Will company values take a nosedive?

Friday, June 30, 2006

WASHINGTON - HMEs who participate in Medicare's competitive bidding program and at some point decide to sell their company could see valuations drop precipitously under a provision in the program's draft proposal.
The proposal states that any company that wins a bidding contract must notify CMS 60 days prior to any change in ownership. What's more, if CMS feels beneficiaries have adequate access to service, it has the "discretion" to prevent the acquiring company from participating in the competitive bidding program. That could be a problem. If, during a sale, an HME provider couldn't freely transfer his Medicare business to another qualified provider, he "could potentially see most of the value of his business disappear," said Bob Leonard, an M&A associate with the Braff Group in Pittsburgh.
"Say I own a company, I win and I die and my widow wants to sell the business?" Leonard said. "There are a lot of ramifications. It's a big imponderable at the moment."
According to the competitive bidding draft, Medicare included its change of ownership proposal to prevent a company that didn't submit a competitive bid from buying its way into the program. Lincare adopted such a strategy during the competitive bidding demonstration project in Polk County, Fla.
Industry attorney Jeff Baird said he understands CMS's logic. Among other things, CMS wants to avoid letting an unqualified provider into the program.
"From CMS's perspective, the winning providers have jumped through a bunch of hoops to get the contract," said Baird, who heads up the health law group at Brown & Fortunato in Amarillo, Texas. "They have gotten accredited and shown they have strong financials and are in compliance with government requirements--basically that they are good citizens. The government doesn't want a company to buy in that can't meetthose requirements."
Additionally, while the 60-day notice is new for Medicare fee-for-service business, it's consistent with general contract law. Managed care companies, for example, often must sign off on an HME sale before an acquiring company can take over an existing contract. In general, such deals go through without a hitch. Will that be the case if this proposal makes it into the final competitive bidding program? There's no telling, say industry watchers.
With that in mind, if the proposal does end up in the final rule, companies should get CMS's blessing before consummating a deal, Baird said.