The Business Evolution of the Physical Therapy Industry, Part 1

The biggest changes are yet to come.

By David McMullan, PT*

The physical therapy and rehabilitation industry has grown and changed considerably over the years. With the move toward value-based care, perhaps the biggest changes and growth opportunities are yet to come. As physical therapy owners across the country prepare for massive health care–wide transformation, a look back at the evolution of the modern physical therapy industry seems fitting.

Booming Business

The late 1980’s and early 1990’s could easily be described as a business boom for private physical therapy practices. Hospital physical therapy departments were significantly backlogged as demand for services outpaced supply. The soaring popularity of fitness programs had people seeking out professionals for advice and recovery treatments. This demand created an opportunity for aspiring practice owners while stratifying a growing need for patients.

Practitioners could command high prices for their services with minimal costs, as operational fees were low. The strong demand, combined with fee-for-service rates and changes in the insurance industry, allowed for healthy profit margins. Light competition meant practices could grow rapidly, often to include multiple sites. The increasing stream of patients and lack of competition helped many who went into private practice early do very well.

It was a golden age for physical therapy. With the industry on an upward trajectory, why did growth come to a halt? Some factors helped a gradual decline, such as increased competition and later a surplus of therapists. However, it was the collective blow of dramatically reduced payments due to strict regulations and a lack of scalable technology that ultimately had the greatest impact.

Regulatory Roadblocks and Reductions

In the mid- to late 1990’s, things started changing for the PT industry. While many practices were law abiding and offered outstanding service, with so much money floating around and relatively zero regulations, corruption seeped in at various levels. Some clinics were leveraging the use of unlicensed staff and billing for those services at the higher rates of professional therapists with little oversight. Some less-than-honest patients were even gaming the system, using insurance coverage to finance treatments (such as massages) that were medically unnecessary for them. These inappropriate and potentially fraudulent activities were increasingly present in many areas of health care, prompting major legislative changes, among them the introduction of the Balanced Budget Act in 1997, created to put checks and balances in place to stop excessive health care spending.

While many of these checks were necessary to prevent fraud across the health care industry, they came down heavily on the physical therapy industry, severely limiting profitability. Provisions included a 10 percent reduction in Medicare reimbursement for outpatient therapy performed in non-hospital settings and the much maligned therapy cap. Health maintenance organizations (HMOs) were created to provide oversight and guidance for such things as a patient’s allowed number of visits. Payers also became more aggressive in negotiating contracts. For the first time, the industry saw capitated rates and the occasional payer pay a flat fee for service.

Fast forward to early in the new millennium, when copays and coinsurance increased. More of the financial responsibility was placed on the patient (it remains this way today). As a result of this burden, patient self-discharge rates increased. Further reducing patient visits was the growing popularity of alternative, yet less effective, approaches to pain management, mainly the rise of prescribed opioid-based painkillers. Additionally, operational costs significantly increased, while average pay per visit declined, in some states as much as 50 percent. Reduced patient visits coupled with the drop in margins made it challenging for practices to survive.

Another less obvious impediment to the growth of the PT industry was reliance on manual processes (i.e., paper), for both clinical and business matters. In the 1980’s and 1990’s, information technology in health care was a new, expensive concept and not even a consideration for the majority of physical therapy clinics. While there were not many, if any, electronic medical records (EMRs) in the 1980’s for the small PT clinics, there were several practice management systems available to help improve operational efficiency. In hindsight, the physicality of paper—the process of hand-writing notes for documentation, medical record storage, transcription, mailing of claims, manually calculating data for reports—was highly inefficient and often inaccurate. The time and financial costs of paper-based processes served as a contributing factor for thin margins and resulted in the inability of companies to enjoy real economies of scale even with multiple sites.

Paper also made it difficult to share and analyze clinical data. Though studies had shown the efficacy of physical therapy for decades, industry-wide data and benchmarking were meager at best. The only outcomes data widely used were based on claims and service/billing code utilization provided by the Centers for Medicare & Medicaid Services (CMS). There was no efficient mechanism or technology available to process much-needed evidence-based outcomes to demonstrate the substantial value of outpatient rehabilitation. For many clinic owners, outside of anecdotes, it became difficult to show PT as a legitimate cost-effective choice in the patient’s care and functional outcome.

Evolution and the Advent of Another Boom

To survive, physical therapy clinic owners need a significant increase in transactions and volume on those margins, plus great operational efficiency. In part two of this article, you will learn how the industry is successfully evolving to do just that, and how the combination of value-based care, advocacy, an informed patient population, and especially technology advances, have put the physical therapy industry on the way to a second boom.1 Hospitals and health systems around the country have made the transition to using electronic health records. Now that we have large amounts of health information available in electronic form, providers and policymakers are focusing on the next goal of ensuring that the data can be easily and securely shared, which is known as interoperability.2 All providers, physical therapists included, will be expected to play a role in this interoperability.


1 www.aha.org/content/15/1507-iagreport.pdf. Accessed May 2017.

2 Achieving Interoperability that Supports Care Transformation, A 2015 Report of the American Hospital Association Interoperability Advisory Group.

David McMullan

David McMullan, PT, is the vice president of Product–Therapy at Casamba Corp. He can be reached at david.mcmullan@casamba.net.

*The author has a vested interest in the subject of this article.