Whenever we speak with dealmakers in the healthcare M&A market, they frequently discuss how the market is fragmented. Although there is no shortage of major players, especially as retail and tech giants push deeper into healthcare, there’s still a high volume of smaller, independently owned agencies and providers. The U.S. outpatient rehabilitation market has more than 37,000 independent clinics, and no company owns more than 10% market share. Some significant players include Select Medical (1,933 clinics), ATI Physical Therapy (900 clinics) and U.S. Physical Therapy, Inc. (629 clinics). Additionally, rehabilitation services are split across many sources: hospitals, therapy clinics, physician-owned clinics, chiropractors and more.
In addition to the vast investment opportunities, there are other reasons investors are bullish on this market. Aging demographics and other health problems, such as rising obesity, drive demand for physical therapy services. According to U.S. Physical Therapy’s investor presentation for the third quarter of 2022, each year, approximately 50% of Americans over the age of 18 develop a musculoskeletal injury that lasts more than three months, and only 10% use outpatient physical therapy services. In other words, there is a significant untapped market potential investors can try to focus on.
There’s also growing demand for new segments and specialties in Rehabilitation. Industrial injury prevention, which combines ergonomic, injury prevention, physical rehabilitation, onsite medical and performance maximization services to clients, is seeing a surge in growth due to increased regulatory measures from OSHA and more cultural emphasis on worker protections. Industrial injury prevention services accounted for 14% of U.S. Physical Therapy’s total revenue for the nine months ended September 30, 2022, up from 9% in 2021.
Some other deal activity also indicates rising interest in contract therapy. The industry-wide labor shortage and wage pressures have worsened physical therapy staffing issues in hospitals, SNFs and other post-acute settings, forcing many providers to rely on contract workers, thus drawing in investors to meet the demand. Lee Equity Partners announced an investment in Therapy Partner Solutions in January, and InHome Therapy, a home health network, purchased Contract Therapy Services. The company provides contract physical, occupational, speech therapy and registered dietitian services in Florida.
Although most deals are small and private transactions, there are some notable significant acquisitions. Patient Square Capital purchased Hanger, Inc. for $1.25 billion, or 1.1x Hanger’s 2021 revenue. Headquartered in Austin, Texas, Hanger provides orthotic and prosthetic services through its patient care segment, with approximately 875 locations nationwide. Sila Realty Trust, Inc., a Tampa, Florida-based REIT, purchased TGH Rehabilitation Hospital, an 80-bed inpatient acute rehabilitation hospital, for $51.2 million. The TGH Rehabilitation Hospital is 100% leased to Tampa Rehabilitation Hospital, LLC, a joint venture between Tampa General Hospital and Kindred Rehabilitation Services.
Sila also purchased The Escondido IRF, an inpatient rehabilitation hospital in the San Diego-Carlsbad MSA, for $63.4 million. The building has 56,000 rentable square feet and 52 beds and is fully leased to Palomar Health Rehabilitation Institute. A joint venture between Harrison Street and Pacific Medical Buildings developed the property.
A few health systems have announced transactions recently, most likely to expand their health network. Allina Health, a not-for-profit healthcare system in Minnesota, acquired Interlude Restorative Suites, a 50-bed transitional care unit offering rehabilitation and restorative nursing in a high hospitality, hotel-like environment.
Although investment activity has been stable, there are some notable headwinds investors need to keep in mind. New CMS rules implemented in 2021 have reduced reimbursement rates for physical therapy by 10% compared with 2013 (and that’s not counting inflation). There are also the aforementioned labor issues hitting the industry hard. Still, the market is resilient, demographics are changing, and investors have a lot of opportunities. Favorable winds are on their way, that’s for sure.
