What the Latest CMS Signals Mean for Practice Owners
In this episode, Paul shares his perspective on a recent CMS update and why it's worth paying attention to.
Full transcript
Generated from the episode audio and lightly edited for readability.
Hello everyone and welcome back to another episode of the Martin Rehab M&A advisory. I'm Paul Martin, founder and president of Martin Healthcare Advisors. And today we're going to take a little bit of time to break down a topic that is getting a lot of attention in the outpatient rehab world. CMS has finalized a 1.75% increase in the physician fee schedule for therapy services. That is exciting. This is the first time in years that we are seeing something move upward instead of downward. And I want to walk through with you today what this really means for your business and for this industry.
As always, I want to talk to you from and as an operator. As someone who has been in this industry for decades, I've lived through every reimbursement shift, every staffing cycle, every financial pressure that the outpatient rehab industry has had to deal with. So, you're getting this from a real operator's view today, as well as my staff, and they have looked into this pretty significantly as well. This isn't a political view. It's not an optimistic spin. It's just the truth about what matters and what does not matter.
So, let's start with what CMS actually did. CMS announced a 1.75% increase for therapy services. On its own, that sounds encouraging, especially after years and years of cuts or flat updates. CMS made this decision because they are responding to real pressure. Clinics have been closing locations, especially in rural areas. Staffing shortages are affecting access to physical therapy and the economics of outpatient rehab have been pushed to the edge. CMS needed to stop pushing downward to avoid creating real access problems for patients across the country. Now, the operator in me needs to say this really clearly.
A 1.75% increase does not mean your business suddenly becomes more profitable. In fact, the very first thing we need to look at is your payer mix. Most outpatient physical therapy practices across the country are somewhere between 20 and 30% Medicare. And if you are like most practices, that percentage is probably around 25. And that means that this increase only applies to a quarter of your revenue currently. So let's talk about what these numbers really mean. A 1.75% increase applied to a 25% of your payer mix results in a total revenue impact of about 0.44%.
So, it's a very minimal impact to your business. It's less than 1/ half of 1%. But you put that number against wage pressure, rent increases, insurance premiums, benefit costs, and everything else that has gone up in the past few years. This increase is not a financial fix. It's not going to move the needle on your EBITDA or your cash flow in any material way. And that's perfectly fine as long as we acknowledge that reality. What we are getting here is a directional shift, not a financial transformation.
So what does this increase accomplish? Well, what it does accomplish is absolutely worth talking about. First, it stops the bleeding. For years, every operator has been planning their business under the assumption that CMS will push reimbursement downward. That mindset forces owners to think defensively. Now, even with a small number, CMS is signaling that they are willing to adjust. They are hearing our pleas. And that shift in mindset really matters. Second, this change gives us li a little more stability when we model the year ahead. Predictability, even modest predictability, helps you make clearer decisions about staffing, about wages, and about growth.
You are not building around another cut. You are building around a very small increase and that's positive. Third, this increase adds another data point to a list of improving macro conditions. Interest rates are coming down. Staffing is stabilizing in some markets and with some providers. Buyers are starting to re-engage in multiple conversations. We saw that at the private practice section. And now reimbursement is showing a positive trend. None of these alone are creating a boom, but together they create a more attractive environment for outpatient rehabilitation businesses across the country.
Now, let's talk about what this increase does not do. It will not and it does not solve margin compression. It does not and it will not solve wage increases. It does not offset the higher cost of operating a modern clinic, rent, equipment, etc. And it does not by itself improve your value and your valuation in this market. It's the fundamentals that still drive your success. And that has always been true and it is even more true in this environment. The companies that win in this environment and that are growing in this environment are the ones that maximize charge capture.
They predict protect productivity and they measure it and they manage it. They manage schedules down to the minute and they have strong front desk processes. I just talked to a business owner yesterday that for years was wondering why they were not seeming to get patients in when they should be getting them in and some patients would not call back. It all came down to that front desk. Now three months into a new front desk person. And that's all about just analyzing what you know what in your system is causing the log jam.
It's also an opportunity to build a better payer mix strategy and these operators retain their best clinicians and they recruit efficiently. And these are all the levers that drive EBITDA, not small moves in reimbursement, but the levers that I just described. So, let's connect this now to the M&A environment because many of you are watching this through that lens. It's the Martin Rehab M&A advisory. Valuation is always influenced by three major factors. First and foremost, cash flow. Second, growth potential. And third is risk. Now, a small increase in reimbursement does not considerably change cash flow, but it does reduce perceived risk.
Investors do not need reimbursement to go up 10%. They need evidence that it's not going to continue to go down forever. So when you combine this reimbursement improvement with the drop in interest rates, better staffing conditions, and increased buyer engagement, outpatient rehab starts to look like a much more stable category once again. And stability is the beginning of buyer confidence. And when buyers get confident, they start feeling the pressure that they're going to be left out. It's the FOMO, fear of missing out, right? They don't want to be left out of these great deals that are out there.
So, they want in. Let me give it to you a as from my take now. We're talking operator to operator. The dollars are small in regards to the CMS increase. The increase is modest. It's not going to fix your margins, but direction matters in this industry and seeing CMS reverse course even slightly is positive. It's simply it is simply one more factor makes outpatient rehab potentially an attractive place to invest especially for companies that are already strong operators. We many times get folks that are actually future investors that want to watch this show and what they're hearing right now is that this is a positive sign for this industry.
So if you are operating well today, this increase will feel like a helpful additional tailwind. If you're struggling, this increase is not going to fix your problem. And that is exactly why execution is everything in this current market. So as you start or continue your planning through this holiday season for 2026, take this increase for what it is. As I've said, a positive directional sign, not a financial solution. The fundamentals still matter. So when you're planning, look at those fundamentals. And the companies that execute well right now are the companies that will have more options, more leverage, and more value when they choose to make their strategic move, whatever move that may be.
Hey, I hope this was helpful today. I appreciate you joining me. And I also want to again urge all of you take the time with your family, take the time for gratitude, take the time for just looking out at how absolutely fortunate we are to be in this industry and also use this as a time to plan. So until next time, if you have any questions about the content we covered today, click below and let's talk. Have a great rest of your day and a great weekend.
Want to talk about your own business?
Marlton, NJ 08053