Moratorium complicates DME deals, but buyers stay engaged

YARMOUTH, Maine – Medicare’s six-month moratorium on new DME supplier enrollments, which went into effect in late February, has not dampened deal-making activity, but that could change, say industry analysts.

The moratorium prevents:

• Existing providers from opening new locations with new Medicare PTANs, effectively halting expansion efforts for many; and
• Changes in majority ownership within 36 months of initial enrollment or a previous change in ownership.

“I've got deals in the market, and we're having conversations, and no buyer has said, ‘Hey, Pat, you know, we're interested, but we can't get a deal done under this environment,’” said Pat Clifford, managing director, home medical equipment, for The Braff Group. “No one has said that. That doesn't mean it's true or not, but so far, that hasn't happened yet.”

Stakeholders like AAHomecare are lobbying for waivers for providers with at least 36 months in business, similar to one used during a previous home health moratorium.

Dealmaking activity continues

Certain deals have become more complicated, Clifford acknowledges. The next round of Medicare’s competitive bidding program (CBP) has a new remote-item delivery (RID) framework that requires providers to serve patients nationally. For many companies, their ability to fulfill the contract will depend heavily on geographic expansion.

“We've seen a little bit of a pause there,” he said.

PE may see more opportunity

One group of buyers that hasn’t shied away from HME: private equity investors, say analysts. PE investors may view these challenges as opportunities, they say.

 “Buyers and investors that are committed to the sector and continue to believe in the growth and expansion opportunities that DME offers find these as barriers to competitor entry,” said Jonathan Sadock, managing partner, Paragon Ventures. “(Those are) hurdles that many strategic buyers and investors have the knowledge, breadth and resources to manage through.”

M&A litmus test 

One thing is certain: The moratorium requires a new question set for buyers and sellers, analysts say.

• For sellers: How long has the business contracted with Medicare? Is it greater than three years?
• For buyers: What’s the best way to structure a transaction that remains compliant with the provisions required for a CHOW (Change of Ownership)?

“There are lots of musings about potential impact to de novo efforts, along with regional expansion to impact on M&A acquisitions,” said Sadock. “There are risks in every transaction and we work to anticipate hurdles and mitigate risk early on in the sale process.” 

• Related: Moratorium fallout: Providers fear growth stagnation, bid setback