Buy-sell debate fuels diabetes market

YARMOUTH, Maine - A handful of national mail-order diabetes providers have been on the hunt for smaller companies to buy, but so far, it doesn't look like there have been many takers.

“I haven't followed up with any of them,” said Chris Rice, CEO of Diamond Respiratory Care in Riverside, Calif. “I don't know what they could possibly offer with the new reimbursement.”

CMS in late January announced an average rate reduction of 72% for the national mail-order program. A box of 50 test strips, for example, will be reimbursed at $10.41 starting on July 1.

While there's no question those rates will drag down valuations, the question is, how low will they go?

“It's difficult to determine what a fair price is,” says Dan Gooch, owner of Pal-Med in Columbia, S.C, who has received two offers. “But, it's either accept some reasonable price or give them away for nothing.”

Shortly before the payment amounts were announced, some providers say they were getting offers of just under $100 per patient, a far cry from the $300 to $600 per patient buyers were paying a few years ago, says industry analyst Kevin Palamara.

“Frankly, some providers are in a position of weakness with no ability to service those patients after July 1,” said Palamara, a managing director with Provident Healthcare Partners.

Palamara says the 15 providers that were offered contracts are likely trying to bulk up to gain efficiencies of scale. Still, he predicts those providers will use diabetes supplies as a loss leader and diversify into other product categories and payer mixes.

“They've got a chance to get at least 1/15^th of the market, but can they make it profitable?” he said.

One provider who isn't waiting to sell is Samuel Kim, COO of Chatsworth, Calif.-based Care Concepts Louisiana.

“If we wait any longer, we have less leverage,” he said. “We'll get a higher price now, because the companies that acquire will get (the higher reimbursement) for the next few months, so it's worth more to them. They might not give us anything if we wait until later.”

Ultimately, no matter what buyers offer, it's a hard decision to make, say providers.

“Competitive bidding may all unravel in a few months,” said Mark Gielniak, vice president of Diabetes Plus in Warren, Mich. “We may not know until July 1 what decision to make, but once you sell them, it's kind of the end of the line.”