by Hilsman Knight, CMAA, Dave Turgeon, and Bradley Smith, ATP, CMAA

Volume 6 Issue 3, February 12, 2019

In the first part of this two-part series, two of our managing directors — Alan Hymowitz and Rachel Boynton, CMAA — discussed why pharmacies and intellectual or developmental disabilities (IDD) service providers should sell in 2019.

In this second part, three of our other managing directors discuss why owners of ambulatory surgery center (ASC), home and community services, durable medical equipment (DME), and home health should consider exiting their markets this year.

Assuming the timing is personally appropriate, ASC owners should take advantage of the ripe market conditions for a sale or recapitalization of their business in 2019. Since we are seeing healthcare valuation multiples outpacing most other industry segments, surgery centers are primed for a successful exit. The ASC model has created a powerful niche in the marketplace that helps solve issues of tightening reimbursements and cost containment measures weighing down other areas of healthcare. Buyers understand the synergistic value that comes with owning multiple centers and are eager to consider these businesses, often regardless of a surgery center’s current financial viability.

ASC owners should take the time to understand their options concerning different types of buyers and what each can bring to their organization. Sophisticated buyers are capable of extracting efficiencies and subduing wastefulness. Understanding your efficiencies can provide greater leverage in achieving your valuation goals.

Whether you are looking for outside capital or a succession plan, timing is everything. The rest of the healthcare marketplace is moving full steam ahead. Surgery center owners should determine how they plan to ride this wave for 2019.

For some owners in the home and community services industry, 2019 is a year where they will need to make a significant decision: sell or stay the course. There are several factors and challenges to consider when weighing these options.

Many in the industry are first-generation owners now planning to sell their companies as they reach retirement. Owners considering selling soon should be concerned about the possibility of the market becoming flooded with available businesses, which could depress the market.

The two largest companies in our industry were recently acquired by private equity-backed companies. The expectation is that there will be a new pricing discipline on their acquisitions, meaning lower prices. These market leaders are also investing heavily in initiatives to lower their costs to prepare for upcoming changes to reimbursement rates.

While there is currently an increased interest in acquisitions of home and community service providers, periods of buying do not last forever. I’ve been around long enough to see what happened in the early 1990s, early 2000s, 2007 and 2008 when all deal activity dried up. I managed acquisitions for a large company in 2007. We had eight deals in process and then, due to market shifts, had to tell these business owners that we could not proceed with the deals, even at significantly reduced prices. For me, one of the worst parts of acquiring hundreds of companies was watching business owners pass on what were great deals for them.

If I had any advice for owners, it would simply be to have an exit strategy. Consider all your options thoughtfully rather than listening to rumors. I first became involved in this space because of a son with disabilities. I have enormous respect for those who care for others. My only goal is to help owners get what’s best for them and their business.

I'm going to discuss why similar developments in two quite different markets — DME and home health — should compel business owners in these sectors to strongly consider whether 2019 is the time to sell.

DME is a market that has bucked the system, and not in a positive way for most business owners. Whereas the trend over the past several years has seen the markets of most healthcare sectors steadily rise, bringing valuations up exponentially, DME has stayed artificially low due to the risks inherent to its market. But over the past 12 months, those risks have largely been taken out of the marketplace.

The most significant risk removed was the expiration of the Durable Medical Equipment, Prosthetics, Orthotics and Supplies Competitive Bidding Program. It (at least temporarily) ended at midnight on Dec. 31, 2018, and there will not be another program for at least two years. What does this mean? The bidding program essentially restricted the number of suppliers that could sell DME to Medicare beneficiaries in certain geographic areas. Without the program, Medicare DME essentially becomes a free market — there are no Medicare contract suppliers and any Medicare supplier can now sell into any market.

Home health's significant development concerned the expiration of the Medicare Provider Enrollment Moratoria on Jan. 30, 2019. Its purpose was to combat Medicare, Medicaid and Children's Health Insurance Program fraud, waste and abuse. How did the Centers for Medicare & Medicaid Services (CMS) believe this could best be accomplished? By restricting the development of any new home health agency in multiple states, including Florida, New York, Illinois and Texas, for the past several years.

The moratorium stifled growth. Now that it has been lifted, home health agencies already with presences in these states can work to expand their footprint and new agencies can explore entering these markets.

Both developments discussed are positive for their respective markets in terms of the potential for new opportunities. As a result, valuations of DME companies and home health agencies are starting to rise.

So, why would owners of these businesses want to consider exiting their respective sectors this year? There are a couple of significant reasons. First is the uncertainty that remains. CMS is a seven-headed monster. Just because you slay one head (e.g., competitive bidding, moratorium) doesn't mean another, possibly more disruptive head isn't waiting in the wings. Are you prepared for the next big disruptor?

The second significant reason concerns increased competition. With markets opening up, competition is naturally going to increase. Are you prepared to invest what is necessary to at least maintain your position in your market(s), if not grow it? Do you have a plan for staving off up-and-comers eager to take away some of your business?

These are just a few of the important questions DME and home health owners should ask themselves when evaluating their plans for 2019. And for some owners, their plan should likely involve an exit.