By Bill Peckham
Fresenius Medical Doubles Acquisition Funding as Prices Fall, should not be unexpected news:
Feb. 24 (Bloomberg) -- Fresenius Medical Care AG, the world’s biggest provider of kidney dialysis, is doubling its budget for acquisitions to as much as $400 million this year as pressure on health costs presents opportunities for deals at attractive prices, said Chief Executive Officer Ben Lipps.
Fresenius Medical, based in Bad Homburg, Germany, may spend as much as $200 million of the funds outside the U.S., said Lipps in a telephone interview today.
What is unexpected is that the amount really isn't that much, $200,000,000 doesn't buy much in the dialysis business.
Providers are sold largely based on their census. Really. It sounds truly horrifying but there is no way around it, dialysis providers are sold based on how many patients they treat. Sales prices are seen as a per patient sales price. Case mix, local demographic trends and strategic decisions influence the per patient price but generally a 2,000 patient provider will sell for ten times the price of a 200 patient provider. There are undoubtedly size and market dominance premiums paid - a provider that is concentrated in a geographic area would likely have more valuable patients than a provider with 10 units in 10 states. However, until a unit sells in today's market, you don't know today's going rate, let alone the going rate post bundle.
The article implies that Lipp's expectation is that sellers are likely to lower their prices going forward and at the right price Fresenius is buying. I believe back in 2005 to 2007 during the big mergers period, and then in the subsequent unit spin off and smaller mergers period, the per patient price ranged from $80,000 to $120,000. If units sell in that range this year $200 million would buy between 2,500 and about 1,700 patients (without accounting for provider debt, the more debt that comes with the deal the more patients $200 million will buy). Thousands of people are a lot of people, but keep in mind natural growth at Fresenius should be about 6,500 patients in 2010 (given a 5% growth rate).
Just to meet the growing need in the communities they already serve, Fresenius will need to build 1,200 stations minimum. Each de novo station cost $100,000 and up to build. It's likely that Fresenius will be spending about the same amount this year on natural growth, as the article suggests is available for acquisition growth.
Bloomberg missed an opportunity to pin Lipps down on what price providers are asking right now. What exactly are these expectations that are too high? And how much does Lipp's expect expectations to decrease because of the details of the final rule? How much exactly, might the proposed rule decrease small provider value?
In my comment to CMS on the dialysis PPS I wrote:
I believe Congress’ intent with MIPPA's low volume provision was to support dialysis choice and access. Congress recognizes in the US that the provision of dialysis is an oligopoly. An oligopoly mostly funded by Medicare, an unprecedented situation. CMS should define “small volume” as units owned by providers who serve fewer than 1% of the total dialysis census so as to allow beneficiary choice, encourage competition, and support the industry's engines of innovation. A low volume adjuster so defined will help balance the oligopoly by giving truly small providers additional resources to operate under the new payment rule.
There is no catching up to the purchasing power of the two large dialysis organizations. They will only get larger and more powerful. The PPS can only maintain provider ownership neutrality if it includes an adjustment for the nation's small dialysis providers. With out an adjuster for small dialysis providers the PPS massively favors large dialysis organizations. Neutrality requires the adjuster.
If the "Bundle Tax" is too high, prices will fall and consolidation will accelerate. But as I write, there is an alternative.
Hopefully the final payment rule will be provider neutral. Instead of burdening small providers and driving down their value the final rule will create a payment that supports provider diversity with a reimbursement adjuster for the nation's small providers. Further dialysis provider consolidation is not in the interest of those who use dialysis today; further dialysis provider consolidation is not in the interest of those who will need to use dialysis in the future.