Utilizing Telehealth Services to Improve Access to Behavioral Healthcare

August 9, 2022

By: Mallorie Holguin, Preston Edison, and Dane Hansen


Over the past few years, trends and events have occurred that have led to increased and continuing demand for mental health care services. First, the Affordable Care Act (ACA) expanded coverage and access to mental health care services.[1] Then, more recently, the COVID-19 Public Health Emergency (“PHE”), and corresponding citywide shutdowns, brought about a spike in anxiety and depression with these conditions increasing to four times pre-COVID-19 levels.[2,3] Healthcare workers were among some of the most heavily impacted with one study finding that almost half of healthcare workers reported serious psychiatric symptoms, including suicidal ideation.[4] While demand for mental health services has continued to increase, the number of providers actively practice in the United States is estimated to have the capacity to meet only 28% of all mental healthcare needs.[5]

As the COVID-19 pandemic increased demand for mental health care services, the healthcare industry rapidly expanded its offering of telehealth services. Specifically, telehealth services grew to represent up to 40% of outpatient care at the peak of the COVID-19 pandemic (up from less than 1% of outpatient care in 2019).[6] This increase in service offerings and patient care in the telehealth space was made possible by relaxed regulations related to the provision of telehealth services.[7] In the following sections, we discuss how healthcare organizations can implement or continue to expand telehealth services to meet demand for mental health care services in the communities they serve.

Implementing Telehealth / Virtual Care Services to Expand Access

As discussed, the gap between the supply of mental health providers and the demand for mental health services is notably widening. As of June 30, 2022, Health Resources and Services Administration (HRSA) has designated 6,300 mental health provider shortage areas.[8]

These designated shortage areas collectively contain over 152 million Americans, approximately 46% of the total population. As health systems and hospitals attempt to navigate these challenges, telemedicine has emerged as a potential avenue for bridging the gap between the supply and demand for behavioral health services.

The American Telemedicine Association (“ATA”) describes telemedicine as the “natural evolution of healthcare in the digital world.” Precisely, telemedicine promotes and improves the quality, access and affordability of healthcare through the use of rapidly evolving technologies. Specifically, telemedicine refers to the use of medical information exchanged between parties via electronic communications to improve a patient’s clinical health status. Electronic communication including videoconferencing, streaming media, transmission of still images, remote patient monitoring devices and many other telecommunication methods allow(s) physicians to closely monitor and/or provide clinical services that would otherwise be unavailable for the patient. Oftentimes, the electronic information is combined with electronic medical records (“EMR”) to formulate a more accurate consultation or specialist opinion. Telehealth allows practitioners and patients to interact without the requirement to be face-to-face in a hospital or clinic setting.

At the same time, remote, or tele-, work was implemented across many industries to combat the challenges of the COVID-19 PHE shutdowns. As a greater percentage of the workforce had the option to participate in a remote work setting, 9 in 10 remote workers want to maintain remote work to some degree going forward.[9] One of the top reasons employees desire a hybrid or fully remote work arrangement is that it increases personal wellbeing. Given the well-documented physician burnout rates exacerbating provider shortages, it would be prudent for health systems, hospitals, and practitioners to consider using alternative coverage models, including employing the use of telemedicine. By leveraging virtual care offerings, practitioners can experience the same advantages that have led the majority of Americans to respond with resounding positivity to remote work, potentially alleviating some of the stressors that contribute to provider burnout.

Telemedicine offerings can also be used to redistribute the supply of practitioners. The hub and spoke model was one of the first practical telehealth models and is a common way to structure virtual care offerings while leveraging the existing practitioner base and extend care to facilities or communities in need. In this model, the hub facility is typically a larger facility that has the resources to provide specialized care that many smaller and/or rural facilities lack. By scaling the existing resources of the hub, the spoke sites are able to close gaps in care without incurring the costs associated with a full-time provider or locum tenens staffing. Behavioral health providers focused on increased access to care and better quality of care outcomes for their patients will find success in a virtual care-driven future.

Telemedicine is a tool for healthcare entities that, if embraced and properly utilized, can help bridge the behavioral health care gap. To effectively leverage virtual care services, it is important to understand the compliance and regulatory implications of these offerings and to establish equitable compensation models for providers that consider any limitations remote workplaces on of their scope of practice.

Financial & Operational Considerations for Behavioral Health Operators

As of July 15, 2022, the COVID-19 PHE was extended through October 2022 by the Department of Health and Human Services (HHS) and, along with it, continued flexibility around regulatory compliance regarding telehealth and reporting deadlines. VMG’s Coding, Compliance, and Operational Excellence (CCOE) division has compiled current documentation and coding requirements for telehealth services, which are listed below. This list is not intended to be exhaustive, but rather an overview of important considerations related to a compliant telehealth service line.

Documentation Requirements:

  • Patient’s Verbal Consent
  • Modality (Audio + Video, Audio Only)
  • Location of Patient
  • Location of Provider
  • Session Start and End Time
  • Total Session Time
  • Add appropriate billing modifiers:
    • 93: Synchronous Telemedicine Service Rendered Via Telephone or Other Real-Time Interactive Audio-Only Telecommunications System
    • 95: Telehealth Service
    • FQ: Behavioral health audio-only services

In addition, the following guidelines should be considered when submitting claims to Medicare for virtual mental health services:

  • If the service is performed via audio only, the practitioner must have the capacity for real-time audio and visual technology.
  • The face-to-face service may be with a clinician of the same specialty in the same group.
  • The patient must be seen in-person once every 12 months, unless it is determined that would be “inadvisable or impractical” for the patient.
  • If the patient is not seen in person once every 12 months, the reason for the exception must be documented in the medical record.
  • Initial evaluations, psychotherapy, and crisis psychotherapy may be performed via real-time audio and visual communication or audio only.
  • Evaluation and Management (E/M) services (office visits 99202–99215) require real-time audio and visual technology.
  • Telephone E/M Services (99441-99443) require audio only.

Additionally, in its CY 2023 Proposed Rule, CMS has proposed to make hospital outpatient behavioral telehealth services reimbursement permanent, which could increase access to behavioral health services in rural and other underserved communities.[11] It is important to note that after the PHE ends, additional behavioral health and telemedicine requirements will need to be met including:

  • The patient must have had a face-to-face service with the clinician within 6 months of starting telehealth (except for substance use disorders treatment and patients in a geographically underserved area).
  • The face-to-face service may be with a clinician of the same specialty in the same group.
  • The patient must be seen in person once every 12 months, unless it is determined that would be “inadvisable or impractical” for the beneficiary.
  • If the patient is not seen in person once every 12 months, the reason for the exception must be documented in the medical record.

As virtual services become more common through further regulatory shifts, healthcare organizations can expect increased scrutiny towards telehealth services arrangement by governmental enforcement bodies. The Office of Inspector General (OIG) and Department of Health and Human Services (HHS) released a Special Fraud Alert (Alert) on July 20, 2022, related to the inherent fraud and abuse risk associated with physicians or other health care professionals entering into arrangements with telemedicine companies, which specifically addresses fraud schemes related to telehealth, telemedicine, or telemarketing services based on dozens of civil and criminal investigations. The Alert identified seven characteristics that the OIG believes could suggest a given arrangement has potential risk for fraud and abuse. To learn more, reference this article and OIG’s statement.


By using telehealth, behavioral health providers can better fill the gap between growing demand and limited supply, providing quality and efficient services to those in need, particularly to underserved and isolated communities. Compliant telehealth arrangements can promote more efficient financial operations for health systems, provide increased access to care for patients, and improve the well-being of behavioral health providers.


1. https://www.commonwealthfund.org/blog/2020/aca-10-how-has-it-impacted-mental-health-care

2. https://www.psychiatrictimes.com/view/psychiatric-care-in-the-us-are-we-facing-a-crisis

3. https://www.kff.org/other/state-indicator/adults-reporting-symptoms-of-anxiety-or-depressive-disorder-during-covid-19-pandemic/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D

4. https://pubmed.ncbi.nlm.nih.gov/33267652/


6. https://www.kff.org/coronavirus-covid-19/issue-brief/telehealth-has-played-an-outsized-role-meeting-mental-health-needs-during-the-covid-19-pandemic/

7. https://bhbusiness.com/2022/07/15/cms-proposes-to-make-hospital-outpatient-tele-behavioral-health-services-reimbursementpermanent/?mkt_tok=NjI3LUNQSy0xNjIAAAGFsMvYuo_UB6dQZxBh_IkZF4hvXACFV0GIjZxfM2vrUb5h-VkrhwcEgWlpyflCT-dNK26J0lXJUVSjQhZQaVKdJQFPw4S7QA5L-e9bxR0

8. https://data.hrsa.gov/topics/health-workforce/shortage-areas

9. https://news.gallup.com/poll/355907/remote-work-persisting-trending-permanent.aspx

10. https://www.fiercehealthcare.com/providers/hhs-renews-covid-19-public-health-emergency-another-three-months

11. https://bhbusiness.com/2022/07/15/cms-proposes-to-make-hospital-outpatient-tele-behavioral-health-services-reimbursement-permanent/?mkt_tok=NjI3LUNQSy0xNjIAAAGFsMvYuo_UB6dQZxBh_IkZF4hvXACFV0GIjZxfM2vrUB 5h-VkrhwcEgWlpyflCT-dNK26J0lXJUVSjQhZQaVKdJQFPw4S7QA5L-e9bxR0

Categories: Uncategorized

Private Equity: Piqued Interest in Medical Physics

August 2, 2022

By: Maxwell Swan, Savanna Dinkel, CFA, & Vincent M. Kickirillo, CFA

The private equity (PE) space is breaking records as the world continues to emerge from the COVID-19
pandemic. PE fundraising surged almost 20 percent in 2021 as firms looked to jump back in after the
uncertain financial climate created by the pandemic. When looking to deploy this capital, PE firms have
continued to take an interest in the healthcare industry. (1) Recently within this industry, PE firms made
investments in the $4.47 billion medical physics industry that has maintained a 5.9 percent CAGR from
2013 through 2021. There are numerous reasons why PE firms have increasingly targeted the medical
physics industry, such as the current industry composition along with the growth in the need and use of
the specialty. (2) These characteristics set medical physics apart as a particularly interesting area for future

Medical Physics Industry Landscape

Medical physics is a healthcare specialization focused on the application of physics to the treatment and
diagnosis of disease. Most often, medical physics is seen in the form of nuclear medicine, diagnostic
imaging, and radiation oncology. The medical physics industry is made up of numerous small-scale
providers that operate in localized geographical areas. Only a handful of substantially sized enterprises
operate in the medical physics space, resulting in a highly fragmented industry ripe for acquisitions and
roll-ups into large-scale platforms. The fragmentation of the industry provides ample opportunities for PE
to enter and expand its foothold in the medical physics industry. (3)

In addition to the extreme fragmentation, the demand for medical physics is expected to grow
significantly over the next six years. Experts predict the medical physics market will grow at a healthy 6.2
percent CAGR through 2028, exceeding a $6 billion market valuation. This growth is driven by the
increasing adoption and widening horizons of nuclear medicine across the healthcare landscape. (2)
Additional growth is expected as hospital consolidation continues to increase the use of outsourced
medical services. Even medical tourism is expected to contribute to industry growth as revenue comes in
from those traveling to seek specialized medical care from countries like China, Brazil, or India. (4) This
multisource growth is an appealing attribute for PE capital looking for favorable returns.

Lastly, significant barriers to entry exist for new medical physics operations, including high capital
requirements for expensive machinery, increasing regulation required for the specialty, and most
notably, the shortage of skilled providers in the medical physics space. In 2014 a mandatory residency
was implemented to better prepare new medical physicists for the complex field. While the new program
has produced well-prepared providers, it has also created a bottleneck that has put a strain on the
industry’s ability to create new operations. (5) This shortage places established operators with experience
at a significant advantage, setting them up as a prime target for PE investment.

Private Equity Investment Considerations

PE firms can be beneficial collaborators and partners to medical physics practices. As PE interest in the
healthcare industry continues to increase, modern PE firms have gained the expertise to be effective
partners to healthcare practices. One of the most effective ways PE firms can enhance a medical physics
practice is through economies of scale. PE firms allow businesses to take advantage of efficiencies
created through economies of scale. By improving and centralizing back-office business operations and
providing greater access to technology, medical data, reporting and tracking systems, consolidated purchasing power, and marketing, private equity partners can create a more efficient business
structure and free up providers to focus on patient care.

Similarly, continued hospital consolidation may require other providers within their spheres of
influence to meet the greater demands and specialization needed in the industry. Some of
these demands include the growing regulation required of medical physics practices. (6)
Increasing regulatory demands may put monetary and staffing pressure on smaller
operations. The resources offered by PE investment could help alleviate some of these
pressures. (7) Furthermore, these resources could potentially improve the negotiating power
of businesses, resulting in better commercial payor rates and increased earnings.

Finally, PE investors could provide exit opportunities for retirement-age providers. PE
investment offers an exit strategy that enables these providers to monetize the business they
have built while also allowing the business to remain as an employer and provider of needed
care in its respective community. Based on an examination of the industry, as well as
discussions with industry professionals, sellers of a medical physics practice may be able to
expect a middle single-digit multiple on a given transaction. (4) For platform transactions, high
single-digit or low double-digit multiples may be warranted in the market.

Major Players and Recent Activity

As PE groups increase their interest in the medical physics industry, there have already been
several notable deals. Below is a summary of a few recent acquisitions, partnerships, and

Blue Sea Capital, a PE firm based in Florida with over $750 million in assets, partnered with
mid-Atlantic firm Krueger-Gilbert Health Physics, LLC in April 2019 to form the platform
company Apex Physics Partners. Soon after, Apex entered partnerships with Ohio Medical
Physics Consulting, National Physics Consultants, Radiological Physics, and ZapIT! QA to
enter the Ohio, Texas, and New Mexico markets. (8) In 2021 Apex added several new
partnerships including Texas-based D. Harris Consulting, Indiana-based Advance Medical
Physics, Indiana-based INphysics, and Pacific Island-based Gamma Corporation to its
partnerships as the firm continued its expansion into new markets. (10, 11, 12, 13, 14)

L2 Capital, a PE firm based in Pennsylvania with over $100 million under management,
acquired Associates in Medical Physics, LLC and Radiation Management Associates, LLC in
May of 2017. L2 combined the medical physics service companies to create the platform
company Aspekt Solutions in April of 2021. In May of 2021, Aspekt Solutions acquired Nordic
Medical Physics to expand its geographical reach. (15, 16, 17)

LNC Partners, a PE firm with $500 million under management, completed a recapitalization
of West Physics Consulting, LLC in May 2018. West Physics has since acquired Phoenix
Technology Corporation and Radiological Physics Consultants, Inc. to become the largest
diagnostic medical physics practice in the US. (18) West Physics operates in all 50 US states,
its federal territories, the Caribbean, and the Middle East. (19, 20)

Fortive Corporation is a publicly traded, diversified industrial technology conglomerate
company. Landauer provides outsourced medical physics services worldwide. Previously
involved with Gilead Capital and T. Rowe Price Associates, Landauer was acquired by Fortive
Corporation in October 2017. (21)

The Future of Investment in the Medical Physics Industry

The medical physics industry is increasingly becoming a hot target of PE investment. Although a
few major players are emerging and consolidation is increasing, there are plenty of
opportunities for PE partnerships to gain size and industry leverage due to the sheer number of
small operators in the medical physics space. The benefits and resources brought by PE firms
may be increasingly enticing to medical physics operators as the healthcare industry evolves. (6)
The spread of usage, science, treatment, and understanding of the industry will continue to
increase the demand for the care that these medical physics specialists provide.


1. “McKinsey’s Private Markets Annual Review.” McKinsey & Company. March 24, 2022.

2. “Medical Physics Market Report.” Future Market Insights. March 2022.

3. “Increased M&A in Medical Physics—What It Means to Business Owners.” SC&H Group. June 13, 2018.

4. “Medical Physics Market Size Worth US $6 Billion During 2018 to 2028.” Future Market Insights. April 1, 2019.

5. “Where Have All the Medical Physicists Gone?” Aspekt Solutions. April 12, 2022.

6. “Medical Physics M&A: Industry Consolidation Outlook.” SC&H Group. July 2, 2019.

7. “Increased M&A in Medical Physics–What It Means to Business Owners.” SC&H Group. June 13, 2018.

8. “Apex Physics Partners Announces Growth Investment.” Blue Sea Capital. May 7, 2019.

9. “Apex Physics Partners Enters Ohio, Texas and New Mexico Markets through Partnerships with Ohio Medical Physics Consulting, National Physics Consultants, Radiological Physics and ZapIT! QA.” Blue Sea Capital. August 23, 2019.

10. “Apex Physics Partners Completes 2nd Add-on Acquisition in 7 Months, Entering Texas Market.” Blue Sea Capital. November 13, 2019.

11. “Apex Physics Partners Expands its Texas Medical Physics Network in Partnership with D. Harris Consulting.” Blue Sea Capital. April 27, 2021.

12. “Apex Physics Partners Continues Midwest Expansion through Partnership with Advanced Medical Physics.” PR Newswire. February 11, 2021.

13. “Indiana’s Leading Therapy Medical Physics Group, INphysics, joins Apex Physician Partners.” Apex Physics. September 15, 2021. Press Release.

14. “Apex Physics Partners Expands Into Hawaii and the Pacific Islands With New Gamma Corporation Partnership.” Apex Physics. May 19, 2021.

15. “L2 Capital Announces Healthcare Services Platform Acquisition.” L2 Capital. May 8, 2017.

16. “Associates in Medical Physics Rebrands to Aspekt Solutions to Meet the Complex Demands of the Radiation Oncology and Radiology Market.” Business Wire. April 12, 2021.

17. “Aspekt Solutions Acquires Nordic Medical Physics.” Business Wire. May 24, 2021.

18. “LNC Partners Completes Recapitalization with West Physics Consulting.” LNC Partners. May 29, 2018.

19. “West Physics Announces Acquisition of Radiological Physics Consultants, Inc.” PR Newswire. July 21, 2020.

20. “West Physics Acquires Phoenix Technology Corporation.” LNC Partners. May 13, 2019.

21. “Landauer, Inc. Private Company Profile.” Capital IQ. May 23, 2022.

Categories: Uncategorized

Is There Value in Your Inpatient Rehabilitation Facility?

June 27, 2022

By: Sydney Richards, CVA and Stephan Peron, CVA

Inpatient rehabilitation utilization has experienced remarkable growth over the past decade, fueled by a demographic boom in the industry’s primary patient population, stable regulations, and continued Medicare reimbursement increases. Per the 2022 MedPac Report [1], inpatient rehabilitation facilities (IRFs) accounted for $8 billion of Medicare spending in 2020, and paid out to about 1,160 IRFs and inpatient rehabilitation units (IRUs) nationwide. IRUs are operated as distinct part units of an acute hospital compared to an IRF which is a licensed freestanding facility.

As the Medicare population continues to grow [2], and industry data increasingly demonstrates both the clinical efficiency and cost-effectiveness [3] of inpatient rehabilitation compared to alternative post-acute alternatives, inpatient rehabilitation utilization is expected to continue to climb. Additionally, with the low cost of capital and proliferation of strategic post-acute buyers available, it is a seller’s market for IRFs. These trends are causing many acute care operators to question whether they should monetize their hospital based IRU by selling or partnering with a third party.

Selling or partnering an IRU can provide numerous benefits to an acute care provider, including the following:

  • An infusion of cash on their balance sheet for selling a portion of or all of a non-core service line
  • Turning facility and support services into revenue from the IRF joint venture
  • Gaining IRF management expertise to improve acute care discharges and assist with acute length-of-stay
  • Freeing up acute care beds
  • Improving strategic focus for operational excellence
  • Freeing up hospital management time while providing host hospital cash flow
  • Protecting from future inpatient rehabilitation regulatory burdens and risks

Benefits of a Joint Venture/Sale of an IRU

The healthcare provider market saw a decrease in the number of transactions in 2020 due to the global pandemic, but according to Irving Levin’s 4th Quarter 2020 M&A report [4] Q4 2020 saw a dramatic recovery in both healthcare deal volume and spending. [3] Based on VMG Health’s 20-year IRF-specific transaction database, IRF average values per occupied bed are trending at a 10-year high. Favorable returns for sellers and buyers are fueling this growth. Post-acute management companies such as Encompass Corp., Kindred Healthcare, and Select Medical have made public their IRF-focused growth objectives and their demand for strategic partnerships with IRFs in markets across the US.

In their September 2020 presentation at the Baird 2020 Global Healthcare Conference, Encompass CEO Mark Tarr reiterated Encompass’s aim to add 100 to 150 beds per year starting in 2021 through de novos and acquisitions. [5] Kindred also stated in a December 1, 2020 press release that they expect “to open 20 new rehabilitation hospitals, acute rehabilitation units, and behavioral health hospitals with leading strategic hospital partners over the next two years.” [6] These factors suggest an opportunity for acute care providers to capitalize on their rehabilitation units through a sale or joint venture model.

Through a sale or partnership, the acute care provider can drive operational excellence for the host hospital by generating additional bed capacity within the health system and potentially lowering the hospital’s average length of stay. An IRF management company with access to best practices in patient admission criteria and IRF regulatory rules could allow for quick patient assessment and discharge from an acute setting to an inpatient rehabilitation facility. If bed capacity or length of stay are not issues for the host hospital, a partnership with a management company could provide additional revenue from facility lease arrangements and patient service contracts. Also, if market demand is present for additional IRF beds, the IRF partnership could use additional nonoperational beds from the host hospital to provide income from otherwise nonprofitable hospital space. Finally, the partnership could license the host hospital’s tradename as another opportunity to capitalize on an existing asset for revenue or joint venture equity.

In addition to driving operational excellence for the host hospital, a sale or partnership with a strategic buyer can advance the IRF’s top-notch quality care and clinical effectiveness at efficient costs. Using knowledge of clinical best practices, therapy recruiting and training, and economies of scale, strategic post-acute providers can drive high-quality care at a more profitable rate and obtain additional returns for the hospital partner. MedPac data corroborates this claim with for-profit aggregate IRF Medicare margins at 24.2% of revenue as compared to nonprofit margins at just 1.5% (see table below).

Source: MedPac 2022 Annual Report to Congress, (Footnote 1, page 323)

Additionally, a sale or partnership can insulate an acute care provider from future regulatory burdens or risks. Historically, the inpatient rehabilitation industry has dealt with material legislative changes to patient admissions and quality reporting standards. Specialized post-acute care providers can navigate industry requirements like the Centers for Medicare & Medicaid Service (“CMS”) 60% Rule [7] and the three-hour therapy care rule [8] while providing additional patient access and quality patient care.

As new developments arise, such as continual revisions to the CMS Inpatient Rehabilitation Quality Reporting Program and patient admission criteria, inpatient rehabilitation-specific operators have the concentration and corporate strategy teams in place to study new legislation and its potential impact on operations. Additionally, a sale or partnership can provide a health system with some protection against future reimbursement risks in the industry. MedPac’s annual report to Congress has suggested a 5.0% reduction in the Medicare reimbursement rates for inpatient rehabilitation reimbursement every year from 2017 to the latest report published in March 2022.1 This was in response to the climbing aggregate Medicare margins in the industry, which in 2020 were 13.5% across all IRFs (freestanding and hospital-based, excluding Medicare COVID relief funds), according to the 2022 MedPac report. [1] MedPac estimates the 2020 aggregate Medicare margin was 14.9% including estimated Medicare share of federal relief funds. Although CMS has continued to project positive reimbursement growth in the final rule, if margins continue to rise it is expected that reimbursement may eventually be reduced. Based on the 2020 -0.7% aggregate Medicare margin for nonprofits (2.6% inclusive of federal relief funds) and the 1.6% aggregate Medicare margin for hospital-based IRFs (4.0% inclusive of federal relief funds), it is unlikely that a 5% Medicare reimbursement cut would be viable for many hospital-based IRFs in these settings.

Finally, the sale or partnership of a rehabilitation unit allows the hospital to continue its integrated delivery model with a partner in post-acute care or have a partner ready to implement an integrated network. As CMS transitions to value-based payments and outcome focus, aligning with or selling to a strategic partner could provide the hospital with focused expertise in managing patient readmission. Multiple management companies, such as Encompass, Kindred, and Select, have proven success with risk-sharing models with acute care providers. This could help the health system with both care quality and profitability.

Downsides to a Joint Venture/Sale of IRU

Although there can be many benefits to selling or partnering an IRU, as with any business transaction, there are also some drawbacks. For an acute care provider, a key downside can be the loss of control. The acute care provider would lose the ability to flex its bed use if the inpatient rehabilitation beds were sold or contributed to a joint venture. The ability to flex beds became an important capability during the COVID-19 outbreak in the US. Additionally, under a joint venture partnership, the acute care provider opens itself up to reputation risk since control and management of the IRU is entrusted to a third party. Through a sale or partnership, the acute care provider sells forward profits, and the host hospital needs to account for the overhead expenses that were historically allocated to the IRU.


In summary, many acute care providers should ask, “Are they generating the most value from their IRU as they could or should?” A sale or partnership of the IRF could add value to the health system beyond the initial cash flow from a transaction. The relationship between an acute care host hospital and the IRF is considered a referral relationship with Medicare patients. Therefore, whether through a sale or contribution, healthcare transactions must be properly established at fair market value. Based on VMG Health’s experience with hundreds of IRF transactions, the departmental operational reports never represent IRF’s real economic impact on the host hospital. As many IRUs operate as departments of hospitals and utilize allocated cost methodologies, it can be a highly technical undertaking to assess the profitability and overall value of an IRU. Specific knowledge and insight into key industry value drivers, such as reimbursement/payor mix, staffing metrics, unit size/bed configuration, and utilization, should be considered. A credible valuation with access to a detailed national IRF benchmark analysis9 for revenue and expenses can help ensure a successful transaction.

To provide some IRF value perspective, VMG Health has observed IRF transactions per occupied bed as high as $800,000, with common value ranges per licensed bed between $200,000 and $400,000, and revenue multiples typically falling in the 0.8–1.4x range. This year might be a great time to ask, “Is your IRU generating the value your patients have come to expect, supporting your healthcare strategy, and adding value to your bottom line?”


[1] MedPac 2022 Report (https://www.medpac.gov/wp-content/uploads/2022/03/Mar22_MedPAC_ReportToCongress_Ch9_SEC.pdf

[2] Medicare population projected at 5% annually over the next several years.

[3] Census projections for 2018 to 2022 and 2022 to 2026. https://www.census.gov/data/datasets/2017/demo/popproj/2017-popproj.html

[4] Encompass Health Investor Reference Book https://s22.q4cdn.com/748396774/files/doc_downloads/investor_reference/2020/11/EHC-Q3-2020-Investor-Reference-Book_11-13-20_As-Filed.pdf

[5] Irvin Levin’s 4th Quarter 2020 M&A Report

[6] Baird 2020 Global Healthcare Conference https://investor.encompasshealth.com/events-and-presentations/other-events-and-presentations/event-details/2020/Baird-2020-Global-Healthcare-Conference/default.aspx

[7] Kindred Healthcare December 1, 2020 Press Release (https://www.kindredhealthcare.com/about-us/news/2020/12/01/kindred-healthcare-advances-growth-strategy-completes-sale-of-rehabcare

[8] Medicare reimbursement per episode of care for inpatient rehabilitation is generally higher as compared to other post-acute facilities because IRFs are designed to offer intensive rehabilitation services to patients that cannot be served in other less intensive rehabilitation settings, such as skilled nursing facilities or home health. Due to the higher reimbursement, CMS became concerned that patients who did not require intensive rehabilitation services were being treated in an IRF setting. Therefore, CMS implemented the 75% rule which required that 75% of patients admitted to an IRF have a primary diagnosis or comorbidity in one of the 13 qualifying medical conditions listed in the table below. After implementing, Medicare adjusted the 75% rule to a new compliance threshold of 60% by the Medicare, Medicaid, and SCHIP Extension Act of 2007 (“MMSEA”). In addition, MMSEA also permitted IRFs to use patient’s secondary medical conditions & comorbidities to determine whether a patient qualifies for inpatient rehabilitative care. The legislation is referred to as the “60% Rule.”

[9] In addition to the 60% rule, to be eligible for payment as an IRF under CMS, patients must attend three hours of therapy in 5 of 7 consecutive days.

[10] VMG Health’s proprietary inpatient rehabilitation database includes 20 years of inpatient rehabilitation analyses with over 100 IRF transactions.

Categories: Uncategorized

Public Healthcare Operators: Valuation Trends Summary

June 21, 2022

By: Jordan Tussy and Colin McDermott, CFA, CPA/ABV

While the valuation of a public company is dependent on macroeconomic, industry, and company-specific factors, VMG Health has attempted to isolate key drivers of the recent market pullback of public healthcare operators. Specifically, VMG Health has isolated two variables:

  1. Change in equity analyst consensus EBITDA estimates for FY 2022.
  2. Change in the implied forward EBITDA multiple utilizing current enterprise value.


VMG Health reviewed the change in enterprise value, EBITDA, and the implied forward multiple, as defined below, of 17 publicly traded healthcare operators from December 31, 2021, to June 10, 2022. We then quantified the impact on enterprise value for each of the identified companies in Exhibit A resulting from fluctuations in EBITDA as compared to the implied forward multiple over the observed period.

Key Definitions

  • EBITDA: Equity analyst consensus EBITDA estimates for FY 2022 as of the observation date per S&P Capital IQ [1].
  • Enterprise Value: Defined as the market value of equity plus interest‐bearing debt (excluding right-of-use liabilities) and minority interest less cash and cash equivalents.
  • Implied Forward Multiple: [Enterprise Value] ÷ [FY 2022 Consensus EBITDA Estimates].

Key Observations

Based on a review of 17 publicly traded healthcare operators, aggregate total enterprise value declined by approximately $46.1 billion, or 15.0%, from December 31, 2021, to June 10, 2022. While 10 of the 17 companies now have lower consensus EBITDA estimates, this appears to account for only 10.9% of the enterprise value decline. The overwhelming reduction in the total enterprise value is due to multiple contraction with 13 of the 17 companies currently trading at a lower implied multiple.

Furthermore, 14 of the 17 public operators experienced a decline in enterprise value over the last six months, whereas Acadia Healthcare Company, Inc., LHC Group, Inc., and U.S. Physical Therapy, Inc. were the only three companies that saw an enterprise value increase over the same period [2]. Unsurprisingly, these companies also did not experience multiple contraction.

The two publicly traded diagnostic laboratory businesses, Laboratory Corporation of America Holdings and Quest Diagnostics Incorporated, experienced the most significant enterprise value decline because of multiple contraction. On average, the implied forward EBITDA multiples decreased by approximately 4.0 turns of EBITDA, from around a 13.0x to approximately a 9.0x. 

Select Medical Holdings Corporation (“Select”) saw the most significant enterprise value decline due to a decrease in consensus EBITDA estimates. Select’s EBITDA has declined by almost $150.0 million over the last 6 months, which has resulted in a 15.6%, or $1.2 billion, reduction in enterprise value. Overall, the trading multiples for public operators within the post-acute care sector have remained relatively flat, but consensus EBITDA estimates have declined by approximately 6.7% with an approximately $2.6 billion impact on enterprise value.     

Among the publicly traded acute-care hospital operators, HCA Healthcare, Inc. experienced the most significant dollar reduction in enterprise value, decreasing $19.6 billion, or 17.0%, from $115.3 billion to $95.8 billion. Of this change, approximately 62.6% was due to multiple contraction and 37.4% was due to consensus EBITDA decline. Collectively, enterprise value for the acute care hospital sector decreased by approximately 14.2%, or $24.0 billion, driven primarily by a contraction in trading multiples of nearly 1.0 turn of EBITDA.        

Of the other publicly traded healthcare operators observed, Surgery Partners Inc. experienced the most significant impact on enterprise value, on a percentage basis, due to the contraction in implied multiple. The company’s multiple declined by almost 5.0 turns of EBITDA from December 31, 2021, to June 10, 2022, resulting in a $1.9 billion, or 21.8%, reduction in enterprise value. Overall, declines in consensus EBITDA estimates did not have as significant of an impact on enterprise value as implied multiple contraction for the other companies with two of the five operators experiencing growth in their consensus EBITDA estimates over the observed period.


The equity markets continue to react to macroeconomic factors, such as interest rate fluctuations, as well as industry-specific information, including rising labor costs. While many of the public companies currently have lower consensus EBITDA estimates for FY 2022, the market seems to have also pulled back on valuations, as evidenced by the decline in the implied forward multiples. It is yet to be determined if this reduction is short-term in nature, and VMG Health will continue to monitor the public markets.


[1] VMG Health relied on S&P Capital IQ for the FY 2022 consensus EBITDA estimates as of December 31, 2021, and June 17, 2022. The consensus EBITDA as of December 31 is primarily based on analyst estimates following companies’ Q3 2021 earnings calls through December 2021. Similarly, the consensus EBITDA as of June 17 is largely comprised of analyst estimates following the Q1 2022 earnings calls through June 2022.

[2] While VMG Health’s analysis focuses on the effect of two variables on enterprise value, we understand there are additional factors impacting public company valuations. For example, following the March 29, 2022 announcement of UnitedHealth’s plan to acquire LHC Group, LHC’s price and forward multiple increased and have remained elevated based on the market expectations of this transaction.   

Exhibit A

Categories: Uncategorized

Five Key Takeaways From the Public Healthcare Operators in 2021

February 9, 2022

By: Olivia Chambers, Savanna Dinkel, CFA, Madison Higgins, Madeline Noble, and Ayla Saglik

As we enter 2022, we look back to reflect on the major trends that shaped the healthcare sector over the past year. COVID-19 continued to be a major player throughout 2021, forcing healthcare systems to adapt to new variants, rising labor pressures, financial activity, and new regulations. Despite these challenges, the sector remains optimistic and ready to adapt.    

Here are five key takeaways we believe defined the healthcare sector over the past year:

Financial Recovery From Pandemic

After the Q2 earnings season, VMG Health released an article analyzing post-COVID healthcare operator guidance. Generally, we found that healthcare operators were optimistic about the recovery of their revenue and adjusted EBITDA metrics over pre-pandemic levels, with most operators increasing their FY 2021 guidance with each subsequent reporting period.

While optimism for recovery to pre-pandemic levels remains, it appears that the post-acute operators have tempered some of their recent growth expectations. Based on disclosures of the public operators, the recent resurgence of COVID-19 through the Omicron variant has caused additional strain on the post-acute sector. During the J.P. Morgan Healthcare Conference, Universal Health Services (“UHS”) CFO, Steve Filton noted that the company was struggling to find providers who can accept COVID patients once they are ready to be discharged from the hospital.

Post-acute providers appear to have been hit especially hard by the recent labor shortages in the healthcare industry (discussed further below). As compared to the hospital operators, the financial performance of these post-acute providers has been affected disproportionally by the labor shortages. While hospital operators have been receiving additional reimbursement for COVID patients, helping to offset a portion of the increased staffing costs, the post-acute care providers have not received a similar subsidy.

Due to these recent pressures, Select Medical Holdings Corporation (“SEM”) released an expected earnings announcement in advance of the actual results, in which it noted “the unpredictable effects of the COVID-19 pandemic, including the duration and extent of disruption on Select Medical’s operations and increases to our labor costs, creates uncertainties about Select Medical’s future operating results and financial condition.”

While we have seen increasing optimism by healthcare providers over the past few quarters, the recent disclosures from the post-acute sector illustrate that the effects of COVID continue to ripple through the healthcare sector.  With the fourth quarter results being released over the coming weeks (HCA and Encompass recently released), it will be interesting to hear if other sectors report similar headwinds.  

Rising Labor Expense: Potential Impact to 2022 Performance

Healthcare labor expenses continued to exceed historical levels with a 12.6% year-over-year increase based on a recent analysis of over 900 hospitals. Labor expenses grew at a faster rate than the number of clinical hours worked, which supports the notion that rising labor costs were not due to increased staffing levels but rather due to labor shortages driving higher pay to improve employee retention. Part of the labor shortage can be credited to the surge of  Delta and Omicron variants in the second half of 2021 that resulted in high volumes of quarantined staff and a reliance on costly contract labor and travel nurses. At the Bank of America December 2021 Home Care Conference, LHC Group announced a decrease in quarantined staff throughout Q4 from a high of 4% down to 1% in December. This indicates that the labor market issues will see some improvement as health systems’ dependence on pandemic-related contract labor declines as COVID-19 surges dissipate going into 2022.

A more concerning challenge faced by all sectors was the shrinking workforce, coined the “Great Resignation.” The Bureau of Labor Statistics reported healthcare and social assistance workers had the second highest quit rate in November 2021 at 6.4% due to increasingly high levels of professional burnout. The waning labor force has prompted companies to offer additional incentives such as shift and retention bonuses. For example, HCA reported during Q3 a 10-12% annual increase in FTEs being in the premium pay categories. Many large public players have voiced an anticipation of continued high levels of premium pay, competitive bases, and higher annual wage inflation to attract and maintain adequate staffing levels in 2022.

Leaders in the industry have announced initiatives to decrease labor pressure primarily by focusing on recruiting and retention to bounce back to pre-pandemic levels of employment. With a heightened focus on attracting and maintaining adequate levels of hired staff as opposed to contract labor, it appears the overall industry expectation for 2022 is that labor costs will likely decrease compared to 2021 although not to pre-pandemic levels. The chart below shows the percentage change in employment across the healthcare sector from the Bureau of Labor Statistics Job Openings & Labor Turnover Survey from February 2020 to November 2021. This highlights the steady recovery toward pre-pandemic staffing levels for outpatient care and physician offices, the continued employment challenges in home health and hospital settings, and the notable struggle for community and nursing care facilities to return to a state of normalcy.

Robust M&A Activity

Deal activity within the healthcare sector was strong in 2021 with industry-specific multiples that reached or in many cases exceeded 2019 levels. Experiencing a noticeable rebound from 2020, volume and value of deals grew by substantial margins on a year-over-year basis. Deal volume in the health services industry rose by 56% while value rose 227% in the TTM 11/15/21 period. Long-term care led all sectors with the highest volume of deals, as seen historically, and continues to remain a hot spot in the transaction space. Similarly, physician medical groups and the rehabilitation sector experienced the largest growth transaction volumes year-over-year.

Physician medical groups have received vast interest in physician employment from private equity firms, new-age value-based care organizations, services arms of managed care giants (Optum, Neue Health), and health systems. This, coupled with independent physician group operating challenges from COVID-19 related volume impact and looming Centers for Medicare and Medicaid Services (CMS) cuts, is creating a robust transaction environment that is expected to continue during 2022. For the rehabilitation sector, strong demographic tailwind, along with the lifted CON moratorium in Florida and continued joint venture interest between health systems and strong rehabilitation operators (Select, Kindred, Encompass), has resulted in material deal volume in the space.

Hospitals and health systems were the only sector to see a decline in volume of deals, down 26% from the previous year. Despite the decline, the total transaction size of deals only dropped slightly year over year, indicating larger deal-size on a per-transaction basis. The acceleration of megadeals taking place, the shifted focus on scale, and the diversification of their business models all drove average total size per deal higher than seen before in 2021.

Price Transparency

Effective January 1, 2021, the Centers for Medicare and Medicaid Services (CMS) implemented a price transparency rule requiring hospitals in the United States to provide accessible pricing information to patients about the cost of the care they may receive. Hospitals must display negotiated rates for all items and services, in a machine-readable format, so that patients can compare prices before arriving at the hospital.

Though, in July 2021, a study was published by PatientsRightsAdvocate.org detailing that a vast majority of hospitals were not compliant with the new rule. At the release of the study, the penalty for non-compliant hospitals was $300 per hospital, per day. While many patients advocate for CMS to stiffen penalties for non-compliant hospitals, healthcare professionals argue against the rule, stating CMS did not provide enough clarity on what the rule should entail.

A vice president of a large U.S. health system discussed the ambiguities around the rule with Fierce Healthcare. “One interpretation is you simply publish your rate schedule – whatever your rate exhibits are in your contracts, publish that and that’s compliant. Another one is to summarize these [CMS] packages [and] what your negotiated charges are.” For many health systems, the resources required to implement their rates in a machine-readable format far outweigh the penalty of remaining non-compliant. The VP stated that he believes many hospitals already provide their rates in a clear, understandable way, but the rule’s lack of clarity and the requirement for a machine-readable format make compliance difficult and costly.

In November 2021, CMS released the 2022 Outpatient Prospective Payment System (OPPS)/Ambulatory Surgery Center (ASC) Payment System final rule (OPPS Final Rule). Within this rule, CMS increased penalties for hospitals that are not compliant with the price transparency rules and removed barriers for patients accessing online pricing information.

While the Final Rule may be beneficial for patients, Stacey Hughes, Executive Vice President for the American Hospital Association (AHA), states that they “are very concerned about the significant increase in penalties for non-compliance with the hospital price transparency rule, particularly in light of the many demands place on hospitals over the past 18 months, including both responding to COVID-19, as well as preparing to implement additional, overlapping price transparency policies.”

The new penalties, visible in the chart above, went into effect on January 1, 2022.

IPO and SPAC Stock Price Performance

A record number of health and health services companies went public during 2021 by way of SPAC or IPO. Rebecca Springer, a private equity analyst with PitchBook noted, “The multiples in public markets are very, very strong right now, so you can get, all else equal, a better return on your investment if you go public with your company rather than selling it to a strategic investor.”

Unfortunately, while the stock market might be performing well, the recently public healthcare operators have not faired as well since their initial offerings. The Healthy Muse Health Tech Index (“HTI”) generally underperformed the overall performance of the stock market, with the majority of the players finishing in red; the HTI declined 35% as opposed to the 27% gain for the S&P 500 during 2021. The public markets seemed like a perfect place for an exit strategy given the multiples observed in the public markets. All recent entrants finished the year below the original IPO price and while the reasons for the price declines varied it is clear the public markets are less forgiving with valuations if an organization does not achieve expectations.


Overall, the healthcare sector experienced highs and lows during 2021 as it continued to navigate a post-COVID world. As pandemic pressures continue into 2022, healthcare institutions will have to keep a close eye on staffing costs and abide by new regulations. Despite these challenges, the appetite for M&A transactions and market participation in the sector remains strong. We look forward to a new year of challenges, wins, and continued changes in this interesting industry.









Categories: Uncategorized