Smart Business Forecasting:
Turning HME Threats Into
Opportunities
July 28, 2014
The Lodge & Spa at Callaway Gardens
Pine Mountain, GA
Before we begin…some
comments regarding the
potential for nationwide
implementation of competitive
bid programs and/or pricing and
the Round 2 “recompete”…
CMS-1614-P
• The Affordable Care Act amended the Medicare
Modernization Act statute to mandate use of
information from the DMEPOS competitive
bidding program to adjust the fee schedule
amounts for DME in areas where competitive
bidding programs are not implemented by no
later than January 1, 2016.
• CMS estimates that by applying bid rates
throughout the entire United States it would save
over $7 billion over FY 2016 through 2020.
DME Provisions…
• Proposed (changes to) the methodology
for making national price adjustments
based upon information gathered from
(all previous) competitive bidding
program (CBPs).
• Proposed phase in of special payment
rules in a limited number of areas (12)
under the CBP for certain DME and
enteral nutrition.
• Update the definition of minimal selfadjustment of orthotics.
• Change of Ownership Rules to Allow
Contract Suppliers to Sell Specific Lines
of Business
“National” Pricing
• How? Adjust fee schedule amounts for
states in different regions of the country
based on previous competitive bidding
round pricing in these “regions”.
• The regional prices would be limited by a
national ceiling (110% of the average of
regional prices) and floor (90% of the
average of regional prices)
• “Regions” are yet to be finalized…
• CMS determines a regional price for each state
equal to the un-weighted average of the single
payment amount for an item or service from
the CBAs that are fully or partially located in
the same region where the state is located.
• CMS determines a national average price
equal to the average of the regional prices.
• The regional price cannot be greater than 110
percent of the national average nor less than 90
percent of the national average price.
• Adjust fee schedules annually using CPI-U
• Revise the SPA each time there is a new
round of bidding.
• Use national ceiling for rural states and
outside contiguous US.
“Bundling”…
• This is a limited phase in (12 areas) of
bundled monthly payment amounts for the
equipment, supplies, accessories,
maintenance and repairs for enteral
nutrition, oxygen, standard wheelchairs,
hospital beds, CPAP/RAD in place of
capped rental policies.
• Bidding would start sometime after
1/1/2015.
• The SPA is based on bids submitted and accepted on
a monthly basis for each month of medical need
during the contract period.
• Monthly single payment amount would include
payment for all nutrients, supplies and equipment.
• Payment is made on a continuous monthly rental
basis for DME. The SPA Includes rent, maintenance
and service, and replacement of supplies and
accessories necessary.
• No separate payments for M&S
Round 2 Recompete
• Current Round 2 product categories, the
associated HCPC single payment amounts and
geographic coverage areas remain in effect
until June 30, 2016.
• CMS is conducting a Round 2 “Recompete” with
seven product categories that differ from Round
2, but somewhat mirror the Round 1 recompete
categories.
Round 2 Recompete: Same Geographic
Coverage but New Bidding Areas (CBAs)
• 90 MSAs for the Round 2 Recompete
• CBAs in multi-state MSAs have been
defined so that there are no multi-state
CBAs. There are 117 CBAs in the Round 2
Recompete.
Area CBAs…
•
•
•
•
•
Atlanta-Sandy Springs-Roswell, GA
Catoosa, Dade & Walker Counties, GA
Augusta-Richmond County, GA
Catoosa, Dade & Walker Counties, GA
Birmingham-Hoover, AL
• Grandfathering will be allowed, but on a
bundled basis.
• If beneficiary moves out of one of these 12
bundled areas, then a new capped rental
period begins.
• Program authority runs to 2019. Comment
period open now.
Today’s Program…
• Revenues, demographics and new market
potentials remain strong, but with cuts
looming, HME businesses have to retool and
retrain to deal with the challenges providers
are facing from every direction.
• Today I’ll provide analysis, update and
commentary… plus new industry metrics
and trends.
What We Know: 2014 & Beyond Will See
Major Reductions in Per Unit Reimbursement!
• Enormous pressures on reimbursement
▫
▫
▫
▫
Healthcare cost increase not sustainable
Cuts across Healthcare continuum
Federal policies mimicked by states and carriers
Natural order of maturing industry
• Prepare for 50% reduction in per unit
reimbursement on existing product lines
• But…let’s look at some actual data…
Actual Durable Medical Equipment Expenditures
($Billions)
Source: National Health Expenditure Projections 2012-2022
http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-andReports/NationalHealthExpendData/Downloads/Proj2012.pdf
Projected Durable Medical Equipment Expenditures
($Billions)
U.S. DMEPOS Spending
60
50
40
30
20
10
0
1960
1970
1980
1990
2000
2010
2020
Actual Per Capita DME Expenditures ($)
Source: National Health Expenditure Projections 2012-2022
http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-andReports/NationalHealthExpendData/Downloads/Proj2012.pdf
Projected Per Capita DME Expenditures ($)
NOTE: Florida per capita DME spend is $231 in 2014
Source: National Health Expenditure Projections 2012-2022
http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-andReports/NationalHealthExpendData/Downloads/Proj2012.pdf
Annual Revenue Per Patient
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Lincare
Apria
AHP
Independents
• Health spending is projected to grow at an
average rate of 5.8 percent from now to 2022, 1.0
percentage point faster than expected average
annual growth in the Gross Domestic Product
(GDP).
• Health spending growth during 2013 remained just
under 4.0 percent due to the sluggish economic
recovery, continued increases in cost-sharing
requirements for the privately insured, and low
growth for Medicare and Medicaid.
• Let’s look at the historical
(actual) and some
predictions of payer models
in our industry…
The Payors: Medicare
• Medicare spending growth was 4.2 percent in 2013 and it
reflects the 2-percent reduction in Medicare payments
mandated in the Budget Control Act of 2011, also referred
to as sequestration.
• I predict for DME, with the implementation of NCB
nationwide, and the prospect of bundled monthly
payments (which we will discuss at the end of this
program), FFS Medicare as a percentage of overall
revenue, will drop to less than 25% for HMEs nationwide
within five years.
Medicaid
• Total Medicaid spending is projected to increase 12.2 percent
in 2014. Enrollment is projected to increase by 8.7 million,
nearly all due to the ACA coverage expansion.
• As some states are expected to expand their Medicaid
programs after 2014 (see next series), an additional 8.8 million
people are expected to enroll in the program by 2016. Overall
Medicaid spending is expected to grow by 7.9 percent on
average in 2015 and 2016. After 2016, Medicaid spending
growth is expected to be about 6.6 percent per year on
average, mainly driven by spending by aged and disabled
beneficiaries.
Affordable Care Act (ACA)
coverage expansions
• Improving economic conditions, the ACA coverage
expansions, and the aging of the population, drive faster
projected growth in health spending in 2014 and beyond.
• Expected growth for 2014 is 6.1 percent, as 11 million
Americans are projected to gain health insurance
coverage, predominantly through either Medicaid or the
Health Insurance Marketplaces.
Uninsured and the ACA
• The Congressional Budget Office (CBO) estimated that the ACA
would newly insure 30-33 million people (still leaving 26-27 million
uninsured in 2016).
• The ACA aimed to fill in “gaps” by extending Medicaid to nearly all
nonelderly adults with incomes at or below 138% of poverty (about
$32,500 for a family of four in 2013).
• However, with the June 2012 Supreme Court ruling, the Medicaid
expansion became optional for states, and about half did not
implement the expansion.
• In states that do not implement the expansion Medicaid eligibility
for adults (including AL and GA) will remain quite limited.
Alabama and the ACA
• Despite previously supporting Alabama’s implementation of
a state-based health insurance exchange, Governor Robert
Bentley (R) announced the state will default to a federallyfacilitated exchange.
• The ACA requires that all non-grandfathered individual and
small-group plans sold in a state, including those offered
through the Exchange, cover certain defined health benefits.
Since Alabama has not put forward a recommendation, the
state’s benchmark EHB plan will default to the largest smallgroup plan in the state, Blue Cross Blue Shield of Alabama
320 Plan PPO.
Alabama and the ACA
• There are 660,000 uninsured Alabamians.
• Under the ACA, in Alabama, nearly half (46%) of currently
uninsured nonelderly people are eligible for financial
assistance in gaining coverage (see Figure 2, next).
• The main pathway for the currently uninsured to gain coverage
is the Marketplace, the new coverage option in the state: nearly
200,000 (nearly three in ten) uninsured Alabamians are eligible
for premium tax credits to help them purchase coverage in the
Marketplace.
• The ACA will help many currently uninsured Alabamians
gain health coverage, but many who could have obtained
financial assistance through the Medicaid expansion will
remain outside its reach. Further, the impact of the ACA
will depend on take-up of coverage among the eligible
uninsured, and outreach and enrollment efforts will be an
important factor in determining how the law affects the
uninsured rate in the state.
• The ACA includes a requirement that most individuals
obtain health coverage, but some people (such as the
lowest income or those without an affordable option) are
exempt and others may still remain uninsured.
Georgia and the ACA
• Governor Nathan Deal (R) announced that the Georgia had
stopped planning for an exchange. In the previous year
Governor Deal issued an Executive Order to create the Georgia
Health Exchange Advisory Committee to assess whether and
how Georgia should establish a health benefit exchange
• The ACA requires that all non-grandfathered individual and
small-group plans sold in a state, including those offered
through the Exchange, cover certain defined health benefits.
Since Georgia did not put forward a recommendation, the
state’s benchmark EHB plan will default to the largest smallgroup plan in the state, Blue Cross Blue Shield of Georgia- HMO
Urgent Care 60 Copay.
• There are 1.8 million uninsured Georgians.
• Under the ACA, in Georgia, nearly half (45%) of currently
uninsured nonelderly people are eligible for financial
assistance in gaining coverage (Figure 2, next).
• The main pathway for the currently uninsured to gain coverage
is the Marketplace, the new coverage option in the state: 28% of
uninsured Georgians (over half a million people) are eligible
for premium tax credits to help them purchase coverage in the
Marketplace.
Georgia Bottom Line…
• In Georgia, 409,000 uninsured adults (22% of the uninsured in the
state) who would have been eligible for Medicaid if the state
expanded fall into the coverage gap. These adults are all below the
poverty line and thus have very limited incomes. Because they do
not gain an affordable coverage option under the ACA, they are most
likely to remain uninsured.
• The 20% of the uninsured with incomes too high to be eligible for
premium tax subsidies or who have an affordable offer of coverage
through their employer are ineligible for financial assistance. Some
of these people are still able to purchase unsubsidized coverage in
the Marketplace, which may be more affordable or more
comprehensive than coverage they could obtain on their own through
the individual market.
National Impact of insuring more people
(AL/GA estimated at 2%)
30 to 50
million fewer
uninsured
people over
next 5 years
Insured
people spend
220% more
on healthcare
than
uninsured
Up to 4%
increase in
DME spend
ACA Durable Medical Effect:
Alabama Estimates
•
•
•
•
•
Health Care Expenditures per Capita (AL) Medical Durables: $108
Population of Alabama: 4.8 million
Current DME Spend = $518,400,000
Estimated New AL Eligibles: 325,000
2% increase of DME Spend (Kaiser estimate of current per capita of
$108*325,000)
Potential increase in Annual DME Spend: $23,256,000
Source: http://kff.org/other/state-indicator/health-spending-per-capita-by-service/
ACA Durable Medical Effect:
Georgia Estimates
•
•
•
•
•
Health Care Expenditures per Capita (GA) Medical Durables: $114
Population of Georgia: 9.9 million
Current DME Spend = $1,128,600,000
Estimated New GA Eligibles: 200,000
2% increase of DME Spend (Kaiser estimate of current per capita of
$116.28 *200,000)
Potential increase in Annual DME Spend: $35,800,000
Source: http://kff.org/other/state-indicator/health-spending-per-capita-by-service/
Private Health Insurance
• Private health insurance spending growth is expected to remain
somewhat elevated at 6.2 percent in 2015, primarily related to
continued enrollment of the newly insured into Marketplace
plans. BUT…analysts predict continued “slow growth” largely
due to ongoing increases in plan cost-sharing and continued
restraint in the use of physician office visits.
• I predict for DME, even with the implementation of the
Affordable Care Act, private health insurance, as a percentage
of overall revenue, will decrease by 2-3% nationwide within five
years…mainly due to the plans emulating competitive bid
pricing.
Managed Care
• As many HMEs may not be aware, Medicare Managed
Care (HMOs/Part C) is not under the program rules for
competitive bidding. More than a quarter of
beneficiaries fall within Part C Advantage Plans. This
number will grow to 30% within 5 years.
• While many managed care contracts are at rates above
Medicare, I predict for DME, as a percentage of overall
revenue, managed care will remain flat within the next
five years.
Out of Pocket/Retail
• In 2012, overall out-of-pocket spending grew 4.1 percent compared
to 2.8 percent growth in 2011.
• This growth rate is be the highest experienced since the recession
began in 2007!!
• However, out-of-pocket spending growth is projected to grow faster
over the remainder of the projection period, reaching a peak of 5.6
percent in 2020 in all categories.
• I predict for DME, out of pocket spending for medical durables, as a
percentage of overall revenue, will increase by 5% nationwide within
five years…an estimated $3.5 billion cash market.
• EVEN WITH COMPETITIVE BIDDING…Nationwide,
the average annual projected growth of the DME
spend is almost six percent per year projected for
2015 through 2022, largely as a result of faster
projected economic growth, the aging of the
population, and chronic care diseases such as
heart disease, COPD, diabetes, and arthritis.
• U.S. obesity (see next slides) is a major factor.
• Nationwide, the average annual projected
growth of the Durable Medical spend is almost
six percent per year projected for 2015
through 2022, largely as a result of faster
projected economic growth, the aging of the
population, and chronic care diseases such as
heart disease, cancer, stroke, diabetes, and
arthritis.
• U.S. obesity (see next slides) is a major factor.
Obesity…
Obesity Trends* Among U.S. Adults
1985
No Data
<10%
10%–14%
(*BMI ≥30, or ~ 30 lbs. overweight
for 5’ 4” person)
Obesity Trends Among U.S. Adults
1990
No Data
<10%
10%–14%
Obesity Trends Among U.S. Adults
1995
No Data
<10%
10%–14%
15%–19%
Obesity Trends Among U.S. Adults
2000
No Data
<10%
10%–14%
15%–19%
≥20%
Obesity Trends Among U.S. Adults
2005
No Data
<10%
10%–14%
15%–19%
20%–24%
25%–29%
≥30%
Obesity Trends Among U.S. Adults
2010
No Data
<10%
10%–14%
15%–19%
20%–24%
25%–29%
≥30%
Obesity drives healthcare demand
50%
40%
30%
20%
10%
0%
Obese
Smoker
Heavy Drinker Past Smoker
% increase in health spending (over norm)
Chronic Diseases…
• About 133 million Americans—nearly 1 in 2
adults—live with at least one chronic illness.
• More than 75% of health care costs are due to
chronic conditions.
• Approximately one-fourth of persons living with
a chronic illness experience significant
limitations in daily activities.
• The percentage of U.S. children and adolescents
with a chronic health condition has increased
from 1.8% in the 1960s to more than 7% in 2010.
The cost of a long life…
COPD: Number of noninstitutionalized adults with
diagnosed chronic bronchitis in the past year: 9.9 million
Percent of noninstitutionalized adults with diagnosed chronic
bronchitis in the past year: 4.4%
Number of noninstitutionalized adults who have ever been
diagnosed with emphysema: 4.9 million
Percent of noninstitutionalized adults who have ever been
diagnosed with emphysema: 2.2%
Power Mobility: Approximately 13,000 new spinal cord
injury cases, 1,500 new Muscular Dystrophy cases, 2,000 new
Multiple Sclerosis Cases, and 10,000 infants are diagnosed
with Cerebral Palsy each year
Thousands of disabled veterans returning from service each
year
Sleep Apnea: Is prevalent in an estimated 18 million
Americans. This statistic denotes that approximately 1 in
every 15 Americans, or 6.62% of the total American
population have a case of sleep apnea.
Diabetes: 23.6 million children and adults in the United
States—7.8% of the population
Diagnosed: 17.9 million people
Undiagnosed: 5.7 million people
Pre-diabetes: 57 million people
New Cases: 1.6 million new cases of diabetes are
diagnosed in people aged 20 years and older each year.
Millions of Americans
Senior Population Explosion
Unprecedented Growth = HME Demand!
65+ growth rate
Arizona +157%
90%
60%
50%
40%
30%
20%
10%
0%
9 million new seniors
70%
1990 to 2010
32 million new seniors
Nevada +142%
80%
2011 to 2030
Florida +127%
Arkansas +125%
Texas +100%
Ohio +49%
Penn +48%
NY +48%
Iowa +47%
W Virginia +46%
Limitations of 65+
65+ and living with a significant
impairment
No significant impairment
Spending will follow age
Impoverished Seniors?
Key Metrics, Benchmarks &
Survey Data
Personnel Costs - % of Rev
36.1%
37.0%
37.0%
35.0%
32.5%
33.0%
31.0%
29.5%
31.0%
29.0%
27.0%
Apria
Lincare
Hanger
HME News
USR
Revenue per Employee
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
Lincare
AHP
Rotech
Apria
Hanger
USR
Independents
Operating Expenses - %
64%
62%
60%
58%
56%
54%
52%
50%
48%
Lincare
Apria
2010
AHP
2011
2012
Rotech
2013
Hanger
Vehicle Cost Benchmark (Lincare)
3.2%
3.0%
2.8%
2.6%
2.4%
2.2%
2.0%
2007
2008
2009
2010
2011
Vehicle expense - % of revenue
2012
Bad Debts - %
9%
8%
7%
6%
5%
4%
3%
2%
1%
2009
2010
Lincare
Apria
2011
AHP
2012
Rotech
Hanger
2013
Operating Income - %
Apria’s numbers are HME segment,
excluding infusion segment
30%
25%
20%
15%
10%
5%
0%
-5%
2009
Lincare
2010
Apria
2011
AHP
2012
Rotech
2013
Hanger
DSO - net
70
65
60
55
50
45
40
35
30
2007
2008
2009
2010
Lincare
Apria
AHP
Rotech
2011
Hanger
2012
2013
Independents
Trends in Valuations &
Investment in HME
Some content used with permission: Don Davis, President, Duckridge Advisors
http://www.duckridge.com
How Have Valuation Multiples and Valuations
Changed since the announcement of Round 2 Rates?
Example:
• $5 million HME
– Assume Round 2 or Recompete Awardee
– 50% Medicare
– 20% EBITDA in 2013
– No New Patients Obtained (Due to Contracts)
– Loyal Referral Sources
Sales
EBITDA
Revenue Multiple
EBITDA Multiple
Revenue
EBITDA
2012
5,000,000
1,000,000
0.7
3.5
HME Valuation
3,500,000
3,500,000
2014
4,000,000
600,000
0.6
3
2,400,000
1,800,000
What Did We See in
Round 1?
• Majors and Regionals Identified Gaps – Moved Quickly to Fill
– Valuations in the 3.5-5X Projected EBITDA - $.50-.$80 on Projected
Revenue Dollar
• Referral Sources Became Free-Agents
– Strongest Marketing Teams Moved Quickly
– Big Got Bigger, Small Stayed Small
• Once Gaps Got Filled Deal Flow Slows
– Smaller Regionals and Hospitals Slower to Move and More
Demanding
• Private Equity Entered Scene
What Did We See in
Round 2?
• “Discovery Period” – Who Has Been Awarded
Contracts and What Are They Going to Do With Them?
• Early Strike by Marketing Teams
• Scale and Filling In the Gaps
• Buy vs. Build Strategy
• $800-$1200 per O2 patient moved to $500-$800
• EBITDA Multiple 3-4 times; some in 2’s.
2014: Who Will Be the Buyers?
• National and Regional Providers Must Remain FullService Providers
– Need Medicare contracts to remain relevant
– Need 50% more Medicare patients to offset cuts
– Protect & Strengthen Core Markets
• New Investors – Private Equity will expect Outsized
Returns
– Require 20-30% Average Annual Returns
• Local Providers Looking For Niche Positions
– Maintain Already Strong Referral and Patient Relationships
– Clean Balance Sheet & Strong Management Teams
Why the HME Market Is An
Attractive Investment
• Investment returns
– Buying For 3-4X EBITDA and Achieving These
Results in Future Results in 25-33% Annual Returns
– Borrowing Rates Lowest in Decades
• Buy vs. Build
– Immediate Returns, Referral Access
• Opportunity Costs, Risk and Reward
Can I transfer (or can I
acquire) a competitive bid
contract?
Source: Jeffrey S. Baird
http://www.bf-law.com/attorney-profiles-1/Jeffrey-S-Baird
Thank You!
Mark Higley
Vice President – Regulatory Affairs
VGM Group, Inc.
(O) 888-224-1631
(C) 319-504-9515
mark.higley@vgm.com