Ironwood's Healthcare Investment Perspective - Medical Equipment

In this post, we will discuss Ironwood's perspective on the medical equipment vertical within healthcare. The overall healthcare industry has seen sustained economic growth and robust M&A activity over many years, which has been bolstered as of late by significant tailwinds tied to financial, sociological, and demographic trends. Ironwood has been an active investor within the healthcare and equipment sectors for two decades, completing investments in medical device, dental, nutritional service and equipment companies.

There are several factors impacting the medical equipment space, one of the largest being hospitals' declining financials. For example, the number of days of cash on hand at hospitals has declined 28.3% since the start of 2022 ¹ and operating margins were below 2% in 2023, following essentially break-even operating margins in 2022 ² . Root causes of the financial pressures include continued underpayment by public payers such as Medicare and Medicaid, increased administrative costs due to greater payer utilization of automatic claims denial and prior authorizations, increased investment in technology infrastructure to support telehealth, higher drug prices, and ballooning labor costs. Such financial pressures have caused many healthcare providers to delay reinvestment in their stock of medical equipment, resulting in an increase in average equipment age by 7.1% for hospitals in 2023 ¹ . This has led to a greater demand for medical equipment rental, leasing, and repair services, as well as refurbished medical equipment, in order to continue to provide quality patient care.

Furthermore, the rise of non-hospital delivered care is another driver of medical equipment demand. Healthcare is increasingly offered in remote settings, home care settings, as well as emergent care centers such as urgent care centers and ambulatory surgical centers (ASCs). For example, many hospitals are now offering "hospital-at-home" services, in which patients receive intensive monitoring through devices that transmit real-time information to healthcare providers. Such programs are not only cheaper to patients, payers, and hospitals, but they also usually result in better outcomes for the patient ³ . The future of the delivery of healthcare calls for an increased need for medical equipment that can function in the home and support telehealth services, all whilst needing greater amounts of repair due to its transportation from patient to patient.

Additionally, the increased number of urgent care centers across the nation, together with their more-frequent usage, has led to a rise in non-hospital delivered care. The market size of U.S. Urgent Care Centers was $56.7 billion in 2022 with an expected CAGR of 11% from 2023 to 2030 ⁴ . Low-acuity healthcare centers, like urgent care centers, create a unique and rapidly growing demand for medical equipment that is both more accessible and affordable.

Furthermore, there has also been a marked increase in the number of ASCs, which predominately moves recovery from the traditional in-patient hospital model to an out-patient model, leading to longer at-home recovery periods. This dynamic is creating increased demand for medical equipment used both in the ASC and at home. Moreover, services that were once offered under one roof in a large, centralized hospital are now increasingly being offered at lower-cost third-party sites, such as radiologic imaging centers. The increase of such centers creates a sort of 'double demand', where these emerging lower-cost options vying for consumer dollars are beginning to create the same demand for medical equipment that their hospital counterparts always have had.

A central driver of medical equipment demand is the United States' rapidly aging population, as well as it's increased usage of medical equipment. One in six Americans are aged 65 or older ⁵ . From 2010 - 2020, the number of Americans aged 65 or older grew 38.6%, the fastest growth rate the demographic has ever experienced ⁵ . Older adults are increasingly using assistive devices, whether they be as simple as a wearable fall monitor or as important as a pacemaker. A survey of 2,000 adults aged 55 and older showed that the majority use assistive or health-related devices ⁶ . The same report found that older adults increasingly want to grow old in their own homes, creating strong, value-focused demand for medical equipment that enables the aging to continue at home.

These demand drivers create a compelling investment opportunity via several avenues within medical equipment in the lower middle market:

• Rental : these are most commonly companies that rent durable medical equipment (e.g. beds, walkers, etc.) to patients recovering or aging at home. Given the need to serve local geographies, this remains a fragmented but consolidating space.

• Repair : outsourced providers of repair services to hospitals, physician practices, ASCs, etc. As care moves outside of a centralized environment, leveraging a 3rd party service for equipment maintenance becomes more logistically and economically viable.

• Distributors/outside sales : organizations that sell medical equipment on behalf of a manufacturer to healthcare providers. With a growing list of new provider locations, equipment companies will need to leverage a more localized sales/distribution model to effectively service these new players.

• Outsourced manufacturers : serve both startup and established medical device companies, providing outsourced design, development, and full-scale production manufacturing of devices. Equipment companies typically favor focusing on R&D and or sales/marketing versus manufacturing.