The State of Consolidation in Outpatient PT

During PPS 2014 in Colorado Springs, the industry’s heaviest hitters—now backed by private equity dollars—strolled about the trade show floor, introducing themselves to clinic owners and negotiating acquisition deals right then and there. This anecdote provides a mere glimpse into a trend sweeping the healthcare industry: consolidation. Healthcare services have always been in high-demand, but with 8,000 baby boomers reaching retirement age every day (AARP), the healthcare market has never been more saturated with consumers—and that makes private practice acquisition a highly lucrative investment move for qualified buyers. Add in the Affordable Care Act (ACA)—which researchers and the media alike agree is fueling market consolidation due to decreased reimbursements—and you’ve set the perfect scene for movement in the private practice market.

With factors such as these, investors are wondering where in the healthcare landscape they should set their sights—and their dollars. As my above anecdote makes clear, some have already landed on a focal point. In fact, Wealth Daily reports that investors “looking for the next major growth industry would do well to consider...U.S. Physical Therapy Inc,” (USPT) which according to the company itself is “‘the largest publicly-traded, pure-play operator of outpatient physical and occupational therapy clinics.’” And that chain only makes up 1% of the outpatient PT marketshare.

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But it isn’t just USPT’s incredibly successful acquisition strategy that’s causing investors to pay attention to outpatient PT. In addition to a spike in the population of baby boomers requiring rehabilitative treatment, younger generations—who have become more health conscious and active—also are seeking PT services: “Increasing numbers of Americans who engage in fitness regimens, coupled with increasing numbers of weekend warriors, is driving increased demand for physical therapy and rehabilitation treatments across the U.S.,” USPT stated in the Wealth Daily article. And according to a report from leading law firm McGuireWoods titled "The Top Areas in Healthcare for Private Equity Investment in 2014," payers are demanding “physicians first refer patients to physical therapists rather than...surgery, in order to contain costs.”

Another factor in the acquisition rush: market fragmentation. As I noted above, USPT only represents 1% of the total market. And according to an IBISWorld study, which investment bank Harris Williams cites and illustrates here, “Smaller, independently owned clinics account for roughly 45% of all physical therapy clinics,” with no “single participant capturing more than a 5% market share.” Needless to say, the market is fragmented. And with reimbursements dwindling due to the ACA and other factors, an uptick in consolidation activity is only natural, because, as healthcare advisor Paul Martin points out in a blog post on PT market trends,   “Larger businesses are able to get more leverage out of their centralized services and traditionally have been able to operate at an overall lower cost.” Perhaps that’s why the acquisitions unfolding in the PT space have been largely PT-led: “...this is a great time to consider joining forces in the form of a partnership with a large company,” notes Martin.

Of course, no investment opportunity is without risks. For outpatient PT, the biggest risk is change, including adjustments to:

• Healthcare reform
• Medicare regulations, including SGR
• Federal- and state-enforced business regulations
• Third-party payer rates and rules
• The availability and affordability of qualified rehab therapists

But private equity firms, investors, and clinic chains in acquisition mode have taken those risks into consideration. After all, this is something that has the potential to dramatically alter the industry, so it’s best to be prepared. As we’ll cover in this month’s upcoming blog posts, when it comes to acquisition and consolidation, there’s a lot to consider—not only from the buyer’s perspective, but the seller’s as well.

That’s why we’re covering this topic—to shed light on the subject, not to cause worry or sway anyone’s opinion on the issue. We want PTs, OTs, and SLPs to be well aware of the trends occurring within their industry. That way, they can make informed decisions, develop appropriate responses, and have a stronger stake in the path their profession takes. As Heidi Jannenga said in this month’s founder letter, “In my book, change is inevitable, and we here at WebPT support industry changes—so long as PTs have the final say over what happens in our profession, and so long as those in this industry make decisions that increase our clout, respect, and autonomy within the healthcare community.”

So, on that note, what questions do you all have about consolidation and acquisition, buying and selling, or expanding and rolling up?