Is a loss of 4,300 HMEs coming?

Monday, January 31, 2005

MELBOURNE, Fla. - The fallout from the Medicare Modernization Act could result in the loss of as many as 4,300 HME companies, industry financial analyst Wallace Weeks deduces in a new report. Skeptics, however, say that number may be overstated.

The Weeks Group’s 29-page strategic report, “Succeeding in Homecare After MMA”, attempts to quantify the impact and timing of the MMA on HME supplier business in order to help businesses formulate appropriate strategies for success, said Weeks.

Acknowledging that his calculation is grim, Weeks nevertheless maintains that the concussion from MMA, namely competitive bidding, will trigger a wave of “acquisition and concession” among the HME industry’s 12,800 providers and that only about 8,500 will be left by 2010.

“A strong majority of the decline will occur in the top 80 MSAs because these are the markets that will be subjected to competitive bidding,” Weeks writes in his report. “The top 10 MSAs currently hold about 30% of the nation’s providers and the next 70 account for about 35%.”

There’s no denying that competitive bidding will cause some companies to close their doors and others to be absorbed by competitors, agreed Cathy Dodd, founder and CEO of Overland Park, Kansas-based financial services firm The Corridor Group.

“This will weed out a lot of companies,” she said. “Those who know the business and can figure out how to operate under competitive bidding will remain. Otherwise, they’ll be targets for acquisition.”

Still, others like Mike Barish are scratching their heads about Weeks’ prediction.

“I have no idea how he arrived at that number,” said Barish, president of AnCor Healthcare Consulting in Coral Springs, Fla. “There may be some consolidation in the 80 largest MSAs, but I think most providers are determined to hang on to their businesses. In the most recent AAHomecare Financial Survey, 89% of respondents said they were ‘not likely’ to sell their businesses as a result of competitive bidding.”

Indeed, survey architect William Cron verified the response and echoed Barish in saying the figure “supports HME providers trying to find a way to make it work.” Yet Cron, professor of marketing at Texas Christian University’s MJ Neeley School of Business, is inclined to believe Weeks’ prediction.

“All industries go through a period of consolidation,” he said. “Homecare hasn’t consolidated much to this point because it is a local phenomenon and national chains could only grow so big because they had to keep adding layers of management. But with advancements in communications technology, they can grow much larger without having to add those layers.”

Dovetailing with Weeks’ forecast of rampant consolidation is his claim that the five largest national players will benefit to the point where they ultimately control about 40% of the industry market share. At this point, those companies will likely be Apria, Lincare, Rotech, Liberty Medical and American HomePatient, he said.

Don Clayback, vice president of networks for Lubbock, Texas-based MED Group, conceded that the likelihood of a handful of companies controlling the market is a realistic scenario.

“I can’t say whether it will be five companies controlling 40% or 10 companies controlling 60%, but it is already headed in that direction,” he said.