Analysts expect M&A to intensify

Friday, March 25, 2016

YARMOUTH, Maine – With the gears now in motion for the Round 2 re-compete of competitive bidding, M&A analysts expect to see an uptick in activity in the next few months.

CMS announced March 15 that it will offer 12,181 contracts to 637 providers as part of this latest round of the program. It plans to announce contract suppliers this spring.

“I know of several transactions that will be announced within 30 days of contracts,” said Jonathan Sadock, managing partner with Paragon Ventures. “It’s literally the trigger point to (close the deal).”

At press time, industry stakeholders were still trying to determine how deep the reimbursement cuts will be when the Round 2 re-compete goes live July 1. Initial estimates range from a few percentage points to up to 20% above and beyond the original Round 2.

Of course, all bets are off if buyers determine the bid rates are too low, Sadock says.

“If it’s a 5% reduction, that won’t affect it, but if it’s an additional 30%, that will affect it,” he said.

Most deals will be on a much smaller scale than Lincare’s recent acquisition of American HomePatient, which saw Lincare pick up 220 locations in an attempt to better position itself for the expanding program, says Patrick Clifford, managing director for The Braff Group.

“Buyers are usually trying to do it the most inexpensive route,” he said. “Historically, that has meant buying the smallest company they can acquire that has a contract.”

M&A analyst Rick Glass says where he’s seeing most of the activity is in the so-called Round 3 areas—non-bid areas that saw a pricing cut Jan. 1, with another cut planned for July 1.

“I think it will intensify after more people start feeling the initial cut in their pocketbook,” said Glass, president of Steven Richards & Associates. “It’s just like we saw an acceleration of consolidation in the Round 1 and Round 2 areas.”

Clifford describes activity in those areas as “opportunistic.”

“You wouldn’t just dive into a new market because the margins are so thin and the costs associated with delivery are the same,” he said. “But, to the extent that a Round 3 area abuts a current area, we have seen some interest there.”