M&A before, during and after a global pandemic

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Monday, August 3, 2020

Since 1965, when the Medicare Trust was first established, entrepreneurial individuals have established and built a wide variety of health care businesses to serve and support a growing population of those in need of medical care. Soon thereafter, the HME sector as we now know it was born.

Receiving care and treatment in the safety and comfort of their home quickly became the preferred method for patients to receive medical care. The associated cost savings became increasingly attractive to the U.S. health care system. Ever since, the needs and number of patients continued to grow as the capabilities of HME providers also increased.

As the business fundamentals and reimbursements changed, these businesses had to evolve. They jumped through many hurdles to sustain, build and grow the business. Most worked hard and drove efficiencies, and through it all many prospered. The M&A markets embraced these businesses through numerous consolidation cycles.  The businesses were attractive not only for the profits they generated but also the opportunities driven by growing demographics and technological innovation. Operational efficiencies combined with quality care continue to propel demand and growth to this day.

During the ensuing 55 years, HME business owners have endured one constant—change. Over the years, these changes came in many forms for a myriad of reasons: Electronic claims, accreditation, surety bonds, audits, timely filing, recoupments and competitive bidding were all hurdles that HME providers have had to scale. Then along came the challenges of health care reform, the Affordable Care Act, tariffs and most recently, a global pandemic. The newest hurdles: supply chain disruptions, staffing, patient access and the challenges of a high-touch health care business model. As you can see, change is not uncommon for health care providers and we are accustomed to finding new innovations to manage our business.

During the past few months of the COVID19 pandemic, much of the HME business world has essentially continued through the challenges of high infection rates, surging respiratory distress and social distancing. It is clearly unprecedented but, like historical infections, there will come a day when it is in our collective past. Through it all, we are seeing continued, if not renewed, focus on mergers and acquisitions for well-established, profitable health care businesses.

As HME providers, through it all, we continue to drive our businesses. We continue to Innovate. We continue to adapt…and we continue to drive on to the future.

The good news as a current HME business owner is that you have survived yet again the unprecedented challenges in your business.

The good news is that an aging population is continuing to fuel demand for your products and services.

The good news is that new technologies continue to evolve, which drive efficiencies and improve profitability.

The good news is to continue to do the noble work of providing high quality healthcare to those in need.

If you are interested in exploring the strategic options for your health care company, now is the best time to start the process.  Start with a professional market evaluation and business valuation of the business. You will then be in the best position to understand the specific terms available and a timeline to execute the best transaction for you and your stakeholders.

Do you remember these changes and challenges for HME businesses?

1970 – 1980 - The Golden Commode - Take the extreme autonomy the industry enjoyed during the 1970s, for example. There was little government oversight, and profits, revenues and reimbursements for home care were large. Providers were left alone, for the most part, to run their own businesses the way they wanted. The early 80s is better known as the “Age of the Golden Commode.”

1982 - Diagnosis Related Groups (DRG) methodology for Medicare hospital reimbursement.  This further drives the value of home healthcare and the cost savings it represented for the American healthcare system.

1985 – Rent/Purchase Plan – Limited rental payments for items costing under $120 to the reasonable purchase price.

1987 - 1989 The Six Point Plan - The Six Point Plan was approved in 1987 and became effective in 1989.  Became “capped rental”.  HME product reimbursements were at least adequate, and HME providers could rent an item and keep billing Medicare for that item indefinitely. Since that time, the federal government strengthened its regulatory grip on Medicare HME expenditures almost annually, enacting such pivotal legislation as the National Association of Medical Equipment Services' 1987 “Six-Point Plan.”

1997 - The 20% Oxygen Cut – Medicare 20% oxygen payment cut approved

2005 - Medicare Modernization Act, which included the Medicare Prescription Drug Plan - The Deficit Reduction Act of 2005 - The agency estimates that the average rate reduction is 8.6 percent for stationary oxygen and 8.1 percent for portable units.  Actual fee cuts, however, vary by state.

2008 – CMS 26% cut in Medicare reimbursement for 10 classes of durable medical equipment, which also includes prosthetics, orthotics and other supplies.

2010 - The Patient Protection and Affordable Care Act - the Affordable Care Act

2011 - Competitive bidding - The CB Program was designed to limit the number of contracted suppliers available to meet projected demand and drive a lowest possible cost model to address the surge of aging demographics.  It has been reported that there has been a 36% reduction in the number of suppliers since competitive bidding began.   The vast majority of those businesses went under or changed their business model in the first three years of competitive bidding.  The others… many have not only survived but thrived in their new normal business model.

2016 – PADME Act - Phase-in of deep Medicare cuts to home respiratory care supplies and services to ensure patient access to care is not placed at risk.

2020 – COVID19 - The COVID19 pandemic impacted all of humanity and for most healthcare related businesses, the strains on the US healthcare system define the term unprecedented.

M&A In The Formative Years of HME

1980 — Abbey Medical buys three top rehab companies, bringing the total number of Abbey stores to 55, with annual revenue of $55M.

1981 — American Hospital Supply buys Abbey Medical, just as Abbey was poised to go public.  American Hospital Supply Corporation acquires Abbey Medical. “I don't think this will mean significant change in Abbey's current or future position in the industry.  We have a very aggressive growth plan and would have continued it in any event.”

1982 — Foster Medical acquires Johnson Rents, adding 17 regional locations to its stable.

1982 — Glasrock sells GP Medical Services to Airco for $100M.

1983 — Abbey Medical focuses on expanding into respiratory, which “is not a business where you can put your toe in the water and then immerse [yourself] slowly,” says Bruce Hoesman, Abbey's president.

1983 — National Medical Oxygen acquires Rios Medical and Respiratory Products.

1984 — Avon Products acquires Foster Medical for $239M in stock.

1984 — Everest & Jennings expands its DME offerings by acquiring Carrom/Thompson-Blair, a home care and hospital bed company.

1985 — Puritan Bennett buys oxygen concentrator manufacturer Biocare.

1986 — Sunrise acquires J.E. Nolan & Company.

1986 — Sunrise Medical acquires Walton Manufacturing, a fitness products manufacturer.

1986 — Sunrise Medical acquires Motion Designs.

1986 — Charles Blanchard of Travenol Home Care and Bill Hefferman of American Abbey Homecare discuss how their once rival — now sister — companies will operate together, creating a $5 billion company.

1986 — Pride Health Care, an investment group led by Stanley Meuser, acquires Pride Equipment & Furniture. The new company, Pride Health, continues to manufacture lift chairs, and adds exercise equipment and a hip chair.

1987 — Primedica buys Beverly Home Health Services, becoming the 5th largest HME provider, by number of locations.

1988 — Abbey Medical acquires Foster Home Health Care for $228M which at the time is the largest single acquisition in HME-industry history.

1988 — Sunrise Medical acquires I.C.E. Down.

1989 — Wessex, the HME division of American Home Patient Centers, merges with Diversicare Corp. of America, marking AHPC's focus on HME.

1990 – 2020 – Over the last 30 years, while there have been many HME businesses that have unfortunately closed (due to a wide variety of reasons including competitive bidding), hundreds of HME businesses have been sold, merged or acquired as part of consolidation within the sector.

A look ahead – The acquisitions, mergers and consolidations for HME businesses will continue as some business owners look to retire while the “new kids on the block” take the reins to continue to serve and grow their businesses.

Jonathan Sadock is managing partner/CEO of Paragon Ventures.