Alliance Physical Therapy Partners: Alliance Physical Therapy Partners and Agile Virtual Physical Therapy proudly present Agile and Me, a physical therapy leadership podcast devised to help emerging and experienced therapy leaders learn more about various topics relevant to outpatient therapy services.
Richard Leaver: Welcome to PT Leadership Podcast Series. I’m Richard Lever, and I’m excited in my usual British monotone voice to welcome Ryan Buckley. Welcome, Ryan. Great to have you on the show today.
Ryan Buckley: It’s a pleasure to be here. Thank you for having me, and I appreciate all you’re doing for the physical therapy industry.
Richard Leaver: Well, thank you. I’m trying my best. Ryan, you’re a partner at Livingston Healthcare Banking, and you’ve specialized in M&A for many years within healthcare, I think over 18 years, I think, in M&A and capital raising and restructuring experience across all sectors. But within healthcare specifically, you’ve spent a lot of time specifically in the outpatient space. Am I correct in saying that?
Ryan Buckley: Yeah, that’s correct, Richard. And maybe it would be beneficial to give you just a bit of an overview on our firm and our experience within physical therapy. So Livingstone, we’re an M&A and debt advisory firm based in Chicago. We have offices in across the globe. We’re focused on the lower end of the middle market, which we define as transactions valued below $500 million of transaction value. We’re predominantly outside M&A shop representing sellers. That’s about 75% of what we do. And many of our clients, over 60% of them are family owned, entrepreneurially owned businesses, with the remainder being private equity owned portfolio companies and corporates. I have the honor of being a co-head of our healthcare practice. Our healthcare practice is predominantly a provider-based practice. We have extensive experience in a range of provider-based businesses, but specifically musculoskeletal is an area where we have deep domain expertise. We’ve completed many transactions in orthopedics, interventional pain management, physiatry, podiatry, and most specifically physical therapy. We’ve been doing physical therapy for 20 years now, did our first physical therapy transaction in 2006, advising ATI Physical Therapy on their first private equity recapitalization. We actually got to know Greg Steele, Dylan Bates, and Matt Kruger, who at the . We’ve completed over two dozen transactions involving both private equity funds and strategic buyers. And I would say we’ve completed transactions in well over half of the states. So we have a pretty unique perspective on both the care models, the state differences, care settings, and that’s That has afforded us the ability to be a value-added advisor to our clients.
Richard Leaver: Yes, your depth and breadth of experience with outpatient therapy, I think, is not necessarily unique, but certainly unusual. And the reason why I was looking forward to chatting with you today was you recently published an article on LinkedIn called Physical Therapy Bull Market Has Begun, Signaling Growth in Healthcare M&A. and I was surprised a little bit to see such a title pleasantly surprised but I wanted to perhaps pick your brain a little bit about this article because at the moment I won’t say there’s necessarily doom and gloom but there’s definitely a degree of pessimism as it pertains to the kind of the economics and finances surrounding outpatient therapy particularly really since I would say COVID if not slightly before that so are excited to talk through about the article. Before we dive into the weeds, though, I’d love to perhaps get your thoughts on kind of what prompted the article.
Ryan Buckley: Well, the title needed to be something bold and needed something catchy that people would want to read. But I will say that this is something that we’ve been forecasting for at least the last six to 12 months that the physical therapy industry should reach a trough at some point in 2025. And the premise to that is the industry has really taken it on the chin for the As we all know, a lot of commercial payer contracts are linked to those Medicare rates. And so we’ve been in this period of declining reimbursement at a where cost structures are very efficient and we have far more demand still than we have therapists to meet that supply. And that, from our perspective, sets the stage for a very strong industry heading into 2026 and beyond.
Richard Leaver: Lots of great points. Definitely been a storm. So essentially, I see four primary issues that you’ve just mentioned. First off is what seems to be almost continual Medicare reductions. And even if you look at it in the longer term, the value of the reimbursement has gone down. I think Medicare approximately 30% over the last 10 years. I think that was a number that I kind of hear banded around. But certainly the more recent cuts have all being well subsided. I won’t necessarily say it’s over, but certainly subsided. And then staffing shortages, that’s been prevalent for a long time, but exacerbated by COVID, wasn’t it, as it pertains to not only structural issues with the numbers that are being trained aren’t sufficient, but those leaving the workforce around COVID and not all of those coming back. And then inflationary pressures, as you say, and obviously the primary cost to expenses is labor, but certainly all facets of the business have experienced inflationary pressures. And then the demand supply for care itself. What I… think about the current situation is perhaps not so much that these issues have stabilized or even reversed, but the idea that with problems come opportunities. And I believe that perhaps the more effective, efficient, better outpatient providers have started to be able to identify and more importantly implement solutions for some of these issues. Do you feel that perhaps is true?
Ryan Buckley: Absolutely. And one of the things that we also didn’t mention is during this period of time, you also saw rate increases, interest rate increases that started in March of 22 and peaked in August of 2023. And when you have those rate increases, what that, you know, in many respects, you know, forces an operator to focus on is the internal low-hanging fruit within the practice. And what could that be? That could be, you know, you know, virtual kiosks at the, you know, at the front desk. It could be, you know, working on productivity in terms of the number of patients per therapist per day. That’s a huge element that we work a lot with our clients on because it is one of the biggest low hanging fruit. If you’ve got a therapist that’s seeing eight or nine patients a day, just seeing that extra one or two to try to get to something that looks more like 12 patients per therapist per day. And it depends a lot on the marketplace. But that, that incremental visit or two per day can have profound impacts on the clinic-level productivity of the practice. We talk a lot about how do you, as opposed to opening up a new de novo, do you have physical space or can you create physical space within your clinic to add that extra therapist or two? Given the fixed cost structure of a physical therapy clinic, that incremental therapist can dramatically increase your clinic-level profitability. And it’s these types of moves that are required when you have the situation where you have declining reimbursement and rising costs. By necessity, you have to get more efficient, more productive.
Alliance Physical Therapy Partners: At Alliance, we believe that partnership means creating something greater than the sum of its parts. Our focus is finding physical therapy practices with a strong culture and thriving community and providing them with additional tools, resources, and expertise to take their practice to the next level. To learn more about joining our nationwide community of outpatient physical therapy practices, visit our website at allianceptp.com.
Richard Leaver: Yeah, lots of great points with regards to perhaps ways or tactics or strategies for perhaps digging out of the hole or the trough. But before we focus a little more on those, my gut feel is a lot of the number of the reasons why entities are perhaps struggling are self-inflicted. And let me perhaps explain that a little bit more. Up until relatively recently, as you say, interest rates were low. Whilst reimbursement was heading in the wrong direction, reimbursement overall was reasonably robust or sufficient, shall I say. not so much the inflationary pressures. And I think a lot of providers, be that mom and pop shots or even larger entities, kind of got over their skis somewhat. And one of the things I feel happened was people grew perhaps too quickly or became kind of fat and lazy, metaphorically fat and lazy. And over the last two, three years, they’ve suffered indigestion as a result of that. So obviously there’s a lot of external factors that have changed and certainly not negating or trying to underestimate those significant changes. But I think there has certainly been a number of internal factors for certain entities as well that haven’t helped. Would you agree with that?
Ryan Buckley: I think you’re describing it in a very good way. And certainly I’m not going to talk about specifics within the industry, but I think that you hit the Certainly impacted a number of operators. I think the other side as well is the importance of culture within a practice. When you start to get to a certain scale and a certain size culture, being able to continue to disseminate the culture that made it successful when it was a small practice is critically important. And there’s no right or single way to disseminate that culture. You kind of know it when you see it, but at the same time, When you get to a point of certain large operators maintaining that culture across the country and or across multiple regions can be tricky. And it is something that needs to be focused on. The pandemic certainly didn’t help by limiting the amount of in-person travel. But that is that has been an area that I think a lot of the successful operators have focused heavily on in the last handful of years is continuing to maintain that culture. And why is that important? It’s because the therapists are in such high demand that they are capable of moving to another operator, with the perception of a – and maybe the reality – of a better culture. And that is, when you have an industry that has had some turnover, you want to be able to limit that, given the fact that you’re not able to replace those therapists as efficiently as you might once have.
Richard Leaver: Yeah. I always think that it’s easy to run a business when you’ve got virtually no inflation, interest rates that are through the floor, basically money’s free, and reasonable supply of healthcare workers and reasonable reimbursement. It’s difficult to really lose money, isn’t it, in that environment? And I think many companies were lulled into a false sense of security for so long. And, you know, they’ve had to have a significant wake up call, haven’t they? And for some, it’s been a real shock. And for others that perhaps operated more conservatively prior to to these challenges have had have fared better. You know, when I look at USPH and you reference them, they they’ve seemed to have weathered very well the storm. And I feel that that’s in part because they’ve always operated in a more conservative way. manner and position themselves slightly different with regards to their M&A strategy and just how they operate generally. Would you agree with that kind of thought process?
Ryan Buckley: Certainly would. And having had the pleasure of transacting with U.S. Physical Therapy last year, you know, we saw firsthand, you know, they provide their partners a great deal of autonomy and it allows them in many respects to have, you know, many CEOs, if you will, and in different markets all around the country. And that local ownership, that local model, you know, is one that allows them to continue to maintain that culture that we were talking about earlier. There’s a point that I thought you were actually going to go down when you talked about, you know, the struggles that the industry has faced over the last five years. And I want to sort of come back to this. And I don’t mean to be doom and gloom around like the depression back in the 1930s. But what the depression of the 1930s created was some of the best innovation ever experienced within our country. And that happens out of trying times over the last four or five years, despite the headwinds that we’ve been talking about. Again, physical therapy operators have been able to adapt and they’ve gotten better. They’ve gotten more efficient. And from our perspective, that is why we have such strong conviction that this industry is creating that bull market over the next three, five, seven years.
Richard Leaver: Yes, Following up on that point, there’s definitely some, I believe, technology innovations or implementation. I don’t necessarily think it’s innovation because I think the technology has been there for quite a while in one form or another, but certainly the challenges have been a catalyst for change. There is a saying, isn’t there? You never let a good, you know. Right, so it’s got to waste. That’s exactly. And I think that’s probably somewhat the case here, isn’t it? So you’ve mentioned it already, you know, virtual front desk, for instance. I think There’s definitely a movement towards optimizing labor and also nearshoring, offshoring where appropriate as well in order to try and reduce overall cost. And I think for the first time that I’ve seen in my career in the U.S., I think these things are actually gaining some traction or significant traction. And certainly when you look at U.S. PHAs, focus, one of their areas is expense control. And I think in the past, that side has perhaps been less focused than revenue generation.
Ryan Buckley: Yeah, I think that that’s well said. We have had certain clients that have outsourced certain functions like RCM to lower cost locations. They’ve been able to do that without impact on the business, which is always a critical component to evaluate such a move. I think one of the other areas maybe to talk about would just be around how do you improve your net reimbursement rates in an environment where you’re seeing declining rates. And I think that you can look at that in a few different ways. You can try to augment your payer mix a bit, focus on some of those payers that have higher, higher reimbursing and suggest that being, you know, workers’ compensation, maybe certain areas like personal injury, focusing on those payers that truly do value what the industry and the profession are delivering. So scheduling for success, certain other areas to drive demand. Many therapists are utilizing Luna in the evening, moonlighting and picking up a shift or two to augment some of the costs that they had from education. And we’ve seen physical therapy operators start to look at home care as a potential way to differentiate for their therapists to provide them such that they don’t have to use something like a Luna. So there’s, you know, again, going back to the let no crisis go to waste, there are areas where the savvy PT operator is looking for improvement.
Richard Leaver: The reimbursement component is really interesting. This is one of the five areas you talk about in your article, isn’t it? It’s Up until relatively recently, I did question, wonder whether there was any value in payer relations because historically a lot of payers have just had a very shut-door mentality with regards to, you know, it’s difficult to get them to move at all. But I feel that there has been some movement, I won’t say it’s dramatic movement by payers, but some movement more recently from to just abusive rates by some of them. But there has been a little movement, and I think that’s multifactorial perhaps, and I’d like your thoughts on this. But I think in part it’s because there is this supply and demand mismatch, and certain providers have become comfortable with walking away, including Alliance PT partners. The irony is because of the shortage of outpatient therapists, Many clinics have an issue with actually excessive demand for the first time since I’ve been in the States for the last 20 years. So then that creates the opportunity to actually push back against the payers. And for those that aren’t prepared, willing to reimburse at a rate that even meets the actual costs, we’re able to actually say enough is enough. but certainly gives leverage to the providers, which hasn’t been there in the past. And I think that’s one of the factors that I believe has perhaps contributed to your thinking as it pertains to botting it out and coming out to the other side, yes?
Ryan Buckley: Correct. I mean, I think if you look at, if we were to look back at our proprietary index of clients and others, generally speaking, actually net reimbursement has either stayed roughly stable or slightly increased over the last couple of years, which is counterintuitive when you think about it in the context of the Medicare rate cuts and then some of the other rate cuts. And I think a lot of that is because, to your point, if you have more demand than you can supply in a day, that enables you to get more aggressive with lower reimbursing payers than the industry previously was ever willing to do. And to the industry’s point, every patient is the same and needs that treatment. But at the same time, there’s the practical element that comes into it that if you have a payer that wants to pay $60, $70 a visit, it’s just impractical. You’re losing money on those visits.
Richard Leaver: Yes, I did some back of the napkin analysis a while ago to try and justify to a certain payer why they should reimburse higher. And I calculated that if a clinic was seeing visits at an average net revenue per visit of $70, the average clinic would actually have a margin of negative 22%. So there is definitely a need to address the lower payers because Because financially, it’s just no longer viable whether we like it or not. It’s nothing to do with ethics or morality. It’s just the ability to keep one door open, isn’t it?
Ryan Buckley: I would maybe look at it a slightly different way. I mean, at $90 a visit, if you have three therapists in your clinic and they’re seeing on average 11 patients a day, that clinic is likely generating about a 27.5% clinic-level EBITDA margin before rev cycle. And so when you think about the corporate overhead that’s required plus the rev cycle, and that approximates about 15%, you get to something that looks like about a 12% post-corporate EBITDA margin. If you look at other areas of healthcare, home care and others, that is not, anything less than $90 a visit starts to then get to the point of unsustainable from our standpoint. Now, this is obviously, we’re talking, you know, across the board or across the country on an average basis. It costs a lot less in upstate New York to deliver care than it does in New York City. But at the end of the day, that in my mind is a framework that some can look at to what is sort of a livable wage within physical therapy.
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Richard Leaver: Yes, it brings us on to the point of staffing a little bit and tying into reimbursement. What amazes me is the short-term nature thinking of payers. So bear with me one minute with this. If payers are reimbursing at a rate that is just not sustainable, what we are seeing as a result of that is weight pressure, essentially. And In conjunction with that, the costs of education have gone up immensely, where I think the average debt for a PT student now is about $150,000. So you’re ending up with a situation where, because the wages of therapists is, I would certainly say, less than other perhaps healthcare professions of similar education, the incentive and the debt is as high, if not higher, than those other healthcare professions. entities or professions. You’re ending up with a situation, we’re seeing this, where the amount of people attracted to the profession is declining or certainly not increasing at the rate in which we need it to meet demand. And then those are actually already in the workforce and certainly recently have exited the workforce. So in a way, you’re reducing overall supply further while which will then actually create a situation where the providers will continue to cherry pick or continue to go out of network with those payers that pay less. So the circle finishes off where the payers are only actually hurting themselves eventually. Now that’s a very long-term view, but that’s in my mind how I see things occurring unless there is a substantial increase in reimbursement, which then translates into higher wages eventually.
Ryan Buckley: You’re like, no, no, I would agree. I think the silver tsunami or however you want to kind of characterize, you know, the baby boomer generation, you know, is just going to further exasperate the issue that we have on our hands here from too much demand and not enough supply. Set aside the amount of hip and knee procedures, which many in most cases will require outpatient physical therapy. You’re also talking about the benefits of therapy for, you know, other issues, balance issues. These are ongoing issues that, you know, if treated appropriately, can reduce costs downstream from falls and other challenges. And so there’s just a tremendous amount of demand on one side of the, you know, call it the Medicare population, at the same time that we have, you know, an ever more active population that’s requiring the therapy. And so it’s a challenge that the industry has to figure out. There are multiple ways that it can figure that out. Reimbursement, therefore, allowing physical therapy operators to pay a higher wage to encourage more to enter the profession. The other way to look at it is utilizing tax, utilizing PTAs in a way that it is on a state-by-state basis. But there are certain states that have a little bit more of a liberal usage of tax, which allow the physical therapy operators in those markets to increase the amount of access, patient access that they have, treating more patients per day because they’re utilizing extenders in a way that is prohibited in other markets around the country. So, you know, of course, rate is one of the key drivers, but there are other ways to try to attack the access issue that is facing this country.
Richard Leaver: Yes, I think the silver lining from staffing is with the reduction in supply and the change in network, in network, out of network, it’s actually, as you said earlier, really, it’s really supporting net revenue per visit or actually increasing it, which then in turn actually will actually translate into being able to provide therapists with higher salaries. So it’s kind of helping indirectly. about labor as well. I feel I have a similar kind of perception to you with regards to the bottoming out. With regards to labor, the post-COVID hangover which you mentioned seems to be at last over. Certainly from a non-clinical perspective, I would say in the last six, 12 months, there’s been a transformation with regards to the ability to attract and retain non-clinical healthcare staff. But I would say probably in the last six, six months this year, there has been, I won’t say necessarily a complete easing, but it’s slightly better as it pertains to recruitment. Certainly retention, I think, has improved across the board as well. The great resignation seems to be over. So I think that turmoil as it pertains to staffing, labor has certainly settled. And with that comes some stability, which then will then translate into all being well-better financial performance, yes?
Ryan Buckley: Yeah, I think that’s right. I think certainly you’re finding that, you know, in a lot of our clients, for example, for a period of. Maybe that’s more on a part-time basis, at least initially. But that could be a portion of what helps solve some of the short-term demand and supply issues here.
Richard Leaver: Yeah, I completely agree. Whilst nobody wants perhaps to have a recession, it certainly may help as it pertains to supply because there are a lot of therapists that are either currently out of the workforce or only partially within it being PRN per diem in status. And oftentimes the therapist is a second income. And when the economy takes a bit of a dive, then the need for that second income may increase and could actually add significantly to supply, couldn’t it? So I couldn’t agree more. Other component that I think you touched on that I’d love to explore perhaps a little bit more, I always say that there are two key differentiators in healthcare. One is labor, and then secondly, technology. I think the majority of other factors are fairly ubiquitous or can be difficult to achieve a differentiator. But certainly, I think technology can be a factor And there’s certainly a lot that’s being done from a technology perspective, both from a clinical and more so at the moment from a non-clinical perspective, I believe. What are you seeing in outpatient therapy companies as it pertains to kind of the perception and use of technology generally?
Ryan Buckley: Yeah, I think we’re going to continue to see more, you know, note-taking, you know, usage through AI, which should, one, save time, also improve, ideally, or reduce maybe the human element and, you know, improve the note-taking capacity. We talked earlier about the self-check-in kiosks. You know, there have been operators that have tried to, you know, go with a leaner staff at the front desk, expecting the therapist previously to then pick up those, you know, that check-in process. And it’s just more to put on the therapists who are already, you know, really need to be prepared. So there’s a variety of different ways to do that. ways to try to implement that technology. You know, I would say also back to the Luna example that we talked about earlier. I mean, in certain markets, the use of home care is a way to try to increase, you know, the productivity of your clinician base, given that they otherwise are already probably doing that. And so you’ve got to implement some technology within your business to figure out how do you, how would you, you know, capture, you know, what at the end of the day are probably 10% of referrals are for home care that most outpatient PT operators don’t. don’t utilize, but is a real potential growth avenue that has been overlooked for years.
Richard Leaver: The last thing I’d like to perhaps touch on is the larger providers have perhaps, shall I say, entrenched themselves the last two, three years, or they’re currently still entrenching. So basically taking a harder look at the business than they perhaps ever done with regards to looking at what is profitable, what is not profitable, and focusing on the core, which is usually same store growth as well. So for instance, I keep referring to USPH, but they actually do a very good job in many, many ways. One of the key measures they have is actually visit volume in the same store. And many entities have divested or just closed clinic locations in the last two, three years and continue to look at their portfolio clinics and adjust accordingly based on financial performance or even just geographical presence from a strategic perspective. And I think that has also helped with improving margin and, again, another indicator that perhaps we bottomed out and trimmed a lot of the perhaps fat off the business.
Ryan Buckley: Yes, I would say from the strategic standpoint, the large strategics, that there is most likely an ongoing review of which markets should we be in and which areas maybe have smaller clinics. We talked a little bit earlier about the type of clinic-level performance you should generate as a three, four, five therapist location. But when you look at one, two therapist locations, when you ended up having… of the turnover and the Great Recession that we ended up having, it really exposed for the industry what happens to clinic-level profitability if someone’s out with COVID or whatever forces them to not be able to be in the clinic practicing. And so I think that that’s a review that many of the operators are looking at. They’re also looking at, you know, are there markets that we got into that maybe we shouldn’t be? Because what the private equity universe truly values is market density and leader in those regions. And if you’re the fourth, fifth, sixth largest player in a market, maybe that’s not a market that we should be spending significant dollars on from a corporate overhead perspective to support. Maybe there is an operator that actually is better suited to manage and oversee and really drive those clinics. Yes.
Richard Leaver: So a lot of work being done to improve operator operations operational efficiencies internally and externally as well I think there’s definitely signs of light as it pertains to reimbursement improvement certainly not going down any further and possibly some upside for the foreseeable future inflation well and interest rates who knows we’ll see what happens tomorrow as it pertains to that but certainly I think certainly from the inflation perspective, nowhere near as bad as it was, you know, 12, 24 months ago. And interest rates, you know, people tend to be of the general opinion that they will go down quite when we’re not sure that we go down. So there seems to be a lot more stability generally combined with some operational improvements to kind of give this perception or the reality that we’ve bottomed out on the way up. So to really finish with, I’d love to get your thoughts with regards to perhaps the type of timeframe that it’s going to take. You know, is this, do you think a kind of a J curve or do you think this is just going to be a kind of a long hard log or, you know, who knows?
Ryan Buckley: Well, I’m a glass half full kind of guy, so I’m hoping maybe more for that J curve as opposed to the long, hard slog, given that that’s where we’ve been for the last five, seven years. I think that when you look at the physical therapy platforms that are in private equity funds’ hands, there were a number of platforms that were initially created in the late 2015 through 2017 because of COVID and the late all of the factors that we’ve been talking about here. So those those businesses are likely, you know, still to continue to benefit from, you know, this rebound. We do anticipate that some of those longer vintage performance And in really doing so, we anticipate with the tailwinds that are supporting that we expect to support the industry in 2026.
Richard Leaver: For those private practice owners that may want to reach out to you, Ryan, and talk further in regards to possible M&A in the future, how might they get hold of you?
Ryan Buckley: Certainly via the website, livingstonepartners.com or my email address, buckley at livingstonepartners.com. We take a very long-term view on the physical therapy industry. We want to be a resource to operators, both small and wide. I love talking about physical therapy and where we think the industry is going. So again, I very much appreciate what you’ve done here for the industry and having me today.
Richard Leaver: Thank you so much for your time Hopefully it’s been fairly enlightening for our listeners. And as I say, when you’re in the trenches as a provider every day, it’s fairly easy to slip into the glass half empty. So it’s refreshing to actually speak with somebody that is a glass half full and certainly focusing more on the positives than perhaps on the struggles that we’ve experienced the last first few years. So thank you so much, Ryan.
Ryan Buckley: Thank you.
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