Medicaid Is Not So Bad After All?: 8 Reasons Why Investors Are Now Focusing On I/DD Services

By Tom Schramski, PhD, CMAA 

Volume 3 Issue 13 June 21, 2016

tt152-6db37bc9-9903-46b4-b98b-e3a60cea3a67-v2The marketplace for intellectual/developmental disabilities (I/DD) services has become one of the largest and most diverse among US healthcare and human service systems.  Until fairly recently, most financial buyers and similar investors have avoided this market because of concerns about the “concentration” of Medicaid reimbursement for more than 90% of eligible recipients.

These concerns have given way to significant investment by financial buyers, often in partnership with existing operators who have demonstrated great success in blending good quality services with progressive management practices, despite the dependence on Medicaid funding.

Why the recent investment enthusiasm?  Here are eight good reasons:

  • A $100 billion market:  Annual Medicaid funding for I/DD services is estimated to be $75 billion in 2016 and growing.  When you add commercial insurance reimbursement, out-of-pocket expenses, and SSI/SSDI payments, the total I/DD market exceeds $100 billion.
  • Expanding customer base:  The number of Medicaid-eligible individuals with I/DD continues to expand at a relatively consistent rate across all 50 states.  People with I/DD are living longer than ever before, with increasing access to improved healthcare throughout their life span.
  • Continued focus on community-based services:  Many states have sharply increased their spending on community-based services, especially residential supports, to more than 90% of their I/DD financial commitment. This increases community integration for people with I/DD, as well as investment opportunities.
  • Reimbursement predictability:  Despite the strong Medicaid concentration, funding is consistent in most states, with few receivable collections issues.  A number of states have also enacted rate increases or adjustments since the Great Recession.
  • Fragmented market:  The I/DD marketplace is highly fragmented, with ample opportunity for acquisition and rapid “roll up” of small and mid-sized providers, who are increasingly considering their exit options.
  • Managed care direction:  States are increasingly looking to managed care types of strategies for I/DD services. This will likely squeeze out many small providers and increase consolidation possibilities.
  • Investor success:  In the past three years, there have been several acquisitions of I/DD providers by PEG-like investors.  That activity has been increasing since two major, very successful purchases of these entities were made by the next generation of PEG ownership.  The results have encouraged new investors to enter the I/DD market.
  • Disruptive innovation:  Embedded in the previous trends are the elements at the core of disruptive innovation: the demand for increased accessibility and affordability of products and services.  Investors can readily see the multiple related opportunities for innovation in service delivery, technology, and consumer products.

Expect considerable opportunity for evolution in this market as well as improvement in the services offered to individuals with I/DD and their families.  This emergence of a new generation of leadership gives us good reason to be excited about the future of services, along with growing investment in I/DD market infrastructure.