients.

“We hear a lot of frustrated comments with people saying they
wish they were out of the business,” Tyson said.

There is little doubt that many providers are actively seeking
buyers — and not only those in Round 2. Some in Round 1 areas
are still trying to sell three months after implementation.

Chris Rice of Diamond Respiratory Care, a Riverside, Calif.,
company that was awarded multiple contracts in the Round 1 rebid,
said his company routinely gets calls from other Round 1 providers.
“Most of the calls are looking to subcontract,” he said.

“However, there are several looking to sell. We’ve only made two
acquisitions this year,” Rice said. “Unfortunately, the ones we’ve
talked to are just not worth much — they are essentially
asset sales only.”

Even with a buyer, getting out of the business is neither easy
nor painless.

“Prices are a fraction of what they were at the peak,” said
Leonard, noting that providers successful in selling are those who
have made a strategic decision to exit the business and “are
willing to sell fairly cheap.”

“The company that might have been [worth] around $2 million is
now worth around $700 grand,” Glass said. “I think there is an
element of price disconnect. Sellers think the price of the company
should be based on what it makes today.”

But with reimbursements still likely to plummet as costs
continue to rise, buyers generally are not willing to buy at the
seller’s price.

“If [sellers] are interested in selling at market value, we’ve
been successful in getting some transactions done,” Glass said.

“When the Round 1 competitive bidding contracts were first
awarded, some winners felt that they had hit the jackpot,” said
attorney Jeff Baird of Amarillo, Texas-based Brown & Fortunato.
“For example, if ABC Medical was issued a contract for four product
lines in four [competitive bidding areas], then this essentially
equates to 16 contracts. ABC might have initially thought that it
could enter into 16 separate asset sales that would, in essence,
allow it to sell all 16 contracts.”

No such luck.

“The CBIC saw this coming and threw cold water on this type of
approach,” Baird said. “The CBIC issued a directive that said that
if ABC plans to enter into an asset sale, then it must sell all of
its assets associated with all 16 contracts. In other words, ABC
can enter into one asset sale, not 16 asset sales. This CBIC
directive has pushed many transactions to being stock
acquisitions.”

Leonard said for some providers, it might make sense to stay
with the business.

“For some going into Round 2, they might be better off hanging
on to it and taking a little money home every week,” he said,
noting owners would need to calculate when reimbursement is going
to change, how much time they have before that happens and what
other elements of their business can carry them forward.

Others, said Glass, need to “move sooner rather than later.”

Baird noted the high number of providers in HomeCare’s
poll who said they want out surprised him. “Only a small percent of
our clients in Round 2 have expressed a desire to sell,” he said.
Instead, most of his Round 2 clients are “taking aggressive steps
to lessen their dependence on Medicare” as well as figuring out
what their options are if they don’t win bids.

“There is a hope among many suppliers in the Round 2 CBAs that
Round 2 will not go through to its fruition,” he said.

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