2017 Physical Therapy Industry Primer – Part 1

Last updated: March 18, 2018

(c) 2018. Jakari Care, Inc.

Introduction

In late 2017, Jakari Care added a physical therapy module to our multi-specialty digital patient questionnaire platform and started serving physical therapy clinics.

Prior to entering this new (for us) specialty area, we connected with and interviewed a large number of clinic owners and managers. We also reviewed publicly available disclosures from some of the largest industry players to help us better understand the trends in the outpatient physical therapy market.

We wanted to share some of our key learnings for the benefit of the physical therapy community.

We welcome any questions or comments on this report at: ptresearch@jakaricare.com, or add a comment at the bottom of the page.

This 2017 Physical Therapy Industry Primer is divided into 2 parts.

This Part 1 answers the following questions:

Part 2 (coming soon) will address the following questions:

  • What are the “unit economics” – patient volumes, revenue and margins — for an average physical therapy clinic?
  • What is happening to the industry margins and why?
  • What are the typical clinic start-up costs?
  • What are the industry valuations for clinic acquisitions?
  • What are the tactics used by larger industry players to gain new patient volume market share?


What is the size and growth rate of the outpatient physical therapy market?

The total physical therapy market is large — estimated at $30 – $33 billion [5][2] and growing at roughly 3-5% per year. [3][4]

The outpatient private practice PT share of the total physical therapy market is estimated at $8 billion – $12 billion[12]


How many clinics are out there and who are the largest players?

There are an estimated 16,000 – 18,000 outpatient physical therapy clinics, with the largest single clinic operator (Select Medical/Physio) having close to 10% market share.[5]

The top-5 players by number of clinics are:

  1. Select Medical / Physiotherapy Associates – 1,604 [6]
  2. ATI Physical Therapy – 700 [7]
  3. US Physical Therapy – 579 [8]
  4. Upstream Rehabilitation/ Drayer Physical Therapy Institute (DPTI) – 560 [9]
  5. Athletico Physical Therapy – 400 [10]

The industry is rapidly consolidating, with all of the large players having aggressive acquisition programs. The most recent large merger was Upstream Rehabilitation (more than 400 clinics in 23 states) purchasing Drayer Physical Therapy Institute (more than 160 clinics in 16 states), announced in early January 2018.


What is happening to patient volumes?

Most of the clinics we interviewed in mid-to-late 2017 agreed with the statement: “Patient visit volumes are not a problem for us.” Larger industry players are reporting 2-3% visit growth rates.[3]


What are the industry volume growth drivers?

The industry has multiple patient volume drivers, including:

  • Aging population
  • Healthcare payors / payment models incentivizing lower cost, high effectiveness settings like physical therapy, and putting up barriers to higher cost treatments such as surgeries
  • Anti-opioid campaign likely to increase demand for alternative treatments for pain


What is a “typical” payor mix for a clinic?

Generally, the clinics we spoke with indicate a strong preference for cash-pay and private insurance payors. The mix of payors varies significantly by clinic. However, U.S. Physical Therapy (“USPT”), with its more than 579 clinics across 41 states represents a good case study. They reported the following payor mix for 2017: [1]

  • Private Insurance / Managed Care: 52%
  • Medicare/Medicaid: 27%
  • Workers’ Comp: 14%
  • Other (e.g., cash pay): 8%


What is happening to revenue per patient visit?

Average industry revenue per patient visit is ~$100-$110. [8] However, a clinic’s revenue per patient visit can vary depending on payor mix (e.g., Medicare generally pays less than commercial insurance) and clinic’s geography (e.g., Florida clinics have on average significantly lower revenue per patient visit than clinics in the Pacific Northwest). [11]

Most of the clinics we interviewed in mid-to-late 2017 reported pressure on revenue per visit. Larger industry players are reporting flat to 1% growth in revenue per visit. [3]

The pressure on revenue per visit is likely to persist, since Medicare (the largest single payor for physical therapy services) is reducing reimbursement for 2018. In its 2018 PFS Estimated Impact on Total Allowed Charges by Specialty, the Centers for Medicare and Medicaid Services (CMS) estimated a -2% impact on physical/occupational therapy reimbursement. Other large commercial payors may attempt to follow Medicare’s lead.

Furthermore, The Bipartisan Budget Act of 2018 contains a provision that would, starting January 1, 2022, reduce Medicare reimbursement for therapy furnished by a PTA to 85% of the regular amount. This may have a material adverse effect on clinics that have a large Medicare patient mix and are heavily reliant on PTAs.

The Bipartisan Budget Act of 2018 also contained a provision that repealed the Medicare payment cap for therapy services, which was initially viewed as a victory for the industry. However, PTs were already able to exceed the payment cap for the extra services that are reasonable and necessary, and while repealing the cap, the Bipartisan Budget Act of 2018 actually lowered the threshold for targeted manual medical review process from $3,700 to $3,000. So, coupled with the provision for a major reduction to PTA reimbursement starting in 2022, this “victory” is likely to be quite negative for the industry in the long-term.

In conclusion

We hope you find this 2017 Physical Therapy Industry Primer – Part 1 helpful. If you would like to be on the distribution list for 2017 Physical Therapy Industry Primer – Part 2, please send an email to: ptresearch@jakaricare.com

Thank you!


Sources and end-notes:

[1] U.S. Physical Therapy 2017 Form 10-K

[2] Capstone Partners Q1 2017 Outpatient Physical Therapy Update citing Luke Schroeder of Gryphon Investors

[3] U.S. Physical Therapy 3Q17 investor call referenced roughly 3% same-store growth rate comprised of 2% visit growth and 1% rate growth (https://finance.yahoo.com/news/edited-transcript-usph-earnings-conference-195101547.html)

[4] “Chattanooga Benchmark grows into new, bigger headquarters” (8/17/17) – http://www.timesfreepress.com/news/business/aroundregion/story/2017/aug/06/chattanoogbenchmark-grows-new-bigger-headquar/441835/

[5] U.S. Physical Therapy Investor Presentation (November 2, 2017)

[6] Select Medical Investor Presentation at the 36th Annual J.P. Morgan Healthcare Conference (January 8-11, 2018)

[7] U.S. Physical Therapy Investor Presentation (November 2, 2017)

[8] U.S. Physical Therapy Investor Presentation (November 2, 2017) and 3Q17 results show revenue per patient visit of ~$105 (http://corporate.usph.com/press/pdf/2017 Q3 Earnings Release – Final.pdf). Select Medical reports revenue per patient visit of ~$102 in Select Medical Investor Presentation at the 36th Annual J.P. Morgan Healthcare Conference (January 8-11, 2018)

[9] Press release dated 1/11/18: “Merger of Upstream Rehabilitation and Drayer Physical Therapy Institute creates the 4th largest outpatient physical therapy company in US” https://www.prnewswire.com/news-releases/merger-of-upstream-rehabilitation-and-drayer-physical-therapy-institute-creates-the-4th-largest-outpatient-physical-therapy-company-in-us-300581744.html

[10] Select Medical Investor Presentation at the 36th Annual J.P. Morgan Healthcare Conference (January 8-11, 2018); Athletico website reports more than 400 locations in 11 states

[11] U.S. Physical Therapy 3Q17 investor call (https://finance.yahoo.com/news/edited-transcript-usph-earnings-conference-195101547.html)

[12] Medicare spending on outpatient therapy services in 2015 was $7.2 billion (http://www.medpac.gov/docs/default-source/payment-basics/medpac_payment_basics_17_opt_final.pdf). Of that total, $2.4 billion (33%) was spent on PT private practice. Medicare is the largest payor for outpatient PT services and represents roughly 20-25% of the payor mix for large outpatient PT practices (e.g.,  23.8% for U.S. Physical Therapy in 2017). This implies that the total spend for all payors for outpatient PT in private practice setting is $10 – 12 billion. We get to similar estimate by taking the mid-point of the estimate of 16,000-18,000 private PT practices and multiplying it by average clinic revenue of $575k – $675k (e.g., $673K for US Physical Therapy’s 578 clinics in 2017, $576K for Agility Health’s 56 clinics in 2016). This estimation approach gives us market size of $9 billion – $12 billion.

 

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