Home Health & Hospice Week

Analysts also foresee "significant consolidation opportunities" for the home respiratory market, the update says. That squares with home care mergers and acquisitions experts' view. "This market is extremely vigorous," says Dexter Braff, president of The Braff Group in the Pittsburgh area.

The Braff Group tracks both public and private home medical equipment M&A transactions, and so far 2003 is turning out to be a banner year. In the first two quarters of the year, Braff has recorded 38 HME deals. In the same period of 2002, only 20 deals had taken place. "That's a 90 percent increase," Braff tells Eli. And there was no fall-off in the third quarter, Braff maintains.

The oxygen market is hot now, with big players such as Lincare, Apria and Orlando, FL-based Rotech Healthcare Inc. making acquisitions, notes Jack Eskenazi, vice president of M&A firm American HealthCare Capital in Los Angeles.

Both existing respiratory companies and new players looking to get into the market want to expand their market share quickly and efficiently through acquisitions rather than growth, Braff notes.

Home respiratory market dominance is not new - oxygen payments were even higher before the Balanced Budget Act of 1997 cut oxygen payments by 25 percent Jan. 1, 1998 and another 5 percent Jan. 1, 1999. So how do buyers continue to find attractive M&A targets?

"There are always new ones coming up," says Eskenazi. The home care industry, which requires a relatively small capital investment, lends itself to small entrepreneurs starting companies. "The most competitive and growth-oriented ones grow and the owners start looking to unlock the cash value of their business" through selling, he notes.

"You'd think at some point it would peter out, but it doesn't," adds Braff. Once new entrants achieve a certain market size, "they become interesting to buyers," he relates.

The most successful acquisitions now take place in niche and select markets, says O'Donnell. And to buy into those markets, players sometimes have to put up some serious money - maybe too much money. "They are overpaying now to get into some markets," he judges.

Wall Street analysts seem to agree. Although CMS says there are nearly 2,000 small local and regional providers in the market, and other sources estimate thousands more than that, "larger companies appear to perceive few available, strategic acquisition targets that are attractively priced," the report concludes.

That's good news for the successful small to mid-size players that are looking to sell to larger operations. They're getting more for their organizations than ever before.

While profits might look generous for the national companies, when you get down to the local providers, "margins at smaller regional competitors are typically substantially lower than those of Lincare or Apria, as both national providers benefit from the efficiency of national reimbursement and account receivable management systems," Thomas Weisel Partners analyst Eric Percher is quoted as saying in the report.

In addition to the lack of attractive targets, the current regulatory environment also might be cooling M&A deals. The double spectre of competitive bidding and cuts to drug reimbursement rates that are currently based on average wholesale price (AWP) loom large, the report notes.

Editor's Note: The report is at www.cms.gov/reports/hcimu/.