In 2018, mergers and acquisitions soared among durable medical equipment (DME) suppliers that either successfully exited the market or used M&A as a means to strategically grow their businesses. From a broad perspective, 2019 is expected to maintain the same intensity around M&A activity as areas of home care and hospice continue to expand, giving more businesses the opportunity to further propel themselves into new markets to create durable and innovative solutions in an inefficient and fragmented care delivery system.
Foreign Investment Accelerating M&A Growth In 2019
The American healthcare system is very attractive to investors, as it’s one of the largest in the world with a large aging population that is at the cusp of a healthcare spending boom. For this reason, foreign entities have become very interested in gaining exposure in the market to take advantage of lower rates and a growing focus to advance healthcare by fusing healthcare and technology.
The aging population and the influx of chronic diseases call for the development of new medical equipment and devices designed to provide optimal care for more patients. By investing in, merging with, or acquiring existing medical equipment suppliers, foreign businesses gain the means to expand their share by both launching their existing products and entering new channels.
Current businesses serve as a platform for entry as they often possess existing insurance contracts, one of their largest barriers to entry, and an existing workforce to continue operations for revenue growth.
Reimbursement Cuts And Legislative Pressure
Reimbursement pressures caused significant consolidation in the DME space. As rate reductions came from Medicare as well as other large insurers, these cuts forced smaller companies out of less profitable segments of the business, and sometimes out of business altogether. It also meant the remaining providers had to operate in a larger geographic region, one that coupled with continued reimbursement cuts means a change in strategy for most suppliers.
Reimbursement pressure, geographic expansion, and added legislative uncertainty coupled with an aging population nearing retirement, have all resulted in an increased interest in exiting the market. For many, the attempts to repeal the Affordable Care Act, tax reforms, and large changes with Medicare are signs that it is time to exit certain lines of business, or all together to gain the necessary capital to either refocus their goals while their patients continue to be cared for. By contrast, the buyer gains a new line or products and services to invest in their growth with the possible ability to launch their new products. It is for this reason that M&A in the healthcare sector remains popular among both buyers and sellers.
Mail-Order as a Priority
National providers have focused for many years on items that can be shipped directly to patients. Those items have included catheters, CPAPs & supplies, diabetic supplies, and incontinence products. Recently, providers have experienced significant reimbursement cuts, as large insurance companies are looking to be more competitive in price, forcing medical equipment providers to adapt.
Buyers are motivated to address demand for reduced pricing by diversifying their product line to adapt to insurance needs while offering new, highly specialized products. To do so, they are often forced to look nationally and expand into new markets or identify new products in existing channels. As a larger company, buyers often possess minimal additional expenses from acquiring mail-order product lines, making consolidation a solution that allows them to capture additional leads from local communities at a relatively low cost.
By contrast, sellers have reacted to the same reimbursement pressures by leaving the items that are classified as mail-order behind. Those reductions usually mean the items are now well below their profitability margin, making consolidation attractive as a solution to maintain patient care while allowing them to collect additional revenue from a business line where they would not otherwise continue to operate. Ultimately, sellers are able to easily cut-ties with their smaller product lines because they have diversified across products in a specific demographic region, making the sale of their business a means of creating additional capital for the segments where they are not profitable.
Mail-order items are valuable because they appeal to more parties. If an item can be mailed, a buyer could consider the purchase from anywhere. If an item requires a physical presence in order to continue to operate, the seller would need a buyer that is interested in operating in their particular market.
What To Expect In 2019
The DME market is favoring more M&A activity resulting from legislative uncertainty, reimbursement cuts, foreign investment, and an aging baby-boomer population. Being prepared to make dynamic shifts and implement competitive strategy will be very effective for building financial resiliency. The demand is high and the competition is fierce. Sellers are able to exit comfortably knowing they have built strong businesses and business lines and expect to be compensated appropriately. For these reasons and others, mergers and acquisitions in the healthcare sector should expect the same momentum in 2019 as they experienced in 2018.
Andrew Amoth Strategic Partnership Coordinator, at Aeroflow Healthcare, a national provider of durable medical equipment (DME) products and construction company programs.