Here is a Unique Perspective On The Current Conditions of Our Market
This week Paul welcomes back Chris Reading, CEO of U.S. Physical Therapy to add his valuable wisdom to our ongoing Delphi series of interviews. Chris shares his outlook of the current rehab market and what he sees as the biggest opportunities in the upcoming months.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good afternoon and welcome to another episode of Paul Martin's Crucial Conversations. Today we are continuing in our series that we are putting together a deli analysis of some of the top CEOs in the country and their responses to some very critical questions for you and in this industry right now. Today I am just so excited you have no idea. Today we have with us Chris Reading. Chris, president, CEO of US Physical Therapy and has been since 2004. Currently, USPT has 660 plus clinics in 41 states.
Chris is a physical therapist, earned his degree from the Medical College of Virginia back in 1985. And Chris has been a longtime colleague and friend of mine and at Martin Healthcare Advisors and has just had an enormous impact on the profession of physical therapy. Welcome Chris. Hey Paul, thank you for having me. So let's jump right in. If you look currently at the trajectory of the M&A landscape in rehab, what do you think are some of the key factors that are driving this right now? I think one of the factors is that the world just keeps getting more and more complicated in lots of different areas.
I think that's one certainly and you know I think the other is people begin to realize that the battles that are out there the battle for patience the battle to remain in a good place from a compliance perspective to stay on top of all the things that are evolving in healthcare industry in general. They're better fought if you have a team around you that is, you know, a strong, capable team. And so I think those are the big catalysts. And frankly, I think there groups out there that are well positioned to capitalize on their market position.
They may just need some resources to help them with their growth plan. And so I think those are the three big ones that we see other than, you know, normal estate planning kind of things where people are like me getting a little gray on the edges and have to figure out what's next. Yeah, really good points. And Chris, you and I have been doing this for a couple years. And you know, literally if we go back to the late 1980s and early 1990s, while there were a lot of mitigating circumstances around things that were going on then, a lot less than what we have right now.
And as you said, for a lot of business owners right now, they just they need a big brother, you know, they need somebody to kind of help guide them through this, whether it's capital, whether it's improved reimbursement, whether it's staffing. It seems like a lot of companies are now looking for, you know, partners to continue this. No, I agree. I agree. And look, I think it's smart. I think we all need to be surrounded by good people. When you know it's I know for myself particularly it's difficult can't be good at everything you know you maybe I'm lucky to be good at one thing but you you've got to surround yourself with really good people and if you have that then you can do great things if you go it alone then it's just it's harder absolutely so this is the million-dollar question all right you know if you look at you know the current economic conditions and you know you what's your projection for the longevity how long will this you know slight downturn that we are experiencing how long will this continue in the outpatient rehab sector you know it's interesting I mean I if what we're calling a downturn means things are continuously and progressively ly harder.
You know, I agree with it. I mean, interest rates are up and staff is harder probably to find than it was certainly two years ago. We're as we're as busy as we're actually busier than we've ever been, though. And and just in preparation for this, I just went back and looked at what we've done the last 12 months. We've gotten six goodsized deals closed. We've gotten another five smaller deals closed. We have three more that are imminent to close. You know, that'll add close to 60 locations somewhere in that range and bring on another injury prevention business.
And so, we're active right now. I think it's in some ways it's a good market. People realize that the difficulty, the reimbursement, the regulatory environment, and probably even the interest rate environment, they're not going to go away and be like, you know, it was well, a couple those things have been difficult for a long time, but the interest rate environment is more new, but I think that's with us for a good long time. And so either wait and hope and on something you have no control over or you find a good partner so that you can continue to execute on what you want to do.
And so I actually think it's a good time right now. I don't I don't really see a big downturn. Yeah, it's you know everybody we talk to Chris you know it's how long is this going to go on? H, you know, when will acquirers start acquiring again? And we're in the same we're we feel this, you know, very similar. Tom and the crew are saying, we're really busy right now. We have a lot of deals out in the market and they're good deals. They're good deals as you just said.
So, that's great to hear. And, you know, volume speaks loud. It's not always the indicator, but you know when you're you know when there's a lot of deals out there and a lot of activity you know that's always promising. And so let's turn to those business owners that are and I'm not going to call it a downturn. Let's just call it the current economic and market conditions. What strategies would you advocate for those business owners who are looking to sell in the near future to strengthen their position in this current market?
You know, I mean, I don't know that this market is different than other markets. I think knowing your business is important. I think caring about your team and a transaction is important. I mean, we look for certain obviously qualitative and quantitative things. The quantitative things are pretty straightforward. You look for somebody that knows, you know, on a relative basis how to run a good strong business. And that starts with keeping good people and incentivizing them and caring about what they do and working at that every day and wanting to make a difference.
And then you know on the on the qualitative side you know integrity and just communication ability and vision. We want people obviously that see opportunity even you know in the difficulty and so those are those are some of the things we look at. What can people do? I think, you know, I think it pays to get another set of eyes on the business and, you know, to make sure that you're running it as efficiently as you can. But I don't necessarily think that's a criteria for getting a deal done.
I mean, frankly, as an acquirer, we look at opportunities to help make things better, too. So, they don't have to be perfect. I mean, I think perfect gets in the way of good sometimes. Sometimes people wait too long and I know those companies that you know from 19 to let's skip 20 for a minute but 2021 which was a really you know busy time in the market with low interest rates. Some people miss that and have a little regret right now because interest rates are up and a lot of companies have more leverage.
You know, we don't, but a lot do. And so that's impacted multiples and there's some regret associated with that. But, you know, you can wait two or three more years and if they would have if they would have transacted back in 19 or 21, you know, would have been different. Now, they're going to have to work to try to get that back. And so look, I think if you want to grow and you want to build on what you have, I think you find the right partner and you go because the environment is not going to be perfect.
Yeah. Yeah. Literally, we just had a conversation of growing through the transaction as opposed to growing to the transaction. What's the plan getting all the way through that transaction with that partner? Now, where can you be, Chris? I could go back if I had a a tape, it would have been a cassette tape 25 years ago. And when I asked you what you're looking for in a transaction, I think you have stayed so steadfast people, dignity, you know, honesty and just, you know, hardworking and so I applaud you for that.
And I think that's why US PT has continued to be I' I've described it and I hope you I hope you embrace this but you're the steamship going through the ocean that never stops but you're not one of the little racing boats that are you know racing around and they you know they flip over and so yeah and I applaud you for that. Old and slow man. Old and slow. So, we've talked about some of these, but challenges, opportunities looking out over the next three to five years, what do you see?
Yeah. You know, I think one of the and I'm I have a couple opportunities. I'm going to talk about this more. One of the massive challenges and opportunities that we have as a profession is we're still Paul so fragmented. You know, it's still really, you know, a private practice kind of an industry. So, if you if you separate hospitals for a minute and you separate the 20 or so larger players, there's it's still mostly a private practice market with anywhere from, you know, one to three or four clinics per company.
And you know, I was in a conversation a couple weeks ago with the group that handles our securities work on the legal side, and I said, "Hey, what are you paying attorneys these days?" And so he told me and I said, "Tell me what you're charging on an hourly rate for those brand new grad attorneys that nobody lets really do anything of any significance. They're charging $600 an hour. For somebody coming out with a with a jurist doctorate degree. That's a that's a real degree. That's a big-time degree, very similar to what we [clears throat] have now with our DPTs, and we're not getting $600 an hour.
We're not anywhere close to it. So, we have to quit taking these low rates, these low Medicare Advantage rates that are 65 cents on the dollar compared to what Medicare is willing to pay from a company or group of companies that are printing money by administering those Medicare Advantage plans. We have to quit taking below margin business and somehow thinking we're making money on that because while everybody, you know, wants to talk themselves into that, you lose money on every case and you lower the bar in terms of reimbursement for the whole market because they can go out and get somebody else to take rates that low.
Yeah, that's a huge challenge for us. We're working within APQI, you know, on the reimbursement front, also with it with the APA, on the administrative burden side. And it's, you know, it's a hard fight, but the studies are there. Physical therapy makes a difference. It lowers cost, gives somebody a healthier life when they've gone through a course of physical therapy, and it lowers the downstream spend. But we need to act like we believe that. Yeah. And I think you know one of our challenges, one of our biggest challenges is how we view ourselves internally.
Maybe not how we view but how we act which I think is an extension of how we view and I think I think we can do better. Yeah. Great points. And you know, when you look at a DPT, you know, seven years at, right? I mean, four years of college, three years, and there are four-year graduates coming out making 80 $85,000 a year in many industries. That's what our PTs are making. And but we can't pay any more and still make a margin the way reimbursement is today.
And if we ever truly got to value based reimbursement, truly what the value of physical therapy is, I think our reimbursement would double or triple and that per hour. We'd be able to pay our therapists a little bit more and they could pay back their debt and they wouldn't have to see 20 patients a day or whatever, you know, that some I think it's a it's a really good point that we got to push on the other side, too. We do. We do. Thank you. Yeah.
So, as you look at acquisitions, is there anything unique that you're looking for? Any different than you had in the past based on today's market? I think I know what this answer's going to be, but I had to ask it. It's kind of a boring answer because it's not that different. I think more than anything right now, maybe the one difference that we try to assess is just somebody's grit and their ability to be resilient. And you know, I've said this for a long time. I would rather look at, you know, 10 or 12 or 15, you know, clinic group or even a five clinic group.
Give me somebody who has had the courage to close the facility because it didn't work out and get through the other side of that as opposed to never having done that before. I mean, there's grit associated with getting through COVID. There's grit associated with you know having to staff facilities these days particularly last year and staff front desks and continue to focus on the right things. So, in addition to all the same things I've been saying for a long time, you know, I think more important than ever is just somebody's ability to continue forward and to find the light, you know, in maybe some surrounding dark patches and focus on that and get through with help.
Of course, it's a great point. You know, I'm looking you now like a coach, right? I I'm pretty sure in Deion Sanders initial introduction to his Colorado team that he said any player that doesn't have grit is not is not going to play here anymore. Just go right into that portal right now. Yeah. He probably said it in a way that if I said it, you'd have to edit it out. But I agree. Yeah. Yeah. But it's so true. And it's so interesting, you know, folks that I talk to that you can immediately feel it and sense it.
They have staff and they're doing okay, you know, and I think a lot of that I mean if you made it through COVID, you should be able to make it through some staffing shortages and you know, some reimbursement issues. So I think it's a great point. Technology you know both of us have been doing this a long time. Is there anything that you're looking at in M&A decisions that's technology related based on the company that you're looking to acquire? I don't know that technology yet. I think it will over time, but I don't know that yet.
I mean, when you look at has really influenced our decisions a whole lot. Again, I look for, you know, I look for open-mindedness. And so, we have we're we've been doing this a long time. And you know, the one of the traits that I look for is people who are willing to kind of say, "This is how we used to do it, but we're going to start we're going to look at doing some things differently today." And it's not a value shift, but it's maybe a shift in approach.
It may be a broadening in terms of how they address the marketplace. We're looking at some things right now that are interesting we think on that are outside of physical therapy but really closely adjacent. Yeah. That could be a good feeder from our clinics and then reciprocally into our clinics. It's kind of how we got into injury prevention as well. And so, you know, with technology, particularly for an older guy, you know, your tendency is, you talked about, you know, you could probably find it on a cassette or, you know, I could say an A track back in the day, but you want to you want to stay current and you want to be where, you know, things are going or try to stay ahead.
And so digital solutions, you know, are on, you know, are here and whether you embrace them or not, they're going to continue to be here. You know, technology, AI, lots of different things that I think are cool right now that have the ability to make us more efficient if we can slow down enough to spend some time on it and not be afraid of new things. Yeah. Yeah, you may make a really good point there is and I think very consistent which is there's not a whole lot of new technology in physical therapy yet.
And so staffing decisions, acquisition decisions, can do people whether they're 24 or they're 64 will figure out new technological things that may be brought in the future that we don't even know about today. A can do is going to do it way better than somebody who has resisted everything they've ever been foot put in front of for the last 20 years. So I think that's a great point. So for a physical therapy business owner who may be considering entering this space today, the M&A space, what advice would you give them to improve their market position, improve where they are today for for acquirers out there?
I think they have to look at their business objectively. You know, you look at you look at you know, your volume, your net rate, your how you have it staffed. And I'm not suggesting by looking at those things that you make massive changes. But I think you need to be aware of where you are. One of the big things that I think makes a difference that's that kind of jumps out and bites some people sometimes, Paul, is just not being prepared on the compliance side. If there's one thing that I think people can do, it's get somebody outside your company that knows compliance to take a look and tell you you're good.
You know, I mean, we run into companies every day. Medicare Advantage, we spoke about a minute ago, who look at Medicare Advantage and treat it from a scheduling perspective like it was commercial. And there's a case right now that's, you know, a painful case for somebody where, you know, that was happening and they're going to pay millions of dollars as a result. And so, you know, from an acquirer's perspective, we don't look for perfection. We look for awareness and intent. Really important. And if they've invested some resources directionally to try to get that part right, that gets us comfortable that we can add the other things that we need to add and get to the other side.
If they've not really invested anything in compliance and they've kind of doesn't happen a lot but you know blissful ignorance so to speak and maybe some hint of resistance and not being as open-minded those are deals that are really difficult to get done because EBITDA probably is going down when you tighten compliance you know and expectations are misaligned and risk goes up. So, you know, that's one thing I think people can do pretty easily because there are good resources out there. Yeah. Yeah. Really great point.
And we're seeing a very different approach in due diligence, especially as it relates to that compliance from ju just about, you know, all acquirers. And so, we're recommending compliance program. And as you said, it kind of at least gives you the, okay, they have a program now. Let's take a look and make sure that they're, you know, executing on the program, carrying it out, but at least there's a program in place. Right. Hey, Chris, as always, you have given our listeners and you have given me an education today and I cannot tell you how much I appreciate your insights, your thoughtfulness that went into all this.
And I think you're going to give a lot of value to a lot of people today and I really appreciate it. Well, you're very generous, Paul, and it's always great to see you and I'm I greatly appreciate what you and Tom are doing for the industry and what you've done for me and for our company and I appreciate the opportunity to be on with you today. Thank you. Awesome. Thank you. Thank I appreciate that. So for all of you out there today, if you have a question for myself or a question directly for Chris, click below. Let's talk. Have a great day and I look forward to talking to you in the very near future.
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