Has The Sky Fallen? 4 Great Reasons To Invest In DME

By Bradley M. Smith, ATP

Volume 1 Issue 19, October 14, 2014

tt152-105157fb-c7e0-4ff8-86bd-0a91d538457d-v2We all know the story of how one acorn dropping from a tree and landing on Chicken Little’s head created the paralyzing belief that the “sky is falling.”  While the world of durable medical equipment (DME) has experienced more than one random acorn via competitive bidding and related market turbulence, there remain tremendous opportunities for those than can see beyond self-imposed despair and false conclusions.

Here are four reasons that you may want to consider as you look for potential DME investments:

  • The DME market has been experiencing rapid “disruptive innovation” spurred by competitive bidding. Very simply, new and more affordable products and marketing approaches, along with competitive bidding, have fed the market’s demand for accessibility, efficiency and cost-effectiveness.  DME entrepreneurs that embrace these factors are very successful and they are growing.
  • Smaller DME companies (< $1 million revenue) are either repositioning themselves into unique niches with a stronger cash component in their revenue mix or, if they are heavily dependent on Medicare, they are prey for absorption at basement bottom prices.  In either case, there are opportunities here for acquisition by entrepreneurs that want to leapfrog the competition.
  • Bigger DME companies are rapidly getting bigger.  They are diversifying their revenue base while recognizing that Americans are more willing to “come out of pocket” for healthcare spending than at any other time in our nation’s history.  This is an increasing phenomenon for Baby Boomers that are living longer than any previous generation, and this positively affects the DME marketplace.
  • Private equity groups (PEGs) have entered the DME space at an increasing rate in the past couple of years despite competitive bidding.  Why?  They have done their analysis, convinced lenders/investors of the opportunities, and are now actively participating in the consolidation.

There are many versions of the “sky is falling” folktale and my favorite is the one where the King congratulates Chicken Little on its journey of courage.  You may not know that this story was adapted by our government during WWII to help everyone understand the disastrous effect of fear mongering at a time when clear thinking and courage were necessary.  While not as cataclysmic, the lesson can be applied to our DME marketplace – if you can see the inevitable opportunities and act intelligently amidst the turmoil, you can reap a significant reward.