Veteran Founder Offers a Perspective on the Path Ahead
Larry Benz, founder of Confluent Health, joins Paul to discuss how inflation, interest rates, and the election are shaping the rehab M&A market and what PT business owners should weigh in 2025.
Full transcript
Generated from the episode audio and lightly edited for readability.
Hello and welcome to another episode of Paul Martin's Crucial Conversations. I'm Paul Martin, founder and president of Martin Healthcare Advisors. And today we're continuing in our series of how you as rehabilitation business owners can make the best decisions in 2025. And we have with us today to help guide you in those decisions, Larry Benz from Confluent Health. Welcome, Larry. Oh, thank you, Paul. It's always a pleasure and an honor and I've been a fan of your crucial conversations for a long time and it's great to be here with you today.
Oh, thank you. Thank you again. If you're joining us today, I'm going to tell you are in for a treat. Larry, as you know, is a physical therapist. He's the founder and a current ex operating director of Confluent Health. And Larry is nationally recognized for his expertise both private practice, occupational medicine. And Larry's always had kind of a special interest in how to integrate empathy, compassion, positive psychology into physical therapy. He also publishes the PT newsletter called the PT newsletter which is you can see on Substack.
It's posted on Twitter and LinkedIn. And also in that vein, he authored a best-selling book. It was called call to care, bringing humanity back to health care. If you haven't read that book, a new version is coming out soon and you should take the time to do that. A little bit about Confluent Health. Headquartered, private equity-backed, headquartered in Louisville, Kentucky, and currently operates over 800 physical therapy clinics across 36 states. Larry, are we ready to go? We're absolutely ready to go. All right. All right. So, Larry, some recent interest rate drops.
Doesn't seem that in recent anymore, but it was fairly recent. Presidential election, that's very recent. So how do you think these events are going to impact the rehab merger and acquisition market? Yeah. So I think you know if you go back let's just start a year and a half ago as interest rates started to go up the other major thing that happened was really inflation and so inflation reared its ugly head and that impacted practices even more so than interest rates. So interest rates hurt the transaction market and the buyers.
We'll get to that. But the but the typical mom-and- pop clinicians, the multi-site practices, they tend to be underleveraged if anything. So, it's not the interest rates that hit them, it's the inflation. On top of that, you had you had shortages. And so, you had this labor inflation on all employees. Then, all of a sudden, you had physical therapy shortages and labor inflations going up to unprecedented levels on your PTS, and that impacted margin. From a transaction side, the acquirers all had those same phenomenons, those macro trends happening as well.
And so what you saw was a lot less transactions the last couple years. I think January of 20124, you know, JP Morgan, there seemed to be this enthusiasm around transaction in the healthcare space. And the only transactions you saw in the healthcare space last year were these sort of mega transactions in the PE, sort of the PPM world or the DSO world. You didn't see a ton of them. And that goes to your point about interest rates. Interest rates have gone down a little, but not a significant amount.
And that will still be, you know, certainly a friction point for acquisitions. Now, people will ask me, they said, why is that? Well, what happens in the private equity space is they're buying companies and then they're putting a lot of leverage on them. Three and a half, four and a half, five times leverage. With higher interest rates, you're effectively putting even more leverage on a practice, which means you have to produce more cash flow to pay down the debt. And so higher interest rates have a higher they impact valuations by effectively decreasing valuations.
It's a threshold relationship between interest rates and a practice's valuation. I'm hopeful that those decreases will continue a little bit. And now you have a president coming in. He's be inaugurated actually today. And certainly, you know, he's been sort of AB tested using my scientific hat. And if you go back to his four years, there was, you know, probably record number of transactions in the PE space generally and in healthc care services specifically. I think you'll also see an attempt to deregulate a bit that could manifest itself in a variety of different ways.
U of course those who around us has been around a long time. We've heard that mantra before without any you know real production but we'll see. If you remember the last time Trump was in office healthcare was his number one priority. He came in tried to make massive changes in healthcare figured out that's when he came up with the famous quote around how it was how it's complicated and then effectively you know we became all beholden to the bureaucrats the CMS bureaucrats you know the department bureaucrats that have really made our lives pretty miserable from a regulatory standpoint where the most overregulated profession outside of nuclear power plants that exists and so I'm hopeful and optimistic as I always in that we will get a little bit of impact on both deregulation and a little less you know interest rates.
But I will also say that you know and you could attest to this having had your career survive or trans through many you know presidential administrations you've had some you've had good years in both Democratic and Republican. And so at the end of the day, health care is a business where it's in our case a physical therapist and their patient and the demand for our for our profession has never been so high. So I'm extremely optimistic. How that manifests itself in the transaction space will be, you know, remain to be seen.
Larry, what I heard you say at the beginning of that wonderful slo, I mean, that was awesome. You answered a lot of the questions that I had and I appreciate that. I heard you say though that the increasing interest rates, inflation, you know, not only on supplies and things like that, but you know, we have people inflation too, professional inflation as well. And that does not only hit small privately held physical therapy, private practice, whether they are single sites or 30 sites. It also hits the large private equity-backed companies as well.
So, it's almost kind of a double whammy. You got the big companies struggling a little bit with margins and you got small companies. Where is that performance going? And you're we're trying to put those together. That could cause a little bit of a sticking point. Is that what I heard you say? No, that's exactly right. So, you know, let's just, you know, name the facts here. We're in a profession where the average first job of a PT is on it for less than a year. In fact, the data point is around five months.
That's not a good thing because even if you have the best employment in the world, you're going to have natural turnover that occurs that is, you know, it's kind of like no-show cancellation rates. You can do all you can to reduce them, but ultimately they're going to be in that 10% range. Turnover and retention have a lot of those same features that you have to expect that if you're hiring new grads, you're going to have some turnover. So turnover is an artificial inflam in its inflammation and it's inflation because you have the replacement cost.
You have lost time of billing. You have the credentiing costs that go with it. Time to get on the on the on the dockets of all the payers. It's a mess. And that is a factor that we're all trying to overcome that regardless of the size of your practice. We are producing in the neighborhood of about 10 11,000 graduates. Not all of them are passing their tests and an increasing number of them are never going to work in a clinical sense. If you ran all the numbers on physical therapists, the 250,000 plus PTs that are out there, only about 20% on an FTE basis work clinically.
You and I are good examples of physical therapists that are no longer working clinically. Nothing wrong with that. But we have to face the numbers and just understand that our supply is not anywhere keeping close with the demand. It's not because we don't have enough therapists that are licensed. It's because we don't have enough therapists that are clinicians. And so we have to kind of keep that clinical context. Some of the ways that I believe you can course correct that is get the clinicians more money.
You know, get them on a salary that is more commiserate with what they produce. And so, I think you're starting to see very sophisticated companies think through this. You know, if this was a phys if it was a pure physician practice management or a dental service organization, they are built for a compensation model that's based on productivity of that of that producer. We have not done that traditionally in PT. It's been always typically salary with some variable cost around bonuses and things like that. So we have to shift that a little bit.
And so that's a that's a pressure point that's a headwind that is not going to be overcome anytime soon irrespective of interest rates coming down. And so in the transaction market you have to look at are they producing are they keeping their therapists longer than the average company? You know what truly are they doing? If they're below 20% on turnover, they're probably doing pretty good. If they're in the 20 to 25 range, that's probably about average. Anything above that, they're contributing to increasing that amount. So, that's a real good factor for your owners to understand is how are they how are they doing in that sense?
I think the Go ahead. Yeah. Yeah. Know, you know, you see a lot of work being done from private practice in recruiting. You know, recruiting. They're going out to the schools. They're doing everything they can to recruit. Do you have any advice for them about the other side of that which I heard at the beginning of your conversation here which is how do we retain therapists and the fear of you know having them go on a you know eat what you kill incentive basis compensation is well you know my neighbor up the street he pays full salaries and he's got his you know clinic seeing you know 10 patients a day and they're just going to go there.
H how do how do you tell what's your advice on overcoming that obstacle? Yeah. So, let me let me start out holistically and then I'll get a little more specific. Our industry is generally speaking a copycat industry. If enough companies started paying therapists on a percentage basis, then everybody over time would because therapists are going to make more money under that model, but they're also going to be held to more accountability. Any conversation around productivity, units per visit, all those things kind of goes away, right?
Because they're g they're on a guarantee and if they exceed the guarantee, the guarantee is not going to pay them what they're what they're used to be paying. They can get that. But aside from that, and that's kind of a discussion that probably needs to have its own life. I think the second way that manifests itself though is that you're going to see a lot less administrative pts. Name me one other company in the private in the PPM space or the DSO space where regional managers and regional directors are licensed clinicians.
They just aren't. And so our most valuable proposition is for therapists to be doing a good portion of their work clinically even if they're at the 80% level and doing 20% administrative work. So that's kind of again it's that's kind of the macro world you know that we live in. And now to get very specific when I look at retention turnover creating a great destination workplace I think of the problems you also have in the world of college athletics. So now you have college athletes that have an unlimited transfer pool.
You can transfer every year. And so what do you do? What do the good programs do to retain those student athletes? They re-recruit them. So recruiting is not a one-time event. It is a culture that you create and how you keep your people there. You do techniques such as stay interviews. You make it personalized. Everything from their comp and their reward system. You create a human capital talent management machine that makes people want to want to laugh, learn, and grow in your organization. And that's non-economic.
You know, most ways to create a great organization are not through incentives and economics. They're through intellectual capital and human capital around social psychosocial issues. And so if you don't have that type of mindset, you're statistically going to fall into that sort of average number. Now, what some companies are starting to do by default is they're just paying more. They're saying, "Look, I know I've got more turnover." I it is what it is. So, I I'll take that into account and I'll just artificially increase salaries.
And you know what? That works until it doesn't work. You know, it doesn't matter if you make more money, if you're miserable, if you're not doing meaningful work that impacts lives, you know, creating a lifetime of change for patients and make it mission more missionoriented, increasing salaries isn't going to help you know, temporarily. It will only give you a temporary you know competitive advantage. And then sort of the last piece is this go back to this regulatory piece for a minute. I think one of the more interesting things that we'll begin to see pretty quickly is what are they going to do with the physician fee schedule.
Right? So one of the reasons why the transaction market in the physician space and in the physical therapy space hasn't been as great is every year for the last 10 years we've had decreases in what we're being paid by CMS. That has to end. It's a flawed formula that it works, but nobody's corrected it. Nobody's taken the time. So whether we kick it kick, you know, the can down the road or not, how the Trump administration will handle the physician fee schedule, I'm of the opinion that they will that they will level set it this year that they'll re, you know, act in some common sensical way and at least keep it neutral this year and work towards a longer term solution because that has to be fixed.
It's at the point where the incremental value of what you're reducing when you reduce reimbursement and thus compensation has already served its useful purpose. The article I have coming out this week in the all things physical therapy newsletter is about what percentage of the $3.9 trillion is physician compensation and physical therapist compensation not their organizations but to the providers themselves. Well, in the physician world it's about 8.6% which is kind of mindboggling that all everything spent in healthcare that it's so small but you know what it is in PT it's.16% okay that's less than you know 20 basis points of 1% and so the incremental value of decreasing reimbursement isn't going to suffice anymore education costs risen dramatically they're starting to come in a little bit more in line and health care costs we can't save by reducing provider cop that's already a proven method that does not work.
So, doubling down on it is not a good strategy. And the ability to streamline on our treatment approaches to make them somewhat similar and provide and what are the treatment options that we have at our disposable to get the absolute best outcomes. It's almost as though that doesn't matter. But in a world where again physician fee schedules start to increase, I think we're going to have to prove that by having more consistency of treatment approaches across the United States. And those treatment approaches showing positive outcomes.
I think that's going to be a key 100%. Yeah, there's definitely the accountability for the spend in health care is going to continue to be ratcheted up. Whether you call that cost economics, whether you call it clinical, functional outcome, utilization, patient loyalty, patient satisfaction, engagement, all those dimensions will be ratcheted up in an environment where compensation, you know, is changed. We tried to do it in primary care, but the primary care, you know, models in the US have all basically failed relative to the economics for the buyer.
You saw were Walgreens, CVS, you know, look at the number of physicians that have been bought by Amazon, for example, and those they're not even projected to make money for several years. Now, in physical therapy, we can't get away with loss liters of clinical care for unlimited periods of time. No, absolutely not. Absolutely not. So Larry, let let's just talk a little bit about your experience with Confluent as well as your experience watching other large platform or large acquirers. How does Confluent and some of their and some other companies out there, how do they address some of these challenges that we have in the industry today?
That's pretty much been what we've been talking about for our interview here. Reimbursement pressure, staffing shortages. What are some of the spe specific resources and strategies that can fluent and other acquirers help business owners with once they're under their umbrella? Yeah. So, let's start again with some macro comments and then I'll get real specific on that on that question. You know what I what I would say is right now if you're looking at acquiring there's a variety of ways to grow. You grow organically, you grow through adding denovos.
Same store, denovos, tuckins, more platform, you know, type acquisitions. The headwinds have been such that we've all seen this massive decrease in margin regardless of what level, whether you're got 800 locations or whether you have three. That's the econ that's the math. Higher cost reimbursement is stayed the course, the margins have to go down. So one of the things that you have to look for in 2025, what I always call the story. Help me understand the story behind your company. What did you do to enhance margin?
What did you do to retain your employees? What did you do to grow your business organically? In other words, same store. If you do th those three things well, you've got a great story and you can really position yourself for very successful and be very attractive to many buyers that are out there. But a lot of buyers are going to decrease the number of pure transactions as they have the last few years. So it's a when it when it is in that type of environment, the best sellers win.
Those who have created the value and who've created a sustainable competitive advantage in their marketplace and who've done the things that I've talked about. Then you then what happens once you're under the tent? What do companies large private equity backed companies do to help once a target has now a partner? And I think that's the extreme, right? Are they a partner or is it a practice that you just acquired and everybody, you know, is skinny down their equity to almost nothing? Generally, regardless of those two extremes, a good buyer will then try to incorporate some aspect of centralization.
That word is a scary word. It's an ugly word, but it's [clears throat] typically of those things that are all back office, the things that are non-patientf facing. So, think of talent acquisition and recruiting, HR, payroll, legal, all the things around, you know, supporting an organization's regulatory, you know, side and the compliance and all the things that, you know, we just continue to add on, add on, add on and all those other areas. And then, you know, what are the resource-wise from a cap capital standpoint?
You know, capital equipment certainly hasn't gone down in our industry. Our ability to fund additional growth and development. That is really what also happens once you get under that big tent. And you know, at the end of the day, does a practice want to grow? And that's a big attraction for a buyer. If they're wanting to stay the same and if their history shows through good times and bad times that they've contracted, that's a far different story than we tried to grow, had some headwinds, you know, had a few hiccups here, but started to do well here.
And again, it's really about how they've positioned the business and what the story of it is. If it's a company that's not done zero growth, and I'm not talking about EBITDA growth, I'm talking about revenue growth in last couple three years, then they're probably not going to be really attractive to a to a big buyer. Sure. Sure. You know, I heard you say something again kind of early in your last discussion, which was I think what I heard you say is that there's a lot of competition for sellers or those seeking a partner and that kind of the cream will rise to the top and not every company that, you know, puts themselves into this market is going to get acquired in this current market.
Did I hear you say that? No, that's exactly right. I mean, I think what you're seeing is more and more PTs out of school are working for private equity backed groups. The bigger are getting bigger. It doesn't mean our industry is consolidated because if you took the 10 biggest players, it's still a re relatively small percentage, but that small percentage has got a little bit bigger. There has been a little bit of consolidation, not a lot. It's not like, you know, dialysis where you have two major players or something like that or lab, you know, which has a couple major players, right?
But there's been a little bit of that. And I think it's very difficult for a mom and pop player to to compete against big folks unless they've taken the intentionality around talent acquisition, creating a great workplace, been thoughtful in how they've grown their practice, have really looked at how do I enhance my margin this year because everybody's had margin reduction. Well, I want to know what you did to enhance it. And so I think you're going to see practices have much less management you know, resource management people. [snorts] if you look with technology folks, the big tech is, you know, laid off a lot of people.
MBAs are becoming scarce in the world and the and the, you know, between AI and other kinds of tools, it's a very scary time for professionals. And so I think the thing that we value more than anything is our license because it gives us an opportunity to do something nobody else can do. And so I do believe that the practices that are positioning themselves correctly are going to have the world is going to be their oyster again. There's no question. Never forget way back when Rocky Gertenzio took over NovaCare with Select Medical.
I never forget one of the first things that he told our group at that time was if you are being managed by a manager your job may be in jeopardy and I think but I what I do hear you saying is for some of these smaller let's call them 10 to 50 clinic companies with lots of regional managers and local managers some of them PTs th those PT licenses are probably going to go have go back to treating some patients along with some other responsibilities I think.
So I mean I think that you really have to be cognizant of your administrative cost and that would be another you know word of a counsel for your clients yeah Paul is that you know when you look at overhead as a percentage it has to come down. If you're not using technology and other means to drive your SGA or your overhead, whatever you want to call it, down, you're really hurting yourself because, you know, traditionally mom and pop practices have had too much overhead because they have no scale and that's why one of the effective buying strategy is that you do synergize some of the cost elements of it.
The other thing that's happening now is you're actually getting true synergies on the revenue side of it. You know, how does payer contracting, credentiing, all those back office things that you get once you're in the tent, how does that magnify your practice's ability, it brings scale, sophistication, and systems to a provider who couldn't get them anymore on their own because they're just too expensive to get. Doesn't mean you can't get them. It's just at a higher cost. But your SGAA or your percentage of administrative cost is something you have to focus on because it's if you think about it just from a value ad in terms of revenue, it only is only a few ways to get your business better, enhance your revenue or decrease your cost.
We we define that as you know being able to see not just to a transaction or a partnership but how do we how can a company see actually through that and where they will be on the other side and how that will influence their ability to grow. Staying along the lines of Confluent and other companies that are out there. Do you think that in 2025 they will be seeking some larger platform opportunities those 20 to 10 to you know 50 or so clinic opportunities or do you think they'll be seeking more of the smaller tuckin opportunities?
You know that's a it's a great question that I'm not sure that comes down to each platform's philosophy. We always like doing what I call the dirty work because if you think about it from a transaction standpoint, from a an a cost of personnel and opportunity cost, it's just as expensive to do a small transaction as it is to do a big transaction. It just is. And so, you know, I always liked the mom and pops and had close relationships in the profession. Wanted wanted to have them as partners.
However, you know, those practices that are in this sort of five to 15 number, I'm sure get letters every week by private equity sponsors and others. And so, yeah, they'll be it'll continue to be extremely, you know, attractive in terms of large groups coming together. And I'm and I'll and I'll talk more in the PPM healthc care service space than I will physical therapy platform specifically, but it's the exact same phenomenon. The only thing that'll that drives mega mergers are either companies that need to be restructured financially on the one end or companies that are in a position because they have a fair amount of capital and have access to and have lower leverage and they have the ability to pounce.
That's the only thing that tends to drive those kinds of things. We're kind of gone from the day I think where a company can go in at least in the PT health service space right now in a $150 million EBITDA company buying a $150 million company. I think those are now mergers or those are you know pooling of similar interests and you know that hasn't happened really for a while in PT. We've had some of that in the past but we haven't had much of that in recent years.
And I'm not predicting that will happen this year necessarily, but if you do see large groups sometimes come together, it's because they're both being restructured. Interesting. Interesting. All right, Larry, I'm going to give you a final one. Uhhuh. So if you are a company in the rehab industry right now, privately held company, is there any benefit from looking at the market in 2025 as opposed to 26 or 27 or having done something last year? Are there any benefits to what this year is going to bring to the rehab M&A market and going into the market this year?
Yeah, I think it's a very good question. It comes down to philosophy. I always encourage practices to find out what you're worth, to go through evaluation, what is happening in the market. And you really can't believe, you know, what you read and see on Twitter and these kind of things when it comes to multiples and those kind of things because it really doesn't get to the root of your company and what is your true cash flow and what is the other non-tangible or you know the things outside of your cash that you bring to the equation.
You know and so people oftentimes traditionally get caught up in oh they got bought by five times 10 times eight times whatever that number is ignore all that noise but it's always good to know what you're worth in the marketplace for a number of reasons and I think you know PT practices oftentimes get overcommitted investment wise to their own clinic and you know any sharp student of business will always tell you to have some diversification and so the ability to derisk is always a good thing.
Sometimes it comes down to most of the time it comes down to timing and fit and all those kind of things, but d-risking is something people should consider. And I don't know that 2025 will be any better than 2026. But certainly with interest rates a little bit more stable and certainly with an environment or at least tailwinds of deregulation coming in, it could be a very good time. I like your term derisk. You know, to me that's, you know, take something off the table and give yourself an opportunity for a future as well.
And I think those are the kind of opportunities that we see out there in the market today that 20 years ago were just not in this market or matter, you know, many other. No, we're blessed. We're blessed. We have an incredible profession and be able to derisk and get rewarded for a lot of hard work because there's a lot of other professionals that don't have that ability anymore. Absolutely. Absolutely. Larry, cannot tell you how much we appreciate your wisdom, your time. And we really thank you for all the great information that you gave our listeners today.
Thanks, Paul. Pleasure to be here as always. And for all of you out there who listened in to us today, if you have a question for Larry or myself, click below. Let's talk. Have a great day and a great rest of your weekend. Take care.
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