Risk and Uncertainty for Durable Medical Equipment: 3 Issues to Watch

Bradley Smith ATP, CMAAManaging Director/ Partner, Vertess

by Chris Nielsen

While I would never claim to have a crystal ball, I can tell you that there are a few issues that will likely have significant effects on respiratory-focused durable medical equipment (DME) companies going into and during 2021. Here are three that stand out.

1. The Presidential Election

The differences in the current Trump tax plan and proposed Biden tax plan would have substantially different impacts on business sellers. For sellers, the numbers clearly show that if the Biden tax plan is implemented, it could have a huge negative affect on what you take home. This isn’t politics; it’s numbers.

There are stark differences between the Biden and Trump tax plans. Currently, durable medical equipment business owners who sell their company will be responsible for capital gains of 20% for amounts above $500,000 or $250,000 for married individuals filing separately. If the Biden tax plan is instituted as proposed, this rate will jump to 39.6% for capital gains above $1 million. Note: Trump recently floated the idea of lowering the capital gains tax to 15% if elected to a second term.

As we are witnessing at VERTESS, and having confirmed with several other merger and acquisition (M&A) firms, there is a rush underway to close as many transactions as possible by the end of 2020 as sellers will likely pull back if the proposed Biden tax plan is instituted in 2021. Under such a plan, we would expect M&A activity to slow dramatically.

2. Competitive Bidding

The outcome of the next durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) competitive bidding round, or whether we will even have an outcome in 2021, is one of the great unknowns of the coming year and could have the greatest impact on durable medical equipment companies’ salability and profitability. Opinions on what will happen vary greatly from one DME provider to another. Some believe the result of a completed billing round will be a 7-10% increase in reimbursements. Others believe the “big nationals” with their pricing advantages will drive the bid down by as much as 30%. Others are of the opinion that, just as non-invasive ventilators were pulled out of the current bid, the rest of the program could be temporarily suspended as we recover from the pandemic, with the Centers for Medicare & Medicaid Services choosing to restart the program in a year or so after the crisis has (hopefully) passed.

This “great unknown” has put a further strain on merger and acquisition activity. Some sellers are justifiably concerned with how buyers will perceive their business as revenue declined during the period when stay-at-home orders were in place. The result is fewer sellers are now in the market, which is creating a supply and demand imbalance. This is driving up multiples for owners of durable medical equipment companies who are looking to sell.

3. COVID-19 Pandemic

Telehealth has taken a big leap forward in 2020, and there’s every reason to believe the trend will continue in 2021. The concept of sleep labs will further take a back seat to home sleep tests (HSTs) as more people are reluctant to come into a lab setting. In addition, Medicare and private payers are pushing for HSTs as the reimbursement between sleep lab services and HSTs differ greatly. A typical HST may reimburse at a rate of $100-$300 while an in-lab study could run anywhere from $400-$1,000. These rates tend to differ from one payer to another and from state to state, but the end result is that HSTs are generally cheaper for payers and more convenient for patients.

There are a number of options for in-home solutions for sleep studies. A sleep technologist can come into a patient’s home to perform a study or the patient can pick up the equipment or even have it mailed to them. A telehealth conference, along with instructional videos, walk the patient through the sleep study. While in-lab studies are still required for military personnel, 2021 will most likely see the continued demise of the sleep lab concept for all the reasons noted above.

At first, the loss of sleep lab business and lower reimbursements for home sleep tests seemed to be a big concern for respiratory durable medical equipment companies. However, with patients being diagnosed via telehealth through their primary physician and referred from there, we have seen an increase in the number of people undergoing screenings.

As Brad Tomasek, regional manager for Total Respiratory, recently told me, “The pandemic has made it easier for patients to diagnose sleep disorders now that Medicare allows this type of screening through telehealth. And I see that continuing until we have a vaccine; perhaps even after we have one. Our geographic reach has also been extended as we can now mail equipment and instruct via Zoom. This is a great advantage in broadening our footprint.”

It is widely believed by the respiratory DME community that all Americans should be screened for sleep disorder. The health benefits of “good sleep” will cut down on cardiac problems and reduce the need for certain drugs, which should ultimately keep more people healthier and out of a hospital setting.

Perhaps, as a result of the pandemic, more Americans are taking greater interest in their overall health and preventive measures that can help improve wellness and avoid hospitalization. This, in addition to telehealth solutions for everything from diagnosis to HSTs, should bring more consumers into the respiratory market.

Key Takeaways for Respiratory DMEs

These three factors could make 2021 one of the most challenging and/or rewarding years for respiratory-focused durable medical equipment companies. When examining the narrative around the coming year, we can see potential positives and negatives as well as a lot of unknowns. Be aware of the risks and rewards facing respiratory DMEs next year and, as always, adjust for the circumstances, whatever they may be.

Consider this real-life scenario: A cut by 20% in reimbursement (Medicare and a private payer) in 2019 to a multi-location DME in Alaska should have brought an immediate $2 million dollar drop in revenue. However, this company adjusted its business model and was able to grow revenue by nearly 10% that year. The takeaway: Those who don’t change die.

Thinking about selling your company? Unsure when you should start thinking about selling? Have general questions about selling? We’re here to help. Email Chris at cnielsen@vertess.com or call 402.957.3275.