Healthcare Industry Update – November 2020

Healthcare Industry Update – November 2020

Focus on Outpatient Rehabilitation

Like many other sectors of health care, the outpatient rehabilitation segment was hit hard by the onset of the COVID-19 virus. In August, the American Physical Therapy Association (“APTA”) published the results of a survey done in July of a large sample of physical therapists and physical therapist assistants. The report compared the results to an earlier survey completed in April/May and should provide investors with a sense of cautious optimism. However, with a recent spike in COVID-19 cases, how practices responded to and fared during the early weeks and months of the pandemic should be top of mind.

COVID-19 Impact on Operations

In the early stages of the pandemic, the volume of visits and treatment hours fell precipitously as physician referrals declined, concerned patients stayed away, practices instituted furloughs and layoffs, and some clinics closed entirely. The largest industry player, U.S. Physical Therapy (USPH/NYSE), indicated in an investor presentation that its visit volumes reached a low of 45% of pre-COVID levels in April. For the most part, treatment was limited to essential care. The situation dramatically impacted the finances of practices, owners and staff. According to the APTA, only 30% of practices had an emergency preparedness plan in place at the onset of COVID-19, leaving many operators woefully underprepared.

With input from various federal governmental agencies, such as the CDC and CMS, state governments, and health care associations, such as the APTA, new protocols for administrative operations and treatment were implemented. Of particular note was the increased utilization of telehealth to fill the treatment gap. Prior to the pandemic, telehealth was used as a care delivery solution by only a handful of PTs nationally. According to the APTA survey, by July nearly half of all PTs were providing video consults, with 13% of PTs seeing more than 10 patients per week. Critical to PT’s adoption of telehealth was the announcement in April that CMS and several major commercial carriers would allow PTs to bill for care provided to new and existing patients via telehealth solutions.

The 3rd quarter saw visit volumes and treatment hours recover somewhat though still well below pre-COVID-19 levels. Not surprisingly, larger players appear to have recovered somewhat faster than small ones. U.S. Physical Therapy even reported record quarterly earnings for the period ending September 30th, though revenue and patient visits remained modestly lower.

M&A Activity

Like many other sectors of health care, the outpatient physical therapy business remains highly fragmented with the top five providers accounting for only approximately 25% of the estimated 18,000 outpatient physical therapy sites.

In addition to the fragmented nature of the business and the demonstrated financial benefits resulting from scale, the outpatient physical therapy space has numerous other tailwinds supporting its positive outlook, including the aging of the U.S. population, the cost effectiveness of physical therapy relative to other treatment options (e.g., surgery), the preference for treatment paths that reduce or eliminate the use of opioids, the increasing ability of patients to seek out care from PTs without having to obtain a physician referral, and the general desire of people to lead healthier and more active lifestyles well into their later years. Along with the relative stability of government (Medicare and Medicaid) and commercial reimbursement, these demographic and market tailwinds will continue to make the outpatient physical therapy sector very attractive for investors and acquirors. We estimate that there are over 20 private equity-backed outpatient physical therapy platforms, most of which are actively looking to make acquisitions.

Deal activity in this season took somewhat of a pause in 2020 as a result of COVID-19. Transactions completed in the 2nd quarter were likely well underway by the time COVID-19 came on the scene. Those transactions also appear to be modest in size such that the impact of COVID-19 was easily understood and quickly diligenced. According to Capital IQ, while no transactions were announced during the 3rd quarter of 2020, commencing in October, deal activity began to pick up again. Of particular note, Select Rehabilitation acquired Kindred Healthcare’s RehabCare business, increasing Select’s overall lead in the rehabilitation segment. Overall, the number of announced transactions in 2020 through the first week of December was eleven versus twelve for the same period in 2019.


Despite suffering a bit of a downdraft in the 2nd quarter as a result of the dramatic decline in patient visits, the outpatient rehabilitation sector appears to have turned the corner vis-à-vis COVID-19. Adoption of safety protocols for patients and employees as well as expansion of telehealth utilization have made physical therapy safer and more comfortable for all involved.

The uptick in the number of COVID-19 cases occurring through late Fall is of some concern. Whether or not the increase in infections will lead to a decline in patient visits seen in the 2nd quarter remains to be seen; however, we believe that patients and employees have grown more comfortable with the efficacy of the safety procedures in place, and we won’t see a significant drop in visits.

On another hopeful note, it appears that the Pfizer and Moderna vaccines should be available for distribution and administration beginning in the next few weeks. As those vaccines, and others, roll out in the U.S. and the rest of the world, it’s possible that we can begin to get back to something akin to pre-COVID-19 normalcy.

Notwithstanding the anxiety due to COVID-19, we believe that M&A activity in the outpatient rehabilitation sector will continue as larger players look to further consolidate the space, and smaller players with less financial and other resources look to partner with other organizations in order to improve their chances of surviving and thriving during and after COVID-19.


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John Patterson

Managing Director, Healthcare Industry Team Leader

Marc Gondek

Director, Investment Banking