It goes without saying that the healthcare industry is undergoing constant change. Between the evolution of how people receive healthcare, government changes at the state and federal level, and an abundance of new technologies and concepts in the space – business simply cannot be conducted as it once was.
One of the groups impacted the most by these changes are the medical equipment providers, a sector that was expected to exceed $150 billion in market size in 2017. Like the rest of the healthcare industry, medical equipment providers must evolve in order to adapt to the constantly changing market while working towards economies of scale and striving to run a lean business. Every time a new government reform or policy is put in place, companies must comply to remain in business. As a result of these reforms, many companies must react and adjust quickly to changes and new requirements.
Trends leading to increased mergers and acquisitions
For smaller medical equipment companies, constant healthcare reform causes stress due to a variety of reasons surrounding insurance, competitive bidding risks, and more that are outlined later within this piece. For larger companies, it can be quite difficult to establish niche product lines in many areas of the country where local, product-specific providers have established themselves. As such, there is a tremendous opportunity for small and large companies to grow via mergers and acquisitions, working together to directly address consumer behavior while simultaneously accommodating changes in the marketplace.
Now, large providers are cultivating relationships and providing solutions to other medical equipment businesses who are considering the sale of their business as margins further compress under constant reimbursement cuts, unknowns surrounding different federal and state bidding programs, and increased scrutiny during audits. These smaller companies are looking for resources and options when it comes to identifying exit strategies via sale to larger companies looking to scale.
Managed Care Organizations (MCO) and Medicaid plans have strict policies put in place, and coverage under an individual’s plan does not necessarily ensure reimbursement. On top of that, these policies may be superseded by State, Federal, or Centers for Medicare and Medicaid Services (CMS) Requirements.
Reimbursement cuts from insurance providers have also significantly spurred M&A transactions. All companies must consider capital structure and partnership opportunities, especially when federal payers are part of the transaction. As healthcare costs rise and reimbursements decrease, some companies may need to make adjustments to maintain their position in the marketplace.
Further, insurance does not guarantee reimbursements, and collecting reimbursements is a time-consuming and expensive process for smaller medical equipment providers, on both a commercial and federal level.
What buyers are looking for
When it comes to evaluating a transaction, buyers seek opportunities to achieve economies of scale, strength their payer network, growth of market share in a particular area, and/or consideration as a capital investment. Below are some key areas a potential buyer considers when discussing an acquisition in the medical equipment space:
1. Insurance payers
Buyers evaluate companies in part based on the types of insurance payers being accepted. Each provider has different reimbursement policies, patient qualifications, and risks associated with accepting their business. How heavily business is weighted in products with high or low reimbursement and risk impacts how well it is received.
Another aspect to consider when evaluating insurance payers is having the workforce in place to contact patients’ doctors and insurance providers. As new regulations are implemented, smaller companies may not be able to maintain their ability as insurance payers, so they will seek to merge with larger suppliers with the proper resources in place to survive.
2. Equipment provided
Another major factor for buyers is the actual type of equipment provided by its acquisition target. The market changes so often that certain items rapidly fall in and out of favor with regards to reimbursement and potential for future audits. Buyers may seek to carve out particular lines of business through an asset purchase, or acquire the entire company if it is an overall attractive product mix.
If a company provides equipment that is very difficult to be reimbursed for, the buyer may not be equipped to take on those costs. Further, if they provide equipment that the buyer currently does not supply, they will have to build new processes to sell and learn new compliance rules for those items.
However, if they identify an item that has high growth potential and strong consumer demand, then taking on a new source of revenue would present high-growth opportunity, even considering the required work that will take place to market and comply the medical equipment.
3. Impact of competitive bidding
Competitive bid areas, a defined region where suppliers can submit bids to provide certain medical equipment and supplies to patients, present great risk to large and small medical equipment providers. Contracts are awarded to the suppliers offer the best price and meet applicable quality and financial standards, but unfortunately, this process has struggled due to bureaucratic government inefficiencies.
With Medicare being a significant payer to traditional medical equipment companies, losing access to Medicare billing privileges can make a significant impact on small and large businesses, a trend that is expected to continue.
In recent years, state Medicaids and MCOs have begun trending towards bidding programs along with the exclusive or preferred agreements. This is a significant point of consideration for buyers when determining the best path forward via acquisition, determining whether or not there is the possibility or currently existing arrangement of this nature.
4. Order fulfilment
Buyers must also evaluate a company’s census, customer acquisition strategies, and process for order fulfillment. The success of a medical equipment business is based upon a number of marketing and customer service functions, varying from ecommerce to inside and outside sales forces. Order fulfillment is also addressed through various of ways, including physical mail instructions or setup by a licensed clinician.
Another important thing to consider is the audience demographic of an acquisition target. Who are they selling supplies too? Are they providing to one-time buyers or people who will return for more supplies on a monthly basis? Like any other product-driven industry, the answers to these questions are critical when it comes to evaluating short-term and long-term success.
5. How much of a company they wish to acquire
Another consideration for buyers involves how much of a company they are actually looking to acquire, as an individual line of business may be more attractive than the rest of the company itself. Often, these individual lines may be acquired when the seller’s goal is to generate capital to refocus on core lines of business, or the buyer simply does not have the interest or need for other products within the smaller company’s portfolio.
Margin compression, or the movement towards lower reimbursement in the context of cost remaining the same, also requires review during the sale of specific lines of business instead of all lines involved, given the risk of their assets further depreciating.
6. Transition and integration
Buyers are also looking for streamlined processes within acquisition targets to ensure the easy changeover of patients and other acquired assets. As with any acquisition, integration of the company’s business, employees, and technology is vital to long term outcome and success.
For example, when a small company is acquired by a larger business, integration is often less challenging as the buyer will not need to increase the size of its existing department to service the patients included in the assets acquired.
The overall objective is to keep an acquired business alive and growing, so varying industry partners and most importantly, the customer, are never impacted by the change in ownership.
More acquisitions and mergers are expected
As pressure from Medicare and other payers continue to make it harder for smaller businesses to keep up, buyers will look for more streams of revenue to increase their market share. With reimbursement policies making it harder for some medical equipment providers to function, it gives other companies the opportunity to thrive, so it is important for companies of all sizes to keep a finger on the pulse of new Medicaid regulations and competitive bids.
M&A can serve as a solution for all parties involved. Buyers receive new lines of business that they are equipped to grow, while providing a helping hand to companies that wish to exit the market or that they simply can no longer compete in. This trend creates opportunities to expand streams of revenue, and most importantly, help provide patients with the supplies necessary to improve their quality of life.