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In the past 12 months, the conditions of the financial markets have created a significant slowdown in the M&A marketplace. The primary reasons behind this have been the lack of financing available from investment banks and other institutions to complete these deals, lower stock prices across the board, and reluctance on the part of banks to extend or renew credit facilities for companies seeking to acquire businesses. That said, M&A activity has begun to rebound in the past 30 days as ‘money on the sidelines’ begins to go to work. But, it still has a long way to go before it returns to the levels seen the second and third quarter of 2008.
The small to midsize deal market has not seen the slowdown that the large deal market is suffering. Healthcare business owners continue to enjoy profitability and cash flow similar to last year based on their relative immunity to the effects of the recession. This is allowing aggressive small healthcare-business owners to acquire and expand into new markets using their own cash to finance deals. But, bank or other financing at the small and midsize deal level is difficult to find. And, traditional sources of small business expansion – home equity lines, signature loans, and other secured and unsecured credit facilities – are not an option in most markets.
To summarize the general outlook for Healthcare M&A activity, cash is king. Deals today are happening only when the buyer has the ability to self-finance a significant portion of the transaction. As stock prices increase, publicly-traded companies will try to use their stock as currency to close deals. At the small and midsize market, look for activity to come from existing healthcare business to use their cash to expand through acquisition.
Trends in the industry
We are seeing moves in the healthcare M&A space in anticipation of many proposed and possible healthcare reform scenarios that may change reimbursement models from a fee-for-service model towards a ‘packaged’ or ‘bundled’ payment system based on diagnosis or condition, and outcomes. In a bundled environment, a primary provider – the hospital, clinic, or other care coordinator – would receive a bundled payment for the services that a given patient requires across the continuum of care. For example, a hospital could be paid a lump-sum for a stroke patient that covers the hospitalization, specialists, and the post acute care. This model would effectively mean that many providers that are downstream of the primary provider would actually receive payment for their services from the hospital or clinic instead of Medicare, Medicaid, or private insurance. To position themselves for this eventuality, many large providers like hospitals or clinics have begun acquiring primary care and specialty practices, pharmacies, and other ancillary providers to better control the care delivery process while maximizing profits. And, if the new models do not go into effect, these organizations will still have a stronger referral and admission pipeline that further justifies the acquisition.
Home Health Care
M&A activity in the Home Health Care space continues to be very active in spite of many proposed cuts in reimbursement, caps on outliers and other potential revenue cuts. Buyers continue to believe that Congress and CMS will recognize the cost-effective nature of the services provided. That said, the threat of significant cuts in reimbursement have many worried and, as such, deal prices have fallen somewhat from their highs in late 2008 and early 2009. We foresee continued brisk M&A activity in the Home Health Care market through the end of 2009. Activity in 2010 will depend largely on the outcome of healthcare reform legislation and the related reimbursement adjustments that should be defined by November, 2009.
Durable Medical Equipment
DME/HME M&A activity has been stagnant for the past 18 months. The Competitive Bid process and its subsequent rescission by CMS halted activity in 2008 while potential acquirers stood on the sidelines waiting to see who won. And, the 36-month oxygen cap is remains in effect with no real end in sight. Now, the market is suffering from a similar stagnation caused by two events that are on the horizon: the pending healthcare reform legislation and its potential effect on the 36 month cap, and the 2010 Competitive Bid process.
Ben A. Sardiñas is a Managing Executive at the Healthcare Acquisitions Group, an M&A Advisory and Business Brokerage firm specializing in exclusively in the Healthcare Industry. Article published in the ACHC HH & Hospice Educator Newsletter Winter Edition.