Opportunity knocks for HME
HME suppliers, large and small, are consolidating at a rapid pace. Case in point, German company Linde’s (Lincare) pending acquisition of American HomePatient. Expect to see more large deals happening in 2016. It’s clear that many investors believe this is a great time to accumulate assets and patients, and I agree. These acquisitions, especially the big ones, present significant threats—and opportunities—for many other HME suppliers.
Let’s start with the threats. Massive scale gives the giant German company a number of advantages over you—namely lower equipment acquisition costs, the power of spreading fixed cost infrastructure over a much larger base, huge advantages in contracting with payers and the flexibility to invest in opportunistic programs. These are formidable obstacles in the battle against your competition. Their lower cost structure makes things like competitive bidding rates less daunting to them than they are to you, assuming they can use such programs to capture larger market share.
But their acquisitions also create opportunities for you. First, integration of acquisitions is difficult, especially large integrations. Absorbing the AHP business—230-plus branches and 250,000 patients on service—will strain the capacity of even the extraordinarily well-executing Germans. Some things will fall through the cracks. Cultures are different, which creates challenges for the surviving entity. People worry about their own jobs and their economic impact, and that leads to merging companies taking their eye off the customer. Attention to detail, follow up and responsiveness to the customer all deteriorate. These are opportunities created for you.
Further, there will be 1,000-plus people with HME experience who get their pink slip shortly. These include people with good relationships with referral sources, ability to develop a territory, knowledge of product lines, treatment protocols, management skills, and billing and reimbursement expertise. Among this group are people you could leverage to grow your business and/or improve your operation. American HomePatient has a significant presence across the South up though parts of the industrial Midwest and into Texas. If you are in one of their markets, take some time to think about how you might be able to capitalize on their absorption.
Finally, every coin has two sides. Being huge has advantages, but so does being smaller. The giant German company has cost advantages over you, but you are in a position to be entrepreneurial, nimble and opportunistic. The community-based provider has the direct line of sight to the business in his/her community and that cannot be replicated by the giant. Use your size to your advantage.
Big companies get bought by bigger companies all the time. Sometimes it works well, other times it fails. A few years back Quaker Oats (parent of Gatorade at the time) wanted to expand their beverage holdings by buying fast-growing Snapple. Both Gatorade and Snapple sat in the lucrative and high growth area of non-carbonated soft drinks. Both were good organizations with good people. But the acquisition was a disaster and ended up costing Quaker hundreds of millions of dollars in write-offs over the next few years. Meanwhile, the noncarbonated soft drink category grew significantly and numerous others stepped in to capitalize on the Snapple disaster.
In many ways, HME looks similar. The category will have strong growth over the next few decades, ensured by favorable demographics, population health or lack thereof, technology, cost and patient preference. The distractions and mistakes made by acquisitions and roll-ups will surely intensify opportunities for you. Be alert to those and take advantage.
Mike Mallaro is CEO of VGM Group, Inc.