Gaming Out a Post-COVID PT Market

By Robert Hall, JD, MPAff

For this month’s column, I want to do the risky work of prediction in an unpredictable environment.

But first, let me wish you and yours good health and luck as our country continues to reel from the COVID-19 pandemic. I am hoping that no one reading this has been personally touched by the pandemic, whether in terms of finances, education, or health, but I know that’s pretty much impossible. Our country looks very different today than it did just last year and I urge everyone to be kind, patient, wash your hands, and be safe.

Beyond the prediction that we will not be finished with the pandemic this year, I have been trying to game out what next year will look like for the private practice physical therapist. I feel confident we will see attempts at another massive wave of consolidation once COVID-19 is behind us. Private equity firms and others already see a golden opportunity to gobble up “distressed” practices in the health care industry and physical therapy practices are no exception. One excellent analysis of the market is provided by Health Care Appraisers.¹ They argue that a number of factors will continue to drive volume for physical therapy practices: “an aging population, earlier discharges from hospitals, a growing interest in physical activities, finding safe alternatives to opioids, and high rates of obesity.” The business model of physical therapy practices is also attractive, as most physical therapy practices have low overhead in comparison with other acquisition targets. Beyond office equipment, exercise and fitness equipment, and treatment tables, the main cost for physical therapy practices is their workforce. This is very different than many firms in other industries that investors may be analyzing.

Pushing against the forces that make physical therapy practices attractive for investors is the very real likelihood of payment cuts in Medicare that will make running a physical therapy practice harder. Medicare cuts will likely be bad in the 2021 fee schedule. And what’s worse is that these cuts often are reflected in private contracts that reference Medicare pricing.

Even with these likely payment cuts, physical therapy practices will still be attractive opportunities for investors, as over the long term, the healthy trend of improving value for physical therapy practices is unlikely to end. Basically, physical therapists run good businesses, and valuations for physical therapy practices have seen a year-over-year increase from 7.6x EBITDA (earnings before interest, taxes, depreciation, and amortization) from 2005-2010 to 10.4x EBITDA from 2018-2019.1 EBITDA is perceived as a good way to determine the real value of a firm to an investor as it eliminates the effects of financing and capital expenditures. Fundamentally, physical therapy practices are perceived by investors to be lucrative firms to buy. Once COVID-19 ends, investors will likely assume that the surviving practices will be even cheaper acquisition targets.

If we do see another wave of consolidation, there could be negative results for patients and the physical therapists who care for them. There is a real benefit to a non-consolidated market in physical therapy, and these benefits are one of the reasons that the federal government implemented antitrust laws more than a century ago. The Sherman Antitrust Act, the FTC Act, and the Clayton Act all attempt to keep prices low for consumers by fostering competition and small physical therapy practices are very good at competing in the market. Large consolidated physical therapy groups may be less so, and in any event, history shows that increased market power tends to drive up prices. It is also important to note that antitrust law is not only focused on national markets. One of the cruxes of whether there has been an antitrust violation is the definition of the market. If one community has a predominant amount of physical therapy clinics under one firm, regulators are more likely to ban further consolidation before a predominant company becomes too large. It’s important to also note that antitrust enforcement has a link to the party in power. According to my antitrust professor in law school, democrats tend to enforce antitrust laws more vigorously, and currently, it looks more likely that democrats will gain more seats in the Senate and may win the White House.

What does all this mean for the private practice physical therapist? I think that it means that after we are past the COVID-19 pandemic, you are much more likely to be offered the opportunity to sell your practice. The physical therapy market is perceived by investors as fragmented, practices will be hurting because of lower volume and lower reimbursement for services during COVID-19, and there will be lots of capital chasing investment opportunities. Just like in the context of contracts with insurers, you don’t have to sign on the dotted line, though.

Contracts can be modified and negotiations can lead to impasse. It is important for a number of reasons for private practice physical therapists to remain independent, from keeping prices low due to the competition that you provide, connections to the community that your business creates, and the fundamental reason most physical therapists probably became physical therapists: the opportunity to help improve the health of their patients. You don’t have to sign a contract that is offered to you. Instead, I urge you to keep competing in the changed world post-COVID. Your margin will likely improve and you will have a better likelihood of achieving your mission as patients return to the clinic.

References:

¹Health Care Appraisers. 2020 Outlook: Physical Therapy Clinics & Centers. https://healthcareappraisers.com/2020-outlook-physical-therapy-clinics-centers/. Published April 10, 2020.

Robert Hall, JD, MPAff, is a senior consultant for PPS working to advocate with private payers. He may be reached at rhall@ppsapta.org.