Valuations
A look at the industry outlook & what buyers want
by Bradley M. Smith & David Coit Jr.

It is often said that the only constant in the health care industry is change. Unfortunately, home medical equipment (HME) providers know this all too well; the constant change they experience can be demanding. As a result, it is not a matter of if, but when owners of HME companies start thinking about exiting their business. For those owners considering selling in the marketplace, we’ve got good news: The marketplace is currently hot for your companies. Buyers are eagerly gobbling up well-performing providers, making this an excellent time to consider selling.    

Multiple factors are driving increased valuations. First, demand is greater than supply. Traditionally, only larger providers would grow through acquisition. However, Medicare’s competitive bidding program has created a significant number of midsized providers with capital—and with mandates to grow through acquisition. That means there are more buyers than sellers. Second, broader health care market valuations have been significantly higher than HME valuations. As private equity firms survey the landscape, they see HME companies as a good value, even at a slightly higher valuation. Moreover, after five of years of declining revenues, the industry is poised for positive growth through 2024, according to researchers at IBISWorld.

Industry Outlook

Let’s take a quick look at where things stand with the HME industry. There are approximately 5,600 uniquely owned HME providers in the United States. They generate combined annual revenues of about $5.5 billion and profits exceeding $530 million. The industry has experienced annual revenue growth of -1.9% over the past five years. Medicare payments contribute to about half of the average operator’s revenue. Although the number of senior citizens continues to grow and drive demand for services, payments to operators have fallen significantly. This decline is mostly attributable to competitive bidding and a cascading downward effect on the various Medicaid programs and private payers.

Competitive bidding is likely to remain in effect over the next five years. As a result, the industry will continue to experience adverse pricing conditions that constrain revenue and limit profitability. However, after the completion of the new competitive bidding program in 2021 and the corresponding dip in reimbursement, we expect revenue growth to return slowly but steadily as operators adjust to the new system and find new tools to operate more efficiently. Overall, revenue is expected to grow an annualized 1.3% over the five years from 2018 to 2023 and reach $5.9 billion.

Market Factors to Consider

If you’re thinking about selling your HME company, there are three important market factors you should understand:

  1. The market is strong now because of the vast amount of capital searching for well-performing providers. It’s unclear how long this will last and when it will slow down—but it inevitably will. The market can change quickly, and, if you wait too long, you may lose your opportunity to sell at a favorable price. We expect to see temporary negative downward pressure on valuations when the Medicare bid is announced and until it goes into effect in January 2021.
  2. As acquisitions and consolidations continue, you’ll likely be competing against larger, better-capitalized companies. The competitive landscape is changing fast. Larger competitors are in more managed care networks with better reimbursement terms, efficient business processes and strong marketing campaigns built around established brands.
  3. The owners of HME companies are aging; it’s estimated that as many as 60% are over the age of 55. Thus we expect an increasing number of companies to be seeking buyers in the next few years.

Buyers’ Concerns

Smart buyers weigh risks versus rewards when considering the purchase of a company. Some of the perceived risks in the HME industry are:

  • Downward pressure on Medicare reimbursement rates
  • Exclusion from payer networks
  • Private payers increasingly limiting out-of-network reimbursement
  • Increasing regulatory requirements
  • Regulators mandating measurement-based outcomes
  • An increasing number of HME providers
  • Payers moving to value-based reimbursement via post-treatment outcomes
  • Escalating enforcement of federal anti-kickback laws
  • Stricter licensing requirements
  • A shortage of skilled HME workers

What Buyers Want

The single most important feature buyers are looking for is profitable growth. Buyers want to know that they can take what you have created, build on it and make more money from it. In their risk/reward analysis, they’ll want to see that your strengths far outweigh your weaknesses. Most buyers have a checklist mentality and will be looking to see that you have at least some of the following attributes:

  1. A strong capable management team
  2. Solid in-network relations with payers
  3. Long-term payer contracts
  4. Multiple treatment or service options
  5. A strong, diverse physician and non-physician referral network
  6. A diversified payer mix
  7. Low uncollectable accounts receivable
  8. Low revenue seasonality
  9. A large population base with good client demographics
  10. A tenured, experienced workforce with low employee turnover
  11. A clean billing audit
  12. Good revenue growth
  13. EBITDA margins in the 10% to 20% range
  14. Understanding of subcontractor versus employee handling of service delivery
  15. Creative staffing with maximization of billable hours
  16. Strong, positive data about client satisfaction with services and outcomes
  17. Multiple service delivery locations, including community-based access
  18. The ability to collaborate with multiple resources to achieve clients’ success
  19. The use of evidence-based practices and treatments
  20. A certificate of need (CON) in CON states

Setting a Price

Buyers are looking for rewards or up sides from their purchase of HME companies. Essentially, their desired formula for making acquisitions is 1+1=3, preferably in the short term. Much of the up side will come from positive industry market conditions that include the following:

  • Expanded in-network coverage
  • Increasing revenue on a per-client basis with overlapping products and services
  • Client treatment demand is not related to economic cycles
  • Niche products or services with high reimbursement rates
  • Skilled employees such as assistive technology professionals, respiratory therapists and billers

Buyers typically go through their risk/reward analysis to come up with a purchase price. The price is usually based on a multiple of normalized or adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Adjustments to EBITDA include non-recurring expenses, such as one-time legal fees; discretionary expenses, such as charitable contributions; and owner-related personal expenses, such as excess owners’ salaries and vehicle
lease expenses.

“Market multiples” refers to the estimated purchase price relative to EBITDA. The typical range of market multiples for HME treatment providers is three times (3x) to five times (5x) EBITDA. Where a provider falls within that range is based on quantitative factors, such as historical and projected financial performance, as well as the qualitative factors highlighted above. Larger revenue providers attract more buyers than smaller providers.

The following are estimated market multiples for HME treatment providers by revenue:

  • $1 million to $3 million in annual revenue: 2x to 4x EBITDA
  • $3 million to $5 million in annual revenue: 3x to 5x EBITDA
  • $5 million to $10 million in annual revenue: 4x to 6x EBITDA
  • More than $10 million in annual revenue: 4x to 10x EBITDA

Note that there are outlier market multiples in transactions in which optimal buyer/seller synergies push valuations above the norm. Moreover, market multiples change over time depending on the overall economy, regulatory and reimbursement modifications and industry trends.

Using market multiples provides a reasonable shortcut for estimating the value of a company. One should speak with an advisor who is familiar with the HME market and can guide you through these concepts on an annual basis to understand the market and your options.



Bradley M. Smith, ATP, CMAA, is a former durable medical equipment (DME) company owner and is managing director with the international health care mergers and acquisitions firm VERTESS. If you would like to personally discuss this article, the value of your health care company/practice, or how to get the best price when you sell it, you can reach him directly at (817) 793-3773 or bsmith@vertess.com.

David Coit Jr., DBA, CVA, CVGA, CMAA, is a certified valuator and is also managing director at VERTESS. If you would like to personally discuss this article, the value of your health care company/practice, or how to get the best price when you sell it, you can reach him directly at dcoit@vertess.com or (480) 285-9708.