How Transparency of Reimbursement Rates is Shifting PT Valuations
A quiet rule change just tipped the scales. Paul Martin unpacks what it means for PT owners, and why it might be the leverage you've been waiting for.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good morning and welcome to another episode of the Martin Rehab M&A Advisory. I'm Paul Martin, founder and president of Martin Healthcare Advisors. And today I want to talk about something that we really believe has been kept under the radar, but this is an absolute gamecher for both small and large privately held physical therapy companies. So let's jump in. What we're going to talk about today are sort of new federal rules that create rate transparency. So, in a landmark shift, and I I'm telling you this is a landmark shift, CMS hospital price transparency rule.
That is a mouthful. CMS hospital price transparency rule and the transparency in coverage final rule. It now requires hospitals and health insurers to publicly disclose their negotiated reimbursement rates with providers. And these rules have been rolled out from 2021 and finally, you know, came into existence fully in January of 2024. And again, this has created a level of market visibility that outpatient physical therapy owners have never had before. I believe this is a foundational change that unlocks both risk as well as opportunity. So, what does this mean for physical therapy business owners?
Well, thanks to this mandated transparency that we now have, you can now see how your reimbursement rates stack up against other providers in your market. And we are finding some eyeopening discrepancies. Some practices are literally getting paid double for the same CPT codes in the same metro area. And so this gives underpaid providers databacked leverage to go back to the table with insurance companies and fight or negotiate or will better rates out of those payers. So what are some of the strategic implications that this will have for mergers and acquisitions?
Well, in most deals, okay, buyers don't acquire your tax ID number. They use their own tax ID number and contracts, which typically means stronger rates on day one if they're ahead of you, which they typically are. With this new reimbursement visibility, we can now model that upside that the acquirer will get and make a case for a higher multiple. Now, will we get all of the upside that they believe that they have earned by having these better tax ID numbers and I'm sorry, better rates from payers?
No. But we may be able to when it's visible, once it's visible, we then at least have that leverage to make a case for it. Prior to now, there was no case to be made because we didn't know. We knew our own client, but we didn't know what the acquirers rates are. Now, here's the flip side of that. If you're being acquired as a platform, so a big company, 10, 20, 30 clinics in a state, and your rates are stronger, the buyer may adopt your TIN or your tax ID number.
And that flips the narrative here because now your reimbursement strength, you're in a state, you've driven your reimbursement to a high level. Your reimbursement strength becomes an asset and it can lead to an acquirer wanting to do a stock deal, which is rarely the type of deals that are done in this industry. But that gives you better tax treatment as a seller and for sure it's going to give you a higher valuation because they're going to get the benefit of those increased rates. So whether you're the one benefiting from better buyer contracts or you are the buyer's ticket to better rates, we now have the data to prove and price it for acquirers as well as for small companies in their markets.
So how do we use this in deal strategy? You know, as M&A advisers, this visibility lets us work, you know, kind of both sides of the deal. If our client has six to 12 months, we can work with them, you know, before they're going to market, we can work with them to improve lowerforming contracts and drive EPIDA, which is kind of the classic valuation, value creation. But if the time is short, we now come to the table with clear data showing how the buyer can get stronger revenue postc close for making this acquisition.
So that makes it easier again for us to push for a higher multiple based on future cash flow, not just trailing numbers. Now in the platform deals where the buyer may adopt the seller's tax ID number, it's a whole different level. The seller's contracts can now elevate the entire system and in those cases the reimbursement rates become a absolute strategic asset often leading to a stock deal with better tax advantages. So what have we done to make this more visible to our prospective clients as well as clients?
But we've enhanced our outside in assessment to take full advantage of this transparency. We now benchmark every client's contracted rates against local and national payers. And through our partnerships with some of the leading reimbursement analytics groups that are out there, and believe me, there are a number of them out there, we've chosen the best. We can then give clients a very clear picture of where they stand and how they can improve. So, how can this help clients achieve the upside going forward? Whether it's going to market or it's planning on just growth.
Again, this is isn't just supporting kind of, hey, we have news for our clients. Your reimbursement is much lower than everybody else in your market. It becomes a plan of action. It becomes a strategic actions moving forward. And we help our clients identify payer contracts that are really dragging them down. You know, we're looking on volume of the contracts, codes that they typically are charging and really digging into the details on how this is dragging that bottom line down. And then we're going to provide guidance on how to renegotiate or reallocate volume to get the benefit of what reimbursement rates are to potentially available in your market.
And even modest improvements in rates, as I'm sure you know, can deliver significant bottom line or epid gains over a very short period of time. And this is critical for valuation. Now what about for large multi-site companies? You know what are they able to unlock with a change like this? Well, the impact of rate optimization is absolutely magnified by multi-site operators. Just a 5% improvement in one major contract. When you spread that across 20, 30, 40, or 50 clinics can add hundreds of thousands and even millions to the bottom line.
Buyers know this and they're paying up for companies that have that proven rate strength in their markets. You know, the best acquirers in the industry all tell us that this is really a top priority when they are looking to go into a new market. They want to find that platform company and if that platform company has the highest rates in the market, they're going to pay up for that business. So, finally, how do we position you to win based on this transparency ruling? Whether you're planning to go to the market or you're simply just looking to continue to grow, you know, I really think the new transparency environment creates a huge advantage if you take advantage of it.
But again, only if you use it. So, we can help you make this work. You know, our now updated outside in assessment will now give you incredible insights and it will drive your business forward in the markets that you are in. So, if you're really serious about positioning for growth or at some point in time in the future, a potential transition, click below and let's talk. I appreciate all of you joining us today and I look forward to talking to you soon. Thank you.
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