Competitive bidding adds fuel to HME consolidation

Monday, September 30, 2002

WASHINGTON - It doesn't appear that competitive bidding has accelerated industry consolidation, but it is helping some company owners make up their minds about selling.

"I'm talking with five companies now about acquiring them, and it comes up in conversations with all them," said Mark Hanley, CEO of O2 Science, a Tempe, Ariz.-based roll-up. "They are aware of competitive bidding, and it definitely helps them make their decision."

For the most part, Hanley said, those most concerned about competitive bidding are small, one-location shops. They're worried that in a competitive bidding environment they may not be able to compete with bigger, better financed HMEs, and could lose a lot of business.

Added HME consultant Wallace Weeks: "I'm hearing more people say, 'I'm thinking about selling because of the probability of competitive bidding, and I want to beat the rush."'

Other industry watchers, however, say competitive bidding hasn't become the straw that broke the camel's back when it comes to whether or not an owner sells.

"I think that for the most part, business owners feel there may be some adjustment but not to the extent that it's creating a mentality of selling scared," said Richard Davis, vice president of Paragon Ventures, a mergers and acquisition firm.

From a consolidation standpoint, the HME industry is an interesting case. Nationals continue to acquire, but the market hasn't contracted because new players are starting up all the time.

A long-time California provider, for example, recently attended a licensure seminar in southern California.

"There were 95 people in the room, and I didn't know one of them," he marvelled. "There were company names I'd never heard of before."

Despite the threat of competitive bidding, inherent reasonableness and other reimbursement cuts, the industry appeals to entrepreneurs for several reasons: Start-up costs are reasonable, about $100,000; there are few barriers to entry, such as a professional credential requirements; and the demographics, the much ballyhooed graying of America, promise sustained growth.

There's another reason for the industry's lack of contraction: It's very common for a former HME owner to start a new business once his non-compete runs out, noted mergers and acquisitions expert Dexter Braff.

"Once an entrepreneur always an entrepreneur," Braff said. "These people get itchy fingers and want to get back in."

Case in point: When Mark Sheehan and Peter Falkson founded Trusted Life Care last year in Canton, Mass., it became Sheehan's third go-round as an HME owner and Falkson's second.

In considering whether to start the business, the duo gave the threat of competitive bidding a long hard look.

"We gave it a lot of thought, and said, 'Let's do it again,'" Sheehan said. "With competitive bidding or any other thing, there is no substitute for managing your business, and if you do that you have a fighting chance." HME