A New Perspective On The Future From A Leading Acquirer
This week as our Delphi interviews continue, Paul welcomes Todd Gifford, CEO of Therapeutic Associates, who offers a perspective about the future we haven't heard before.
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, so excited to have with us a new guest on the show. Today we have with us Todd Gford. Todd is the CEO of Therapeutic Associates and Therapeutic Associates is a privately held company that was founded in 1952 headquartered in Kent, Washington. Currently Therapeutic Associates has over a 100 locations, Oregon, Washington, Idaho, Southern California. And the structure of Therapeutic Associates is that there are 53 physical therapists that actually are the owners of the company.
Very, very unique structure. Very impressive. And Todd has actually is the CEO of the company and he's been with the company for 33 years. Todd, it is great to have you with us today. Thank you, Paul. It's it's great to be with you. So, I know that our participants and our listeners today they got to be on the edge of their seats waiting for your response to some of the questions that we've been asking to CEOs across the country and it's part of our Delphi analysis.
We did the first 50% of the interviews we laid out all the results at PPS back in November. But we're now headed towards another 15 and we're gonna do a round two and then put them all together. But Todd, what do you see and what do you perceive the current trajectory of the merger and acquisition landscape is in the rehab industry and what do you think are some of the key factors that are driving that trajectory? Yeah, I think it's, you know, my perception is that the M&A activity has definitely slowed down.
The key factors I put, you know, general econom, you know, the general economy, higher interest rates, inflation, especially with labor costs, that are impacting margins in the industry. And then in healthcare, obviously, you can't just go out and raise your prices like other industries can. So that's we can't add that cost onto the consumer especially when we're contract with insuranceances. Then I think the constraints around professional staff licensed staff we're all competing for a limited resource and that's going to impact both sides of any deals out there.
You know, the owner operators are facing all these things that's potentially tightening their margins, going to decrease the value of what they can ask, and then buyers are going to need to dig in deeper to and due diligence to find out what the true value is that they're buying. So, especially for a company like ours that do a lot of denovos and smaller purchases, you know, for us right now, probably our biggest growth opportunity is actually adding staff to our current location. So, long-term we want to focus on all things related to growth, but the current market as far as labor has really caused us to look at how we're going to grow in the near future.
Yeah. And your perception of, you know, physical therapy deals being down in terms of numbers of deals. You know, we live in the physical therapy deal market every single day. And, yeah, I mean, deals in 2023 in terms of numbers compared to 2022, you know, down almost 50%. So yeah, enormous change from 21 and 22. So if we are, you know, considering this prevailing economic climate that you just described, you know, and certainly things seem to be simmering down, but what's your projection for the longevity of kind of this downturn that we have seen in 2023?
When's it going to end? When are we going to start seeing more transactions taking place? Yeah, historically I've always viewed healthc care as being pretty resistant to recessions, but that said just I think I think we're going to see some challenges in the industry for probably longer than we would like you know 7 to 10 years in my mind and I think a lot of it you know the demand for PT is extremely high at least in our markets. But again, it's the how do you operate a sustainable model with some of the things we're seeing around labor and costs.
So, I kind of I look at the demographics and what I've talked to our owners about are kind of the two bubbles. You know, you have the Medicare bubble and then you have this the decrease in birth rates following the Great Recession, so in 2008. So you kind of have a negative bubble coming up that's going to impact us in the long term. So you know we have aging providers, people aging out of the workforce and then we have this coming you know what I've read is the enrollment cliff for higher education.
So those people are going to that's going to decrease the pool of potential therapists for us several years down the line. So, that's going to and then the, you know, the Medicare bubble is obviously impacting our payer mix and payment that we're receiving per unit of service. So, I think that's one of the main things. And then just the things around education that we need to resolve as an industry, just the economics of what it costs to educate therapists and what they're what they're able to get in the marketplace for payment.
And yeah, that's one that I think we just have to tackle as a profession because I think there's a perception out there that's decreasing the number of therapists or candidates that are applying for PT schools. And then if you combine that with what's going to be happening as far as the overall pool of students coming through, if we don't address that, we're going to struggle to find people in the long run. So those are the things that kind of give me pause about the future. I don't really see the staffing piece changing that much.
Sure. In the near future. Sure. So, when you talk about the Medicare bubble, to define what you mean by the Medicare bubble, I'm just I'm struggling to I'm not following that. Well, you know, if you look at a pyramid graph of the age of the population, you have I'm in the last of the baby boomers. So, you know, so I they've already entered retirement age, but the there's still five more years to go. So, you know, I mean, and that's just a mathematical problem of what we're seeing with Medicare reimbursement.
It's not it's just that there's we're all competing for a finite pool of money across all of health care. So what the trend we've seen in reimbursement of Medicare for PT probably not going to reverse in the near future. And so I and I think what I also heard you say is that the demand for these services due to that Medicare bubble due to you know just people getting older and being more active, the demand is getting so far ahead of the supply of therapists coming out of school that you think that could keep this sector into a long-term downturn.
Is that is that am I did I capture that? Well, I think the margins are just going to be harder to maintain. So, we can work on it obviously and try to change that through operational changes. I think with any of these things there are opportunities also. So I really think with some focus on some of our systems that we use obviously value based care may be an opportunity for us in the future as far as really growing that in our in our industry. But again I think the just the economics because of the population and the payment we're getting from that group that's entering Medicare age is going to be stressed.
Yeah. Yeah. So for small business owners and when I say small you know 20 clinics and below who are looking to potentially try to find a partner in this downturn what strategies would you advocate for them to strengthen their market position become more attractive in the market? Well, you know, I think educating themselves. So, getting curious and understanding what the potential buyers in the market are going to value. So, obviously knowing your business and the EBITDA that you generate, but also the things you're doing to develop your staff, what your book of business is, your payer mix, and that what your market presence is.
So, really understanding those and be able to communicate those well. And then you need to be clear on what you want. You know, if you're if you're looking to sell, what's your ideal timeline for that transaction to occur? What what type of things are you focusing on? Is it getting the top dollar? Are you trying to create a legacy for your your practice? May determine who you want to sell to. And then how long you want to stay around. Because some of the things, you know, especially in the smaller clinics or smaller groups, staffing is going to be that challenge as far as what are you buying, what is the buyer getting as far as a team that you're leaving behind and then getting your books in order and then again doing things to create a good culture where your team is curious about what the next steps are for them.
So any opportunities that come up to sell, they're wanting to be part of that going forward. So again talking interviewing to you know advisors like your group and then I think there's also you know educating yourself with the peers around you that have already gone through this experience is another way to get some information. Sure. Sure. And you know it's interesting and for the business owners out there listening today you know many business owners as you know Todd of large companies are still treating patients because we're therapists and that's what we do and typically in a practice you are you know one of the best physical therapists as well.
What strategies would you advocate? Because we hear this a lot from CEOs like yourself, which is we we'd like to see business owners and they can position themselves better if they know their businesses. And again, understandably, it's difficult to know kind of the ins and outs, but what strategies do you find are effective for a business owner to know the business better than they know it today? Well, that's where I think there's, you know, there's obviously advisors out there that can help you with it. I think developing a good peer group, you know, there's opportunities within the APA with the peer-to-peer group model.
I'm a member of Vistage. So, we all have strengths and weaknesses and you know, and we, a lot of us didn't go into PT thinking we'd be business owners and you grow something and then it becomes maybe more complicated than your knowledge base. So, I think really working on how you can gain that knowledge base or developing a network of people that can help [clears throat] you understand at a deeper level. And then I really think we tend to spend a lot of time looking at our own industry, but I think we can learn a lot from other industries.
So that's what I've gotten out of a Vistage group is you start to realize all business problems exist across all sectors. So learning what other people have done to challen is beneficial. In my experience t talking to a lot of physical therapy business owners, those physical therapy business owners who have stepped just a little outside of you know all physical therapy all day long and whether it be treating patients or just in your business. Other folks from other industries seem to look at businesses different and unique, which causes us as business owners then to take a new fresh look at our own businesses and sometimes find a little bit more on, you know, inside that watch, what's, you know, making ma making that watch actually tick.
So I think that's a great suggestion. Yeah. So you talked about you know a lot of the challenges. If we look now going out kind of over the next three to five years or you know in your world you seem to you seem to look at longer spans 33 years with therapeutic associates. I think you've been seven years as the six seven years as the CEO. But for physical therapy businesses business owners looking out over these next three plus years what do you see as some of the biggest challenges but also some of the biggest opportunities in this space?
Yeah, I think some of the biggest challenges are going to be the ways that you can enhance your value by strategic adoption of better systems. I think it goes back to the question before really knowing what's happening within your operations and I think it's the tools that we have in health care maybe that all PTs don't necessarily adopt you know for our company we're on an EHR so versus a PT specific EMR and it's enabled us to integrate with the providers in the bigger health care system around us.
So, you know that interoperability is a word that a lot of PTs don't necessarily hear or think about, but we've been excluded from needing to use an EHR system by the CMS rules. But in the proposed rule for 2024, that exclusion was removed. But then it was added back in. But I think the time the you know the clock is ticking on that. So I think there's you know that's just one one thought on a on system improvements but you know dashboards lots of different tools that are out there to help you understand your business better and then I think the big part of that is how can you make the system work for your providers.
So, how can you change that paradigm where they're feeling burdened by the documentation, all the administrative pieces? Not only the lead providers, but you your providers, but also your owners are kind of bogged down by that. So, I think we need to look at systems that can help us manage that more effectively so that people can spend more time doing what they kind of got into the profession for and treating patients. Sure. Sure. And for those out there that may not know the specific difference, walk me through the difference between the EHR and the EMR.
Yeah, if you think about an EMR, it's really kind of a charting system within an organization. So, it lives within your entity. An EHR is a certification where of the product. So it is it has to have certain standards to communicate with other systems. So most people understand if they've been to a hospital or major physician group, they've been on Epic. So Epic and Athena are kind of the leaders in the EHR market. But in our marketplace, if we have a patient that comes to us from a physician office, we don't necessarily have to re-register them in our system.
The orders and demographics, all their meds all come directly through the system to us. So again, it they're not necessarily specific to PT. You have to optimize them for your setting, but I think that's we're going to have to move that way if we want to play in the bigger health care system. And actually I think that's going to be one of our challenges and opportunities going forward as far as being part of valuebased care. We need to have systems that integrate well with the other providers around us.
If you could look into the future and make a prediction, how many years I I've continued to say that we are one of the greatest values in health care and we should be reimbursed at least 50% more than we are per visit on based on the value that we provide to our patients. How long into the future do you think we're going to go before we start really seeing because we've been talking about valuebased care? Probably since you and I both got out of school, but you know, I asked at PPS, how many of you out there are being reimbursed based on the value that you provide to patients?
And not one hand went up. How far away do you think that is? Well, I think there's some interim steps. You know, maybe it's with a payer having some type of episodic payment that we're getting rather than a fee for what we do. I also think that we need to really f you know and there's groups that are working on this as far as direct to PT you know carving oursel especially with self-insured employers carving ourselves out of the insurance part and getting you know some type of pe per employee per month payment to serve a population.
So, and then with that, you obviously need to track and be able to demonstrate the value you're getting for the pay. I think once we get those opportunities, we can make the most of those and hopefully that'll start to change the paradigm. Obvious there's a lot of research out there that's being done to show those things, but in the end you have to convince the financeers of the industry that we're the val, you know, we're the unforeseen or un realized value out there in the market that can help them be more efficient.
I feel like we need to do it before the payers do it. I think when we left it up to the payers, I'm sure you remember and I was in practice when capitation came in and boy was that traumatic. Yes. Yeah. Yeah. Not not a great model, but so do you perceive that as a as an acquirer, you guys do some acquisitions. I know you do a lot more startups than you do acquisitions, but is there anything specifically that you guys are looking for in an acquisition today different from you know maybe back in 2020 21 and 22?
Yeah, we're I think the one thing and people we've talked to recently has been some type of continuation for their for the owner and then their staff. You know, what kind of team are we going to have after the transaction takes place? And that just goes back to the labor pieces. And then, you know, we're also looking for maybe some unrealized value that owner has, whether it's on coding efficiency or their care team model and what their culture is like that for us to be able to integrate some of our systems in to realize that value.
Yeah. Yeah. So technology and innovation, we're actually going to do an entire series on innovation, technological advancements. What are you seeing are, you know, the most impactful new technology, you know, in the industry, and does this impact M&A decisions for you guys? As far as, you know, what businesses you are willing to acquire? I think some of the most exciting stuff is around AI. So, we're working with an AI vendor where they get all of our clinical data and right now we're using that for compliance purposes and also to optimize coding and operational decisions.
Yeah. And if you just think about it, you know, if you were to go into a someone you were going to buy and do some chart audits, you might pick a small sample, but I can envision a day not too far in the future where you get their entire database and are able to run it through the same algorithms we're doing now and able to see both the risks and opportunities that are there. So I think that's some of the exciting stuff for me. And then yeah that AI technology is just learn it's you know language learning.
So big opportunities from that are things that other specialties are already starting to see around autonomous scribing. So that's the those are the game changers I think that we can start to look for. So I think you have to have so the other piece of that would be looking for other businesses or other clinics or potential acquisitions that are technology savvy that they have a team that's willing to adopt has ideally if they have some type of change management process that they've gone through before and been successful.
Those are the types of groups that you want to see just from a cultural standpoint if you're going to implement a lot of change. Now you said something earlier, in fact you said it twice and it and it hit me very positively both times you said it which is curiosity and I think that you know from our perspective when we have clients that come to us that we then take and expose to the market and those companies and those business owners that have been very curious about new innovative ways in order to improve you know what they're doing at the patient level, whether it's improving operations or improving simply the experience for the therapist to the patient.
Seem to be viewed more strongly by acquirers than those who really are kind of set in their ways and don't want to go down that path of anything really too new. Yeah, we're seeing the same Yeah, we see the same things. Yeah. Yeah. So if you're a private physical therapy business owner and again, let's call it 20 clinics or less at this point. And you're hesitant about entering the M&A space because of all the things that you're hearing that the multiples are down in 23 and there's not as many deals.
What advice or insights would you offer to potentially ease their concerns? Yeah, I think there, you know, there's opportunities out there. I think the again it's educating yourself developing a peer network as I said before of people that have gone through this before you and really take that on try to learn that ways that you can optimize your business now and create a an environment that is going to be attractive to people looking from the outside. So I think the those opportunities are still going to be there.
Some of the challenges may be for very small groups is you know they be may be more limited in what their potential acquiring pool would be. But again I think if you create an organization that is open to change and optimization u there's tons of opportunities for them. Yeah. Yeah. Absolutely. Absolutely. Todd this has been absolutely fantastic. You have been a wealth of information. And I really want to thank you for coming on and being very open and providing myself and our audience today with I think a lot of valuable information and you know, I would tell you right now that we had such a good conversation today is hope hopefully you'll be looking for invitations for me to talk on other subjects as well, but I want to really thank you for your participation today.
Well, again, thank you for the opportunity. So, for any of you out there who were listening in today and have a question for myself or for Todd, click below and let's talk. Thanks for listening and have a great day.
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