7 Insights On Why I/DD M+A Has Just Begun

by Tom Schramski, PhD, CMAA and Joshua Boynton, CMAA

Volume 5 Issue 11, May 22, 2018 

Just 50 years ago nearly 200,000 people with I/DD were locked up in large institutions across the US. Today, about 27,000 people with I/DD live in such environments, including skilled nursing facilities (SNFs) and other similar institutions. This exodus into our communities has dramatically improved the lives of people with disabilities, as well as their families. It has also created a dynamic marketplace for the organizations providing services and supports to these same people.

As in any evolving marketplace there are entrepreneurial opportunities, and this is certainly true in community supports for people with I/DD. Along with the expansion in Medicaid-funded services (approaching $100 billion annually), people with disabilities are living longer than ever and are seeking more choices in the supports they receive. This transformation has opened the door for significant investment and M+A activity in the I/DD market and here are a few insights on why:

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The marketplace is fragmented – There are many “mom and pop” providers of I/DD services across the US, including people who became providers because of their personal commitment to people with disabilities. In many cases they have had no interest and/or ability to significantly build their services and they are now seeking an exit. While this provides a great opportunity for investors, there can also be a challenge in “rolling up” enough business activity to warrant the investment.

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The marketplace is technologically immature – Many I/DD providers have invested very little in technology that can expedite service delivery and improve overall provider operations. The understandable challenge for a buyer is the time and expense to implement the technology. Yet, astute investors often see that the ROI on these types of investments can be significant over a short period of time while increasing the ability of the investor to rapidly scale up the organization.

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Margins can be improved in this marketplace – Along with the “mom and pop” phenomenon are many providers who have survived over a long period of time with slim margins, often less than 5%. Investors see the same difficulties but will move forward when they see the possibility of improving margins through a mixture of efforts, including bringing aboard executives with a strong track record and systematically monitoring all areas of operation.

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This marketplace has good cash flow – While there is considerable reimbursement rate variation among states, there has been a historic sensitivity to the cash flow needs of I/DD providers in most of our country. Many states allow providers to bill more than once each month and provide payment for 90% or more of services billed within 5-7 days. This is attractive to buyers and investors who see the opportunity to stretch their capital, especially if they are in an expansion mode.

Growth is inherent to the marketplace – The incidence of I/DD in our population, including Autism Spectrum Disorder, is consistently about 3-5%. The prevalence of newly eligible Medicaid service recipients each year is a similar percentage, while the increasing life span of people with I/DD has also expanded the total eligible population. Though some states simply add more people to waiting lists, entrepreneurs see the natural growth as an indication of increased opportunity.

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The marketplace is increasingly focused on value – The world of I/DD services has traditionally paid great attention to the process of how eligible children and adults receive services (e.g. person-centered services). In many cases this has not been accompanied by an emphasis on demonstrated outcomes (e.g. desired employment). Payers find that I/DD providers lack the sophistication to verify outcomes, while investors possess the technology and organizational discipline to do so.

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The marketplace is rapidly shifting from political sensitivity to an economic bias – Medicaid funding consumes more than 20% of many state budgets, making services for people with I/DD a natural target. As a result, states are increasing their reliance on managed care, including “carve ins” of previously excluded I/DD supports. Buyers are generally not intimidated by this trend and often perceive an opportunity to acquire providers who don’t want to surf the new normal.

If you are a provider of I/DD services, it is worthwhile to assess your future with the above perspective in mind. You may be inspired to grow and diversify your services and supports given the possibilities you see. If that’s not the case, you may want to assess and build value in your existing organization as you prepare for one of the many transition options available.