If You Like Physician Practices: You will Love Veterinary
John DeLorenzo, CFO Consulting Partners LLC
Following our introductory article introducing our healthcare practice, we followed up with an article that discussed the changing dynamics of physician practices.
As we serve our clients in healthcare practices, we are seeing significant opportunity within the veterinary practice area. This article titled – If You Like Physician Practices: You Will Love Veterinary, will tell you why.
While there are some larger corporations leading the consolidation of vet practices, think Mars, NVA (National Veterinary Associates) Blue River and VetCor, they generally target groups that have had some level of consolidation already. Mars targeted some of the larger consolidated groups such as Blue Pearl, Pet Partners, Banfield and VCA, while consolidators like Blue River out of Chicago will target individual hospitals. Groups like Veterinary Practice Partners and Community Veterinary Partners, both in Eastern Pennsylvania, will invest in and co-own practices with current owners.
While private equity has been active in vet consolidation, they are also investing in the consolidators, leaving early stage consolidation to others. Earlier this year Oak Hill Capital Partners, Harvest Partners and Cressey & Company recapitalized VetCor. Morgan Stanley Global Equity Partners invested in Pathway Partners Vet Holding. In 2017, Summit Equity sold NVA to Ares and OMERS and KKR invested in Pet Vet Centers. NVA and Pet Vet Centers valuations were rumored at EBITDA multiples of 13-15x while the Mars acquisition of NVA was at 18.2x according to bankers.
According to Forbes/Merger Market, smaller hospital acquisitions are fetching 8-10 multiples while smaller single practices in less desirable locations are getting 6-7x. A typical larger vet group can have EBITDA margins in the area of 15-20%, with smaller practices 7-18%. According to Simmons Veterinary Practice Sales and Valuations the industry average is 10-12%.
So, what we are learning? The vet business is healthy with an industry average of 10-12% EBITDA margins. Consolidators can acquire practices in the low to mid-teens multiple range, while growing margins as a result of creating a consolidation platform to 15-20% while increasing the valuation multiple as well. This is a recipe for good returns for investors while providing significant exit returns for sellers.
Also, it appears that the competition for buying opportunities is easier than that of physician practices as vet practices are in an earlier stage of consolidation than physician practices with the absence of hospital competition that exists in the physician practice area. Also, people love their pets and are willing to pay for more complex procedures that continue to develop in areas such as orthopedics, neurology and oncology.
While the vet business still has some of the “professional corporation” regulatory issues faced by physician practices, there is significantly less liability, payor issues (Medicaid, Medicare, private payor), and general regulatory issues to contend with than that of a physician practice. On a simplistic basis, these advantages seem to accrue while providing similar investment returns between physician practice and vet practice investments.
CFO Consulting Partners’ healthcare practice is here to help you as we are well versed in hospital, medical and veterinary practices. We can assist vet practices to prepare for an exit while providing private equity with assistance to prepare a consolation strategy, identify acquisitions and assist with due diligence and integration.
In our introductory article introducing our healthcare practice, we provided a general assessment of the American Healthcare system and the state of flux that currently overshadows the industry and its practitioners.
There are significant changes that are profoundly affecting individual practitioners and small physician groups that require self-assessment and adjustment to survive in the changing environment.
Because of a more recent development, a totally different method of provider reimbursement, from fee for service or volume payments, to outcome based reimbursements or Value Based Care (VBC) is being encouraged by both Centers for Medicare and Medicaid (CMS) and by private insurers. Essentially, fees for services under VBC are paid based
on case outcome and the payment must be shared by all providers in the continuum. VBC reimbursement was originally introduced by the CMS, however now private insurers are moving in the direction of value based reimbursement and they are providing incentives to healthcare providers to participate. What is essential to succeed in the VBC method of reimbursement lie in integration of providers and the ability to aggregate data.
Even prior to the movement to VBC, the PPACA is requiring all practitioners to utilize Electronic Medical Records, (EMR) which is costly in both software acquisition as well as implementation. While a burden to small practitioners and groups, EMR will ultimately allow groups to operate, integrate and bill more efficiently.
As new requirements continue to be heaped on single physician practices and small groups, they have been dwindling as more groups consolidate to gain scale and integration. Also, there is a significant trend toward physician groups selling their practices to hospitals, as hospitals are a significant cog in the VBC wheel.
Because of PPACA, more insurers are requiring providers to be part of networks and are grouping providers into tiers where reimbursement is based upon a provider’s relationship with the insurance provider and other providers within the network and tiers. It is becoming less likely that practitioners can assume that the patient’s insurance company will cover the services provided, as more insurance companies are restricting out of network reimbursements. As an example, there are no insurance providers offered by the PPACA in the New Jersey marketplace that reimburses out of network services.
Viability in the changing healthcare delivery model for practice groups will require a significant change in how a practice operates, will require investments in information technology, possibly require upgraded staffing as well as the development of relationships with other providers in the continuum.
Sole practitioners and practice groups need to assess their situations and determine if they are positioned to continue independently or should they align with a network of providers or sell to a larger group or hospital.
CFO Consulting Partners’ healthcare practice is here to help you. We can assist you to access your current situation and help you create and implement a plan forward. We can also assist you should you decide to align with a network or sell or consolidate with another group or hospital.
The United States possibly has the most complex healthcare system in the world. The American healthcare system regulates the industry at both the federal and state level. It is paid for by private health insurance as well as from the government under its Medicare and Medicaid programs. Healthcare services are provided by the private sector; by both for-profit and non-profit entities, however; the government also provides services directly through the Veterans Administration. All of this, in a population with disparate levels of wealthy and poor citizens, leads to highly chaotic distribution of care and a complex payment system.
While half of all Americans receive healthcare coverage through their employers, the plans are subject to crushing regulations both federally and at the state level. Those Americans receiving healthcare coverage through Medicare and Medicaid, subject the provider to lower reimbursements. As a result, providers are less willing to take on Medicare and Medicaid patients, leading to a shortage of providers for that patient base. Patients that are not covered by their employer or a federally provided healthcare program are required to seek private insurance. However, because of the Patient Practice and Affordable Care Act (PPACA), patients are provided limited options and those options greatly restrict their choices regarding providers.
Because of a more recent development, a totally different method of reimbursement to providers, from fee for service or volume payments, to outcome based reimbursements or Value Based Care (VBC) is being encouraged by both Centers for Medicare and Medicaid (CMS) and by private insurers. Essentially, fees for services under VBC are paid based on case outcome and the payment must be shared by all providers in the continuum. VBC reimbursement was originally introduced by the CMS. However private insurers are moving in the direction of value based reimbursement and providing incentives to healthcare providers to participate. What is essential to succeed in the VBC method of reimbursement lie in integration of providers and the ability to aggregate data.
Even prior to the movement to VBC, the PPACA is requiring all practitioners to utilize Electronic Medical Records, (EMR) which is costly in both software acquisition as well as implementation. While a burden to small practitioners and other small providers, EMR will ultimately allow participants in the continuum to operate, integrate and bill more efficiently.
Adding to the complexity of the American Healthcare system is the attempts to repeal of the PPACA. The potential of repeal is having the greatest impact on the insurance industry, impacting the cost of insurance, as subsidies provided by the federal government are uncertain depending on the success of repeal and its subsequent replacement.
CFO Consulting Partners’ healthcare practice is here to help you. We can assist you to access your current situation and help you create and implement a plan forward that will help insulate your practice as the rapid changes within the industry unfold.