EXAMPLE - Physical Therapy Transcript - BEFORE

Rehabilitation and Physical Therapy Services
Private Equity Investing

December 12, 2019
Gene Miyamoto
Former Chief Operating Officer at Agility Health (Alliance Physical Therapy Partners)
Listen to Audio Transcript
For your convenience a synthesized audio track is available for this transcript.
Emily
Good afternoon everyone and thank you for joining today's conversation focusing on the US
rehabilitation
industry, which continues to face dynamic market change along with the entire healthcare space.
My name
is Emily Voight with GLG's content team and I'm pleased to welcome Gene Miyamoto as our
speaker. Gene
has over 30 years of C-suite and CEO, COO and board role experience leading and advising
many large
regional healthcare systems, including their full continuum of rehab services and a rehab venture
with 160
clinical sites across 23 states, hospitals and skilled nursing facilities, outpatient clinics and
Fortune 500
industrial clients. His experience crosses for profit, nonprofit, publicly traded and private equity
financed
companies and ventures.
During our call today, we will overview the market, demographic drivers, major consolidators,
regulatory and
reimbursement risks as well as opportunities. It will be a Q&A discussion that lasts between 30
and 45
minutes. And while we already have a prepared script of questions, you may also submit a
question that you
would like Gene to address by sending them in an email to teleconferences@glgroup.com and
we can
address them if time permits.
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Lastly, before we start, I do want to acknowledge that Gene will decline to answer any questions
that are
related to confidential matters. So with that, welcome Gene. We're glad to have you here today.
Want to start
out with just a few kind of basics to help us set the tone for this call and lead us into our deeper
questions. So
really want to hear first what the current market size is for rehabilitation and physical therapy
services.
Gene
Good afternoon, Emily. It's a privilege to join you and the GLG clients online today. I'm looking
forward to
covering the topic of rehab. When we look at rehab in the market, I'm including physical therapy,
occupational and speech therapy. And as we look at the market, we look at side segments. The
first which I'll
be covering with greater focus is the outpatient clinic market. As a second, skilled nursing
facilities. Next
would be acute care hospitals and then I combined long-term acute care hospitals and rehab
hospitals as a
fourth segment. And then fifth, occupational medicine and industrial medicine and rehab.
Coming back to your question, the market size for outpatient clinics is estimated to be
approximately $30
billion within the US area.
Emily
And talk a little bit more about who or what the main components are for this market size and
how you
estimate that.
Gene
Yeah, sure. The estimation was based on or is based on annual reports, quarterly reports, press
releases,
government agency reports, professional journals, all public sources of information. And that 30
billion, 30, 31
billion in the US is specifically to the outpatient clinics. The segment, which we'll get into a little
later, is fairly
large with 18,000 clinics and fairly unconsolidated.
Emily
What's your opinion on the growth outlook for the short to long term? And talk a little bit about
key drivers of
that.
Gene
Yeah. The growth rate over the last 10 to 15 years has been fairly consistent at approximately
seven percent
per year, which I think is pretty healthy. The future growth rate is estimated to be double digit. I
tend to use 12
to 17 percent per year. 17 feels a little optimistic, but that's the range I'm looking at and we can
get into some
of those drivers if you'd like.
Emily
Yeah, that'd be great.
Gene
All right. So growth, as we move into the next few years, is really driven by demographics and
shifts in clinical
care, the aging of the population, obesity, and a shift from inpatient to outpatient, which I'll focus
on a bit more
as we go on here. But in the next 20 years, which I realize seems like a long time for investors,
but as we look
at the demographics of the baby boomers and we're right in the middle of that as we all know,
that group,
cohort is probably for the next 10 to 20 years going to drive substantial growth as the baby
boomers age. By
2040, the US population over 65 is projected to be 20% of the total population and elderly, more
susceptible,
are more susceptible to injury and have greater physical activity falls. Then clinically, arthritis,
osteoporosis
and other factors of aging become drivers.
Common procedures such as total knee and hip replacements requiring postoperative rehab are
also a
drivers. A little bit closer in, over the next 10 years, US population projection is showing about
50 or more
percent are going to be, let's say considered to be obese. And obesity is co-related with strong
demand for
outpatient physical therapy. And so with future obesity related health care costs, some are
projecting ... This
is just not for rehab alone, but 147 billion per year or nine percent of the annual medical
expenditure. So those
are substantial demographic drivers.
And the 10 year forecast for projected orthopedic, inpatient and outpatient case volumes is really
using
double digit growth rates. And that's where I come to looking forward from the seven percent of
the past to
let's say 12 to 17 percent going forward.
As we look at all diagnostic categories, many of the volume metrics across other diagnostic
groups is
tending to go down in relationship to procedures and particularly inpatient procedures as
technology and
clinical capabilities and economics shift us all to the outpatient side, which is going to be less
favorable from
a reimbursement point of view. But the area of orthopedics, both the inpatient and outpatient
growth rates
are favorable and double digit.
So maybe I'll pause on that and not go too long, but the baby boomers are the big driver, as well
as clinical
capabilities on the outpatient side. I will just mention, and we may be able to revisit this later,
that following the
baby boomers, we're going to have a gap and that will be the Gen Xers who are a much smaller
population.
One estimate is baby boomers are running about 75 to 80 million in the population while Gen
Xers are
running in the 50 million range. So that will be a long pause before the millennials begin to show
up as they
age for rehab.
Emily
Okay. What technology or is there a key player that you think is currently disrupting the market?
Gene
Yeah, let's split that into two parts. The first is technology and then the second is in the market.
Let me speak
to technology first and I believe you may have had a related question to that. But the ability to ...
Rehab is a
very hands on experience in many cases. There can be some observation by the therapist of
course, and
instruction, but many times it's very hands on. But telehealth and remote physical therapy has
begun to grow,
as it has in other areas of provider health care. And so along with that, there are some emerging
technologies such as, I've seen demonstration of PlayStation, Wii, which instructs at home
patients in the
proper exercises to be done and then watches them through the computer to make sure their
range of
motion is correct and will actually show corrections if necessary. And then that can be reviewed
by
therapists. Some of that, of course, reimbursement has not caught up with that yet. I think maybe
you
received a question about a couple of different vendors.
Emily
Yeah. So I'd love to hear your viewpoint on the adoption of technologies like SwordHealth or
Hinge Health,
which allows patients to digitally perform their therapy at home for musculoskeletal disorders.
Gene
Yeah, and those companies are not familiar to me, but I have had contact with other ventures that
are
pursuing the same goal around teletherapy and, as described, they're able to use existing
technology as well
as developing proprietary capabilities, which allow for that remote therapy capability that is very
complementary to where health systems, hospitals and clinics are moving. But just as with those
other
providers, the insurance company and reimbursement from governmental agencies hasn't really
caught up
with that. And so its prevalence is probably formative at this point. I think it holds great promise
and it is in the
direction that we will be going in. It's not unusual for different technologies to take a bit of time
to be accepted
and covered and reimbursed.
Emily
So as you look ahead, what headwinds or even major tailwinds do you anticipate?
Gene
Yeah, and let me make sure I include in that the disruptors. The federal government and the
healthcare
industry overall, we're all operating under the great burden of the unacceptable cost of healthcare
and the
very traditional methodology of volume driven reimbursement, which I believe still can make up
80 to 90
percent of the way we are paid, and therefore many ways the way that we practice. But volume
to value is
clearly the direction that we need to go in. It's not just my opinion, you'll hear this. You probably
have heard
the CEOs of major health systems call out, maybe somewhat optimistically, that our current
system is so
dysfunctional, broken, economically unaffordable, that moving to a value based and population
health is the
direction that we must go in.
However, the Obama Administration was aggressively pursuing this, and particularly in the form
of bundle
payment, which we can dive into a bit later, that is directly related to orthopedic procedures,
particularly joint
replacements, which therefore drives rehab. With the Trump Administration coming on in 2016,
for about a
year, that aggressive implementation of bundles, they basically stepped on the brakes. Just
recently in
October of this year, new bundle payment advanced programs have begun again and on a much
more
voluntary basis. So disruption from the governmental regulatory point of view is a big one. I
mentioned
already that there are substantial reductions in inpatient volumes that are occurring and shifts to
the
outpatient capabilities. Joint replacement in particular, is considered to be for the uncomplicated
patient a
preferred venue and from an infection control standpoint, a more desirable, perhaps safer venue,
outpatient
surgical centers. And more and more and more acceptable and reimbursed. With that however,
the
reimbursement and the savings for that matter go down unfavorably for the providers. So those
are some of
the drivers and I'll make sure that we try to stop there and we can maybe pick up any questions
that we have
later.
Emily
Just want to touch on any macro indicators or regulatory dynamics that you view to be paid
especially close
attention to.
Gene
Yeah. Regulatory, as we talked about just now, with regard to reimbursement is one factor. And
we've not
seen a great deal of compliance fraud, whistleblower activity on the outpatient clinics side per se.
But in the
second segment of skilled nursing facilities, there have been substantial fraud and abuse
settlements led by
the DOJ. And so as we look at that as an example, some of the major... The large providers of
service have
seen substantial settlements, 125 million in one case and smaller but still significant settlements
on the
skilled nursing facility rehab side. I'm not sure that many of your clients online today are really
focused in that
area necessarily. Maybe we can pick that up with more clarity during the questions.
But in that area of skilled nursing facility rehab, the new introduction of reimbursement has
shifted greatly
from relative value units, RVU rates basically, and minutes of therapy and thresholds to ultra
levels to
maximize reimbursement to a patient driven model, where individual patient care is more of an
emphasis
and less so on therapy. And most recently in the last few months, we've seen some of the major
providers of
SNF rehab reduce their staff substantially, by 10% in some cases. Does that indicate they're
having been too
aggressive in therapy in the past and now they're moderating as a result of this new
reimbursement? I
cannot say, but what we do see is that they are responding to this major disruption in their
reimbursement
methodology.
Emily
Switching gears a bit, want to hear a little bit more about the dominant business models within
the industry
and what are some of the economics behind those? Can you break down just revenue, cost
drivers, et
cetera?
Gene
Sure. Yeah and I'm going to make sure we... I mentioned that I'm going to kind of return to a
focus on the
outpatient clinic side primarily and from there we see a highly fragmented US outpatient rehab
market,
18,000 clinics approximately and none of the major market shareholders hold more than 10%.
Public
information, Select Medical has about 9.5% with 1,700 clinics. I'll mention a couple of others
here, ATI with
700 clinics or 4% of the 18,000. US Physical Therapy, approximately 578 clinics, which is 3%
and another,
Athletico, 500 clinics, about 3% as well, 2.8%. And so the business model of course that they're
following,
and let me start with the grassroots around the individual clinics, most of the 18,000 clinics still
remain, so
90% of the market.
A bit more like mom and pop operations. Some of them may have one to maybe six or ten
clinics, if they've
been a little entrepreneurial and they are looking for referrals. Primary care physicians are a big
driver,
orthopedic surgeons are another with those referrals. Most states now allow direct referrals from
patients
themselves, although marketing has not been strong there. Reimbursement by insurance
companies is
following but is sometimes a bit delayed. With that type of revenue, the outpatient clinics tend to
be from the
payer mix point of view, highly commercial insurance driven, industrial occupational medicine
driven. When it
comes to governmental payers, Medicare, Medicaid, they will tend to have a much smaller
percentage of
payer mix related to those patients. Many times hospital systems are taking care of them. But a
commercial
payer is a big driver on the revenue side.
And then on the expense side, bear with me here just a second. Physical therapy is very labor
intense and as
a result of that, up to 70% of expenses can be related to staffing and benefits. And facilities can
run maybe 15
to 20%. Many times storefront operations, sometimes independent, free standing, very nice
facilities, many
times storefront along with malls. Strip malls in many cases. Supplies and administrative
expenses run in the
we'll call it 5 to 8% range. And that's a basic business model. In my experience, and it may be
quite different
for others, but EBITDA operating margin that could run 15 to say 22%, in my experience. The
model itself in
brief. Hopefully that's helpful.
Emily
Can you also call out just main areas of risk or vulnerability when you look at a business in this
space?
Gene
Right. In that regard, on the outpatient clinic side, vulnerability takes on a few different forms.
One of them is
as consolidators move in, their ability to standardize back office operations and also standardize
clinical
practice are the greatest challenges. I have seen some of the major consolidators who are still a
small
portion of the market as I mentioned and had the opportunity to get to know some of the former
executives,
they've since been bought out. But within the last few years as a matter of fact, and even this
year. But their
back office operations have been quite impressive and their clinical standardization brand as well
as clinical
practice has been good. And so those types of risks of integration of new acquisitions are of
course with all
acquisitions, absolutely key and real challenges.
The other side of that and we can get further into this into market risk and competitors is the
shifting of
health systems and practices of say somewhere close to, some would say 50%. I tend to believe
it's higher
than that, other publications would say 70% of physician practices. Physicians are now employed
by health
systems, so there's a great consolidation going on in parallel to the outpatient clinic
consolidation. And by the
way, 70% comes from physicians under the age of 40. It's about 70% are now employed by
health systems.
Some insurance companies, but mostly health systems. And I emphasize this because that is a
rapid trend, it
continues. And with that, control of referrals also has gotten much more successful.
And with that... I mean Pittsburgh with United Healthcare... Yeah, UPMC rather. UPMC and
Highmark, it's a
great example. If you drive around Pittsburgh, you will see these two behemoths with their
physical therapy
clinics all over town. And if you're trying to compete with them, which I have done, you're
wedged in there
with your individual clinics, which is tough, especially getting into network with them if you're
independent.
So those are some of the challenges. There are a few others we can cover, but I want to make
sure I'm being
brief.
Emily
That's great. Do you want to talk a little bit about reimbursement trends? We've kind of briefly
covered, but
how does this affect profitability and what is that like?
Gene
Right. Slightly into that second market again, with the change in reimbursement in the SNF
rehab market, as
of October, in November immediately we saw one of the largest provider companies see a
reduction in their
revenue of about 10%. And with that they pretty immediately reduced their clinical staff in
particular by that
same 6%. I'm sorry, 10%. And as a result of that, their public quarterly information showed that
they did not
anticipate seeing any reduction in their income or earnings. But you can imagine that that's a
very substantial
shift that needs to be addressed when governmental payers begin to disrupt the market, so to
speak.
On the outpatient side, however, reimbursement has actually been fairly, well let's say consistent.
And over a
number of years. And that is because of the two shifts that we talked about earlier around the
demographics
of a growing population that does require rehab therapy and their voters as well. And secondly,
because of
the shifts from the inpatient to the outpatient side, and that's right where these outpatient clinics
live. As the
government has moved towards bundled payment, 14% of expenses you know are really on the
post-acute
side of a joint replacement in skilled nursing facilities, and there has been a true effort on the part
of those
holding the money bag, if you will, the hospitals in particular and physicians, but mostly the
hospitals to find
ways of appropriately, from a clinical care standpoint, bypass the skilled nursing facilities.
Previously, if you owned those skilled nursing facilities or in a rehab unit, you tend to want your
surgeons to
refer to them. That's volume based, but now with this shift towards bundled payment, even
though it's a small
proportion of total revenue, but it is where we're going, you see a real effort on the post-acute
side to move to
where many surgeons have wanted the care to reside and that's either in home care or in the
outpatient
clinic side for efficiency. So I'll stop there.
Emily
I want to switch gears and just talk a little bit about the current competitive landscape. Call out
some key
players, what their strengths and weaknesses are.
Gene
Sure. Here again we'll return to a focus on the outpatient clinic side. Mentioned a highly
fragmented 18,000
clinics, 90% pretty much independent still. A select medical and physio, about 1700 clinics. Less
than 10%
nine and a half percent, not to go too much and repeat those, but ATI, 4%, 700 clinics. Athletico,
500 clinics.
US physical therapy, 578 clinics, 3%.
When you put them all together, that is the bout 3,500 clinics of the 18,000. We're about 19%,
and so what we
see is that the market and the competitors, if you will, are fairly small in number. The challenge,
and many of
your clients online today may see this, is that acquisition growth as the acquiring company grows
itself as a
percentage becomes more of a challenge because the acquisitions have to continually be fairly
large or
larger to keep the percentages going. The number of acquisition targets seems to be fewer. So the
competitors that I've just mentioned, and a number of others, Upstream is another in the
Southeast region,
are hunting, but the number of let's say clusters of clinics is being taken up as many of them have
been. So it
becomes a challenge to continue to grow as you grow because the number, the fragmentation is
so
substantial.
Oh, and let me offer that I mentioned the health systems, but as competitors, as the health
systems cover,
let's say, metropolitan areas and reimbursement moves to giving them the revenue to hold on to
effectively
and distribute, of course their alignment with physicians, many of them will be employed,
already are, the
referral networks will be controlled. So the independent rehab groups who in many cases are in
the board
rooms working out affiliations with these health systems, and they should, are going to let's say
be
challenged with being out of the network, and being out of the network in some markets can be
very
unfavorable of course.
So competitors, lay of the land. Well, I'll make sure I don't go too on and on with that. We can
maybe cover any
questions in the follow up.
Emily
What's your outlook for additional M&A activity specifically over the next six to 12 months, and
where do you
think that might be focused?
Gene
Right. My expectation is that many on the line who are active in acquisitions would expect to
continue that.
It's interesting that a number of the larger competitors that have been named here already have
relatively
recently since 2016 been then acquired. So there may be some transfer, but the actual acquisition
of the
independent clinics I believe will still continue to be competitively sought. The challenge, as I
just mentioned,
makes it much more difficult. Therefore multiples on acquisition seem to be high. I have found
in the dental
industry that multiples are 16 and higher, but in physical therapy 10/11 I've actually seen. So I
believe in the
next year that acquisitions are still certainly going to be pursued and rightly so.
Emily
Are there businesses adjacent to this industry that could be viewed as potential add-ons for those
already
invested?
Gene
Yeah, some of them will have to take some creative imagination, but occupational medicine and
industrial
medicine is a real natural, and we can go into that further if you'd like. Home health care, durable
medical
equipment, coming out of your therapy, crutches, wheelchairs, all the rest. Home health care is a
bit of a
challenge because it's a natural destination for these patients where we're seeking value. But so
far the
particular governmental reimbursement for home health care has really been reduced to the point
where
surprisingly you'd think that health systems would be acquiring them or starting them up, and
many have
invested. So it is where we should be going. It's just that the economics have been driving us in
the other
direction.
Other, let's say, parallel industries or urgent care, free standing emergency rooms. Then there's
always the
CVS and Walgreens out there who have been working through clinics, but they've not, to my
knowledge,
focused on rehabilitation. Maybe there's opportunity for affiliation there. I think they're
surprisingly still trying
to figure out what they're going to do, but I expect that they have true potential.
Emily
What criteria or KPIs do you think should be used to evaluate a potential acquisition within this
space?
Gene
Yeah, it seems as though a lot of consolidation has occurred in the Southeast region from
Florida, Carolinas,
all the way back through maybe Texas. So geography becomes a piece of this course. As you
move out
West until you get to the coast, population is fairly thin except in some of the metropolitan areas.
The markets
themselves, mentioned that the Pittsburgh market is probably a great example of one that is very
competitive, aggressively competitive. But there are many other metropolitan areas where you
look at, let's
say the measure of managed care in some of those primary county market places, and you could
see many
that are not quite mature yet and so there's opportunity around markets. Then health system
dominance is
another element to that. Of course, presence of regional, the same group of competitors that we
just talked
about is another indicator.
Once you get into the organizations themselves, whether it's a cluster of clinics or some
combination of
individual ones, leadership and management, compliance, review, of course, in due diligence.
Payer mix is
another piece of that. There are some markets, El Paso is an example, where governmental
payers through
the military is one factor, but there's also a fairly indigent population as an example. So payer
mix becomes,
and bad debt, becomes an element to consider.
Recruitment and retention, in the metropolitan areas in particular, it's a bit more favorable once
you move out
to the rural areas. Very challenging and that's where some of the outsourcing companies for
physical
therapy come in because the communities in rural areas, underserved areas, find it very difficult
to recruit
and retain payer mix therapy and also be fairly unfavorable. As a result of that, in some cases,
reimbursement
or let's say fees, contract fees for those outsourced rehab physical therapists can have fairly good
margins.
But the challenge is your recruitment and retention capabilities as a provider of those services.
So those are
key performance indicators, the indicators for acquisitions. Of course, all the financials and
therapy metrics
are out there too.
Emily
We are just coming up to our final few minutes. I want to pass the floor back to you for any final
remarks or
comments that you'd like to make for our audience, including anything that you think we might
not have
addressed that would like to at this time.
Gene
Yeah, I just summarized as you started that the market really faces dynamic change, and along
with the
entire healthcare industry. So there's great risk and reward for owners and operators, health
systems, clinic
owners and investors. It's a fairly dynamic combination of market demographics that we've
covered the
consolidator competitors, regulatory and compliance risks, and then changes in reimbursement. I
would
tend to say that the general theme is that reimbursement in revenue is going down. That's not just
in the
rehab area which has been buoyed by being on the outpatient side in an aging population, but
generally
because of the high cost of healthcare in the US and many of the pressures by the government as
well as
employers, self-insured employers are driving revenue and the shift to outpatient really driving it
revenue
down.
So not to be pessimistic about it, but there are opportunities. It's just a fairly complex and
dynamic market.
With that, I'll turn it back over to you, Emily, and any Q&A that you'd like to lead us through.
Emily
See More
Okay. Well we have no final questions. Gene, thank you so much for your time, and thank you
everyone that
joined and contributed on today's call. If you'd like to follow up with Gene directly for a one-on-
one
conversation, please contact your GLG client solutions manager. Thanks and have a great day.
[ END ]
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Private Equity Investing

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