Private equity has been making a big play in outpatient physical therapy (PT) with a frenzy of mergers and acquisitions heating up in the last few years. While interest in the $35 billion industry isn’t entirely new –– it’s been steadily climbing over the last two decades –– shifts in market forces have intensified that interest, attracting countless private equity groups. Private equity groups are seeking attractive acquisitions and, despite the consolidation that’s occurred thus far, outpatient PT remains fragmented compared to other healthcare services sectors making it ripe for consolidation.
But will the trend continue? If so, what’s fueling the trend? And what types of operators are driving the strongest strategic interest?
The PT landscape
Over the last several years, the physical-therapy sector has been experiencing significant consolidation, with private-equity investors now backing a number of the largest practices, many of which have been established through serial acquisitions. Even with the consolidation, there are more than 245,000 licensed PTs in the U.S. spread across approximately 35,000 outpatient clinics. No single provider has more than 10 percent market share, according to U.S. Physical Therapy.
The heavy fragmentation within the sector provides the opportunity for medical practices with capital to increase size and scale rapidly through acquisitions, or leverage brand equity and marketing strategies to compete through de novo clinic openings. However, the large supply of small practices and limited number of consolidators has pushed investors towards the former –– leading to a surge in add-on acquisitions versus new platform investments.
“According to Bain & Company’s 2018 Global Private Equity Report, between 2012 and 2016, 12 PE investors made initial platform investments in outpatient PT,” said Nancy Ham, CEO of WebPT, a provider of software for rehab-therapy clinics and a Battery portfolio company. “Over the last couple of years, however, industry transaction volume has been shifting more heavily to add-on deals versus new platform investments. In fact, in the last three years alone, PE platforms made 72 publicly announced add-on acquisitions –– this is up three times from the three years prior.”
Why the interest?
Physical therapy is a large industry with favorable tailwinds, and this has investors banking on the future of the industry. The consumerization of healthcare, high-deductible health plans (which cause patients to comparison shop), and more self-payment by patients are all factors contributing to the overall increased demand for PT services. Also driving demand are the aging U.S. population, whose members increasingly require outpatient therapy services; growing payer and provider focus on outpatient therapy over costly surgery and hospitalization; a backlash against other high-cost alternatives and opioids; and the shift to value-based care coupled with increased regulatory complexity. These are all coalescing to create steady growth in the industry, which has grown at a rate of approximately 3.8 percent from 2013 to 2018.
“The $35 billion outpatient therapy market is projected to grow at five percent CAGR or more, making it an extremely attractive opportunity for investors and PE buyers,” Ham said. “In addition to the aging population and increased payer/provider focus on outpatient therapy, government regulations are expanding patient access to therapy services. This should help raise awareness about PT among the 50 percent of Americans who develop a musculoskeletal injury, 90 percent of whom never seek physical therapy.”
These tailwinds have fueled retail health buyout deals, which have been rapidly increasing in North America as PE investors realize the opportunity to help these businesses perform better and gain traction fast. In fact, buyout deals to boost organic growth by adding new outlets is proving to deliver very high returns on invested capital.
“M&A provides strong arbitrage on EBITDA multiples that historically have expanded with growing scale and clout,” Ham said. “Businesses with less than 10 outlets are garnering multiples of around four to seven times EBITDA. Organizations with 10 to 50 clinics are selling for seven to nine times, and some marquee assets with more than 50 clinics are trading in the low teens.”
The opportunity is not without its challenges
Finding buyout deals does come with a few challenges, namely finding organizations of scale –– those that have established a solid customer base, strategic partnerships, and a commitment and reputation for excellence. As a software investor with a specialization in the healthcare space, I’m seeing providers who have demonstrated the value of their rehab services by way of outcomes and patient engagement data, and have focused on interoperability by leveraging the right tech, are proving to be in a stronger position.
“Data, and the technology used to collect, analyze and derive meaning from that data, have become core to rehab therapy, particularly for therapists who are aiming to assert their value,” Ham said. “As the spotlight grows stronger on value-based care and the patient experience, providers must be prepared to measure and demonstrate high-quality experiences and clinical outcomes. Payment models are also shifting towards value, and therapy clinics that are set up to collect and report on that data are solidifying a stronger future.”
What other factors make an outpatient PT company attractive? The following are five key areas to review in assessing potential deals:
- Strong management, including a mix of leadership from inside and outside physical therapy;
- Geographic concentration for operational efficiency and payer negotiation leverage;
- High-quality clinical care and demonstratable outcomes;
- A favorable payer mix generation; and
- A highly scalable technology foundation, including electronic medical records, practice management, revenue-cycle management, referrals management, patient relationship management and comprehensive data collection and analytics.
The market for mergers and acquisitions in the outpatient PT market is booming, and the consumerization of healthcare and shift to value-based care has brought greater opportunity to those who’ve incorporated a methodical blend of retail and healthcare best practices. Retail investors bring expertise in retail management, site selection, branding and marketing. They use a consumer mindset to home in on target customers and meet their needs. Healthcare specialists attack the operations side of the business by improving clinical workflow, driving patient outcomes, optimizing billing practices, and improving negotiating power with payers. The key to M&A success in PT is to find the right healthcare providers who’ve committed to optimizing workflow, clinical outcomes, billing, and the patient experience through innovation and the use of data.