Why the Outpatient Physical Therapy Business Model is Broken

… and What Can Be Done About It

The outpatient physical therapy business model is broken. More specifically, the third-party Fee-for-Service (FFS) in-network reimbursement model, once a source of business growth for physical therapists, is now slowly constraining the profitability of smaller practices that do not have negotiating leverage over payors nor economies of scale to weather increasing overhead costs.

There was a time when there were higher reimbursement rates combined with looser restrictions (a lower burden of pre-authorizations, visit limits, medical necessity audits, billing/coding requirements, payment delays..etc), but those “good old days” are gone.

On a fundamental level, FFS is not a significantly profitable business model for physical therapy in today’s world. And this is because the FFS model does not properly capture the value creation achieved from physical therapy, such as mobility and quality of life improvements, prevention of unnecessary procedural care, and chronic disease management. Therapists can not extract the value achieved from these activities in terms of revenue in this business model. There is no CPT code for “prevented knee arthroscopy” or “abolished low back pain without the need for an expensive MRI or CT scan”.

So is the profession destined for an agonizing decline? What can be done to counteract this trend?

The bright side of the story is that physical therapy as a service has strong demand in the healthcare market. The value is still recognized. We just need to modify how we extract value. And the best way to do this is to look at other business models, in healthcare and elsewhere, that have successfully captured value with analogous market dynamics and constraints.

Hospital Systems, Loss Leaders, and The Airline Industry Offer One Solution

Perhaps the closest analog is our friends over at the hospital systems. Hospital systems have services such as primary care and emergency care at scale. The only issue is that primary care is largely a loss leader for US hospitals. Many hospitals lose money on primary care visits. However, these visits do act as a referral source for higher-margin services such as orthopedic and cardiac surgeries. Similarly, physical therapy, with ever decreasing reimbursement, can act as a “loss leader” of sorts to more profitable, higher margin cash-based services such as medical equipment sales, massage therapy, fitness classes, personal training, and coaching/wellness programs.

Providing the service of physical therapy and getting paid for that service may NOT be the correct economic model for this business. On face value, this may seem counterproductive to move away from the core competency of the profession but there is precedence for this type of business model.

In fact, this is actually quite common in many other industries. For example, the airline industry makes some of its revenue on passenger ticket sales. However, in recent years, the ancillary services and revenue streams have contributed substantially more to their overall income. These ancillary services include in-flight services (beverage, entertainment, wifi), baggage fees, and most importantly- loyalty programs. By loyalty programs, I am referring to frequent flyer programs.

Let me state this clearly- Airlines don’t make that much money by charging you for a seat on their plane (their core competency). They make their money by partnering with credit card companies for points and sales of miles. Credit card companies will give the airline profits from its high-margin/high-interest rate debt that they are issuing to credit card holders who entice you to build that high interest debt with airline points.

These companies also enhance their revenues by co-branding credit cards, so airlines earn revenue every time a transaction is made, when someone opens a new credit card, or when an annual fee is paid on that card. All of these strategies (and more) have transformed these frequent flyer programs into financial assets with significant standalone value that sometimes even exceeds the airline’s core operations!

But airlines aren’t the only ones using this strategy. Ancillary revenue streams have become significant contributors to overall profitability in other industries such as hospitality (think major hotel chains that make lots of profit not through sales of rooms, but through services like in-room dining, WiFi, event hosting, and ofcourse- alcohol sales).

Value-based Care Offers Another Great Solution

The other solution to the FFS problem lies in improving the overall care quality and entering into different types of contracts other than FFS. By moving from a no-risk / fee-for-service model to a model that assumes some level of risk and charges self-insured employers a bundled payment or case rate for physical therapy services, some companies such as Integrated Musculoskeletal Care (IMC) have been able to grow and expand by contracting directly with employers (rather than insurance companies) and contractually guaranteeing both clinical and financial outcomes.

In fact, a study published in 2019 demonstrated how IMC uses standardized, quality-assured treatment for low back pain to achieve a cost-savings of 51% in musculoskeletal care compared to standard community care through quantifiable reductions as demonstrated in claims data for downstream interventions such as MRI, spinal injections, and lumbar surgeries for a major employer. The savings were consistent after adjusting for age, gender, and other risk factors.

The key to this is increasing the risk on the part of the provider. If patients get better quicker, we get paid more per unit of treatment time. If patients don’t get better or end up using more downstream services, we take the financial loss. And in order to pull something like this off, we need providers trained to a high standard, quality assurance programs built around those standards, and the technology available to measure this data over time.

Why Subscriptions Are Key

Similarly, we can achieve similar results through full capitation or even subscription-based arrangements. If done correctly, we wouldn’t bill FFS, but we would have a constant stream of revenue to manage the MSK health outcomes for a particular population. In this scenario, the patient or the employer is paying a subscription model for a clinic or service.

Subscription services have recurring revenue. And this inherently makes them a more scalable business model in any industry, not just healthcare. In fact, healthcare is not the only industry that uses a FFS business model. Other service-based industries such as legal services, accounting, consulting, automotive repair, plumbing companies,...etc also use a FFS business model. And they face similar difficulties in scaling using the FFS model, namely the fact that FFS:

1. Relies heavily on labor intensity (often skilled labor) making it challenging to scale operations without a proportional increase in workforce

2. Has standardization difficulties as we’ve seen in physical therapy (but also in other professions such as law) where services are tailored to individual clients, complicating efforts to standardize offerings for mass delivery.

3. Has geographical limitations which often require a local presence which limits the ability to expand without establishing multiple physical locations.


Here’s The Point…
The value extraction in physical therapy is based on value that is created by restoring mobility/function, improving quality of life, and preventing unnecessary downstream procedural care. And this is not captured properly through FFS. It is better captured either in a:

1. Recurring revenue stream: such as a subscription service or a value-based care model (such as a bundled payment or case rate) where you’re taking on premium risk.
Or
2. Loss leader model: such as that which is used by hospitals and airlines, where the physical therapy service itself is merely an enticement to higher margin in-demand services like fitness classes, wellness programs, and other modalities.

Which of the two is better? I would say the #2 is the better short-term solution, while #1 is better for the long-term. However, what I can say for certain is that both models can work, whereas FFS is becoming more and more unsustainable in today’s environment of increasing overhead and decreasing third-party reimbursement.