7 Critical Market Trends DME/HME Executives Need To Consider Today
By Bradley Smith, ATP, CMAA
Volume 4 Issue 22, October 24, 2017
The rapidly evolving DME/HME market continues to grow in volume despite significant downward pressure from insurers. This market has experienced significant consolidation in recent years, in part as a result of fee schedule changes introduced by the Centers for Medicare & Medicaid Services (CMS). Further cuts in Medicaid and private insurance reimbursements are expected in 2018 as the DMEPOS Competitive Bidding Program continues to play a significant role nationwide. This has led to continued market uncertainty. It has also meant that many so-called “Mom and Pop” companies have been squeezed out as greater economies of scale are increasingly needed for DME/HME providers to be profitable.
Some of the most significant trends include:
- Consolidation is one of the biggest trends impacting this sector. Historically, the DME/HME sector has been highly fragmented due to the strong presence of small providers. Since reimbursement reform took hold in early 2010, providers are shedding a full-service approach in favor of focusing on a few interrelated product vertices. This approach of “falling back” to a core competency has created a class of local, regional, and national players aggressively pursuing niche products on a national scale, dramatically increasing value for select “favorable” product verticals (i.e. disposable, NIV, urological, etc.).
- Most industry players have become regional in scope, covering large metropolitan areas and/or regions. These regional players are typically well-entrenched in the community with a strong clinical services background that often focus on delivering high-tech services. In the past, large national DME/HME players have tended to shy away from these types of high tech services because they have tended to lack a deep bench of clinicians, and as a result, also lack the strong local relationships needed to thrive. This is enticing larger DME/HMEs to reconsider the space. Additionally, private equity groups have also noticed the reimbursement trends and increased barriers to entry. Consequently, these groups have also begun investing in roll-up acquisitions.
- Technology, automation, and outsourcing is also playing a large role with savvy providers who are making do with less. These new shrewd providers have sought opportunities for disruptive innovation within operating capacities. Namely, they have altered traditional delivery models, outsourced intake and documentation, and stopped carrying inventory.
- Targeted revenue with a core revenue source is becoming the norm. A typical DME/HME with $1 million in EBITDA will have a total revenue of at least $5 million with 60% of their revenue coming from their core competency (e.g. PAP therapy), followed by 30% of their revenue from a complementary service (e.g. supplementary oxygen therapy), and a tertiary catch-all of 10% of multiple products. Their breakdown of revenue by payers is usually very diversified with two or fewer payers making up no more than 30% of their total revenues.
- Deal architecture continues to evolve. Typical multiples at this level are 3x to 4x of EBITDA with a structure of 80% cash at close and 20% held in escrow for 12 months and closing on a cash free, debt free basis, with one month working capital, seller keeping the AR, and the buyer purchasing the inventory in a separate transaction at wholesale value. Multiples will vary drastically depending on the product and payer mix.
- Most transactions are asset transactions as opposed to stock transactions. This is usually in an attempt to limit claw back risk for erroneous Medicare/Medicaid audits. Additionally, we recommend hiring specialized consultants to evaluate the integrity of the patients’ data to ensure compliance with the insurance standards.
- It is common for DME/HMEs to carry debt on their balance sheet. The amount of debt varies dramatically based on the revenue cycle of the type of products they carry. For example, PAP blowers carry a 12-month capped rental, while CRT is usually a purchase. However, it takes 90 days for reimbursement, and O2 and vents are a rental that never caps. Typically, this is offset by the company’s AR and usually does not extend greater than six months’ worth of revenues.
Despite the pending risks associated with reimbursement changes, we feel that DME/HME acquisition presents a good value at the present time. We are of the opinion that market multiples have reached a bottom point and will begin to rise within the next five years. Additionally, demand for the baby boomers, a fragmented market, and reduced providers in the market all lead to a favorable outcome in the long term for providers.