Mergers & Acquisitions: Understand the current landscape

Q. How has the M&A environment for HME providers shifted over time?  

A. Following the introduction of competitive bidding in the early 2010s, M&A activity in the HME sector grounded to a halt, as reimbursement was cut drastically. However, as the marginal impact of each subsequent round of competitive bidding lessened and the reimbursement environment stabilized, investors demonstrated a renewed interest in HME providers, driven by market tailwinds that have positioned the sector for growth.  

A growing preference across the health care ecosystem for home-based care, coupled with an increasing geriatric population with a high prevalence of chronic conditions and a fragmented market landscape, has led to an uptick in institutional capital entering the sector. This increase in private equity-backed platforms creates a broader, more diverse buyer universe for HME providers exploring M&A and an increasingly seller-friendly environment. 

While recent macroeconomic concerns such as inflation and rising interest rates could present near-term valuation headwinds, buyers with a multi-year investment horizon have continued to target HME opportunities to capitalize on the structural factors driving continued growth in the space.  

While specific value-drivers vary by sub-sector, investors generally ascribe premium valuations to HME providers who exhibit the following attributes: 

• Revenue diversity – No meaningful concentration among individual payers, products or suppliers creates a more stable earnings base. 
• Replicable growth strategy – Investors will evaluate the historical growth strategy (e.g., organic growth vs. M&A), how replicable this model is and whether the level of infrastructure in place today can support future growth without requiring incremental investment. 
• Platform-caliber management team – Depth, quality and longevity of key leadership capable of guiding the company through the next phase of its growth. 
• Compelling market opportunity – Fragmented market landscape and effective competitive positioning relative to peers to withstand external market forces. 

Kevin Palamara is managing director at Provident Healthcare Partners. Reach him at kpalamara@providenthp.com.