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Do You Have a Practice to Sell?

By Franklin J. Rooks Jr, PT, MBA, Esq
September 2014

At some point, practice owners inevitably think about what is next after private practice and start planning for retirement. It also may make sense for the private practice owner to think about pre-retirement plan- ning. While the private practice owner may not be ready to retire, he or she may want to consider options for exiting the ownership of the practice while continuing to work for the practice. In this regard, the owner is not retiring, but instead monetizes the practice by “taking some chips off the table.” It is pre-retirement in the sense that the owner continues to work—albeit under new ownership—and is able to invest sale proceeds to further achieve future retirement financial goals. The private practice must be a saleable asset—but is it? What do you have to sell? Some practice owners have been met with a rude awakening when they realize that they do not have anything to sell. That is, what they have built is not of value to any would-be buyer. As many practitioners have come to see, there is a tremendous distinction in the creation of a job versus the creation of a business.

Many private practitioners have outstanding clinical expertise and provide exceptional care, but that alone does not create a business. Many practitioners have been able to set up shop, design their own hours, control their vacation times, answer to themselves, and practice physical therapy the way they want. They are their own boss. Unless there is a significant earnings number created in the process, the private practitioner has succeeded in creating a job for him/ herself. Instead of working for a hospital or other entity, the practitioner has chosen to work for him/herself. This is laud- able, but not worthy of any financial consideration as part of any value-added transaction. Acquirers are not purchasing jobs, they are purchasing businesses.

Who’s Buying What

The physical therapy market has been active recently with a number of mergers and acquisitions taking place. Some of the acquisitions are strategic; others are financial. In a strategic acquisition, an entity that is already entrenched in the physical therapy space purchases a physical therapy practice that fits into its overall growth plan, making it a “strategic” fit. The purchaser is considered to be a “strategic buyer.” In some cases, a strategic buyer is a competitor of the target company. Other times, the strategic buyer is not a competitor in the target’s geographic marketplace, but wants to enter the region. The overall goal of a strategic buyer is to make a synergistic acquisition that fits within the acquirer’s growth strategy. Although, a financial buyer is generally one without any investments in the industry in which the target company is situated. A financial buyer looks at the metrics of the company—cash flow, return on equity, management sta- tistics—with the goal of increasing the financial performance of the target company.

These buyers typically determine the target company’s earnings, termed EBITDA. “EBITDA” is the acronym for earnings before interest, taxes, depreciation, and amorti- zation. This is a standardized measure used by buyers to assess the target company’s financial performance. The cal- culation subtracts the company’s revenue from its expenses, but the expense calculation excludes taxes, interest, depreci- ation, and amortization. The measure is intended to insulate the target company’s value from accounting treatments and accounting elections it may have made. EBITDA may be supplemented by certain add-backs, which serve to increase the EBITDA. Many times, add-backs are those expenses that are not required to run the company or those expenses that would not exist but for the current owners operation of the company. Examples may be the add-back of the owner’s automobile expenses to EBITDA, adding back any excess compensation or even the cost of tickets for sporting events that are not exclusively used for the business. These add-backs result in a higher EBITDA. Just as there may be add-backs that favor the seller, there can also be negative adjustments to EBITDA. For example, if the target company is under-insured and obtaining proper insurance results in a material expense, the application of that expense could lower EBITDA. Making positive and negative changes to the practice’s earnings produces an adjusted EBITDA.

Once the adjusted EBITDA is determined, the target company value is determined by using a multiplier. The multiple of EBITDA provides the enterprise value. For example, if the company has EBITDA of $750,000, and the multiplier is 4.5, the enterprise value is $3,375,000. Many factors influence the multiple. The buyer’s risk and the industry’s ability to grow are predominant factors. There are also “deal specific” factors that may come into play. Strate- gic buyers may pay a higher multiple than financial buyers. With respect to physical therapy, buyers may consider the following: How many clinical locations does the target company have? Does the target company have locations in more than one state? Is the EBITDA above or below a million dollars? This is not an exhaustive list. However, at the end of the day, you need to have EBITDA. EBITDA is typically the basis of any valuation.

Is There Enough EBITDA?

Simply put, EBITDA is what is left over after all expenses. For the solo practitioner, if all of the practice’s earnings are paid out in salary, an adjustment is made based on what the market compensation is for a person functioning at owner’s capacity. That is, if the solo practitioner pays him/herself $200,000 and the market price to replace that individual is $150,000, a rough estimate of the EBITDA is around $50,000. An EBITDA multiple of 5.0 would translate into an enterprise value of $250,000. Upon any sale, these proceeds would flow to the seller net of any debt that the practice has. If the prac- tice had $50,000 of debt, the proceeds to the seller would be $200,000. If a broker was used in the sale, there would likely be transaction costs. And, of course, the sale would be subject to federal and state tax. On the other side of the equation, there is a tipping point for which the sale does or does not make economic sense. Buyers in all transactions conduct due diligence on the entity that may be purchased. Getting the deal across the finish line requires accountants who assess the quality of earnings and lawyers who draft transaction documents and finalize the sale. All of this involves expense. The value proposition must be such that the deal makes eco- nomic sense. EBITDA of $50,000 may be too small. However, there is a point—which is buyer-specific—that determines whether or not to entertain the transaction.

Planning Ahead

Think about your exit strategy. Take a critical look at your business. As you plan for retirement at some point in the future, does your practice represent an asset that you can monetize? Does your perceived value of your practice mesh with realities of the market? What have you created? Your EBITDA is a great indicator of whether you have created a job for yourself or whether you have created a business.


Franklin J. Rooks Jr, PT, MBA, Esq, is a physical therapist and practicing attorney in Philadelphia. He was a founding partner of PRO Physical Therapy in Wilmington, Delaware. He can be contacted at fjrooks@gmail.com.

Healthy Competition?


Is anticompetitive conduct by HOPTS and ACOs driving you out of business?
Maybe the Federal Trade Commission can help!

By Gwen Simons, Esq, PT, OCS, FAAOMPT
August 2014

The Federal Trade Commission (FTC) historically has been concerned about hospital mergers that tend to foreclose competition between hospitals, although more recently, the FTC has grown concerned about the substantial growth in hospital acquisition of physician practices and its potential effects on health care competition. The number of physician practices owned by hospitals more than doubled between 2002-2008.1 It’s not unusual to hear that in some geographic areas of the country, 75 percent of primary care physicians are hospital employees. Declining reimbursement, greater administrative/compliance burdens, and increasing technology needs (i.e., EMR systems) have converged to facilitate a consolidation of hospitals and physicians. The Affordable Care Act seems to have incentivized this further by promoting Medicare Accountable Care Organizations (ACOs). The end result of all this consolidation, whether through acquisition, merger, or contractual arrangements between hospitals and physicians in an ACO, is a growth in Hospital-owned Physical Therapy Services (HOPTS) that is threatening the survival of private practice. The question is: “is this trend helping or harming consumers?”

Management Retention


Use the carrot, the stick, or both?

By Paul J. Welk, PT, JD
July 2014

Successful physical therapy private practices have a number of common characteristics, one of which is a strong management team. Given the high demand for skilled management, these individuals may find themselves tempted to leave their current employment situation for other opportunities, whether that be for another employer or some type of “better” opportunity. When considering ways to avoid the loss of management team members, the retention methods tend to fall into two categories. First, there are mechanisms to incentivize management to remain in their current setting and to work toward achieving a particular goal or “carrot.” Second, there are mechanisms that are designed to have a negative effect on departing individuals and serve as a “stick.”1 This article examines a few common carrots and sticks used to retain upper level physical therapy management teams.

Class Action Settlement

Class action settlement with coventry health care affects physical therapists who treat injured workers.

By Diana E. Godwin, Esq.
June 2014

On June 2 an official notice from the U.S. District Court in Oregon will be sent out to approximately 38,000 medical providers around the country, including physical therapists, who had a First Health PPO Provider Agreement during the period of March 25, 1999 to the present. The notice will inform the providers that a settlement has been reached in a class action case against Coventry Health Care, Inc., (Coventry) involving payment to providers for certain workers’ compensation medical bills.

The full title of the class action lawsuit is Chehalem Physical Therapy, Inc. v. Coventry Health Care, Inc.

The notice you may receive is ten pages of dense print and explains that the class action lawsuit relates to how Coventry has calculated the discount on payments to providers for workers’ compensation medical services. Specifically, the lawsuit claims that when a provider bills below the maximum fee specified under a state workers’ compensation fee schedule, Coventry applies the discount rate in the provider’s participating provider contract to the lower billed amount, rather than calculating the payment as the lesser of the provider’s lower billed rate or the stated percentage discount off the maximum fee under the state fee schedule, as the language of the contract requires. (For example: The maximum payable for a certain CPT code under the state workers’ compensation fee schedule is $100. The provider bills $90 for that CPT code. Under a First Health PPO contract that specifies a discount rate of 80 percent, the provider should be paid $80, which is the lesser of the $90 billed or 80 percent of the maximum fee schedule amount. Instead, Coventry has applied the 80 percent discount to the lower billed amount of $90 and tells the workers’ compensation insurer to pay the provider only $72 (80 percent of $90.)

Among the benefits achieved for providers under this settlement are money damages and injunctive relief. The injunctive relief in the settlement gives providers who currently have a First Health PPO contract the right to terminate or “opt-out” of just that portion of their contract that applies discounts to workers’ compensation medical care.

The information telling providers about the opportunity to opt-out of having discounts taken against their workers’ compensation medical billings is found in Paragraph 13 on page 6 of the notice. It says that if you no longer wish to have your worker’s compensation billings discounted in this incorrect manner (or have them discounted at all) you may terminate just the workers’ compensation portion of your contract, while still remaining a member of the First Health preferred provider network for private health patients. Please note that your right to terminate the workers’ compensation portion of your contract must be exercised by no later than July 2—30 days from the date of the notice. Do not miss this very short window of time to take advantage of this opportunity!

As one of the lawyers who brought the class action case against Coventry, you will see my name listed in the notice. I am also a member of the Administrators’ Council. As part of my legal practice, I serve as the executive director for two statewide private practice organizations, Oregon Physical Therapists in Independent Practice (OPTIP), with 165 members, and the Private Practice Special Interest Group (PPSIG) of the Physical Therapy Association of Washington, with 170 members. One of the class action plaintiffs, Chehalem Physical Therapy, located in Newberg, Oregon, is a member of OPTIP. In addition to Chehalem Physical Therapy, the second class action plaintiff is South Whidby Physical Therapy, located on Whidby Island in Washington and owned by Andy Goetz, a member of PPSIG and a PPS/APTA member. We all owe them our thanks for stepping up to serve as the representative plaintiffs on behalf of all of the medical providers around the country who are in the class.

I have had many opportunities at PPS annual conference to discuss the problems of participating provider contract discounting in workers’ compensation with a number of PPS members from around the country. Unlike the situation with private health patients who are “steered” to members of a PPO network through the mechanism of a lower copayment, a lower percentage of coinsurance, or a lower deductible, workers’ compensation patients do not pay for their medical care, so there are no financial incentives or mechanisms by which to steer these patients to providers who are members of a PPO network. Since there is no “steerage” of patients, there is no quid pro quo, or benefit to the provider for accepting discounts on their workers’ compensation billings.

The PPS members I have spoken to have expressed frustration with the fact that if they want to see private health insurance patients who have First Health as their PPO network, they have had to sign a First Health contract that requires them to accept discounts not only for their private health patients, but also for their workers’ compensation and motor vehicle accident patients. The First Health contract has been an “all or nothing,” “take it or leave it,” proposition.

For the first time, as a direct result of this national class action settlement, private practice physical therapists will have the opportunity to rectify the situation.

Diana E. Godwin, Esq., is an attorney at law and member of the in Portland, Oregon. She can be reached at dianagodwin@earthlink.net.

Benefit Design and Compliance

Nancy J. Beckley, MS, MBA, CHC
May 2014
Q:  What is an insurance plan benefit design and what does it mean for therapy providers?
A:  An insurance benefit design specifies services that are covered under the health insurance plan, whether government-funded, employer-funded, or a personal plan (available to individuals and families via insurance brokers). The benefit design includes deductibles, various co-payments for physician and emergency room visits and hospital stays (including inpatient rehab and skilled nursing) as well as prescription drugs, laboratory, radiology, and additional benefits such as physical therapy.

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