VGM analysis: Industry consolidation overstated

WATERLOO, Iowa — The VGM Group takes exception to a recent report by industry consultant Wallace Weeks that predicts national HMEs will eventually control 75% of the market. “That is a flip flop of today and isn't supported by the facts,” said VGM CFO Mike Mallaro When it comes to home medical equipment, Weeks neglected to address two critical factors, Mallaro said. First, HME isn't like other industries and doesn't reap the same economies of scale. Larger providers may be able to secure volume discounts, but in general, they can't gain market share by selling those products cheaper. Medicare, Medicaid and many other payers reimburse all providers the same. Secondly, HME is a service industry. That gives the independent owner-operator an advantage and helps level the playing field. Additionally, while the nationals continue to increase their revenue significantly through acquisition and internal growth, with the exception of Lincare, between 1994 and 2003 those revenues have grown slower than the overall HME market, according to data VGM compiled last year. According to the Office of the Actuary within Department of Health and Human Services, the HME market grew at an average annual rate of 5.7% from 1994 to 2003, from $13.5 billion to $22.2 billion. During that time, here's how the industry's four nationals stacked up: — Between 1994 and 2003, Apria increased its revenue by $425 million but underperformed the HME market by 27%. (In fairness, VGM noted, during the last several years Apria's net income has improved significantly, following a tumultuous period from 1995 to 1998 after which it underwent a major reorganization.) — Rotech grew its revenue from $71 million in 1994 to $618 million in 2002, yet still underperformed the HME market by 39%. — Between 1994 and 2002, American HomePatient grew its revenue from $90 million to $320 and underperformed the HME market by nearly 110%. — Lincare outperformed the HME market by 9%, growing its revenue from $210 million to $961 million during those same years. As a conclusion to this data, VGM states: “First, while HME providers can grow via acquisition, it remains extremely difficult for the consolidators to maintain the revenues from acquired businesses; and secondly, it appears they have difficulty growing their core operations at or above the market rate… It (also) appears the ability to drive costs out of national HME is much more difficult than may be perceived.” Additionally, while “a lot of independents are running around crying that they'll be out of business, a lot of independents are doing really well,” Mallaro said.