WEBVTT 00:00:02.508 --> 00:00:02.730 All right, 00:00:02.750 --> 00:00:04.253 today we're going to talk about a phrase 00:00:04.272 --> 00:00:05.977 that everyone who's ever worked inside a 00:00:06.017 --> 00:00:08.561 large healthcare organization has heard at 00:00:08.641 --> 00:00:09.364 least once. 00:00:09.624 --> 00:00:10.827 And maybe you Googled it to see what 00:00:10.846 --> 00:00:11.108 it meant. 00:00:12.718 --> 00:00:14.519 also usually a little bit of dread 00:00:14.880 --> 00:00:15.641 attached to it. 00:00:15.861 --> 00:00:16.742 And the phrase is, 00:00:17.242 --> 00:00:18.943 what's the EBITDA impact? 00:00:19.463 --> 00:00:20.664 Now, if you're a clinic director, 00:00:20.844 --> 00:00:21.804 a regional operator, 00:00:21.844 --> 00:00:23.626 or someone working inside a PE-backed 00:00:23.666 --> 00:00:24.567 healthcare organization, 00:00:24.586 --> 00:00:25.486 the size doesn't matter. 00:00:25.847 --> 00:00:28.428 You know exactly what that question means. 00:00:28.509 --> 00:00:30.791 It means the conversation has just shifted 00:00:30.890 --> 00:00:33.712 from clinical care to financial 00:00:33.893 --> 00:00:34.453 performance. 00:00:35.137 --> 00:00:35.337 Now, 00:00:35.777 --> 00:00:37.399 Larry's been watching this happen across 00:00:37.518 --> 00:00:39.560 healthcare for years, not just in PT, 00:00:39.880 --> 00:00:41.521 but in dental service organizations and 00:00:41.621 --> 00:00:43.142 other consolidated healthcare models. 00:00:43.802 --> 00:00:45.923 And his argument is simple and pretty 00:00:45.984 --> 00:00:48.585 provocative and likely to make some people 00:00:48.606 --> 00:00:49.125 uncomfortable. 00:00:49.767 --> 00:00:52.088 EBITDA was supposed to be a reporting 00:00:52.107 --> 00:00:52.427 tool. 00:00:52.988 --> 00:00:54.329 And somewhere along the way, 00:00:54.810 --> 00:00:57.131 it became the mission. 00:00:57.991 --> 00:01:00.435 So today, let's unpack how that happened, 00:01:00.655 --> 00:01:02.597 what it's doing in physical therapy, 00:01:03.097 --> 00:01:05.661 and what a better scoreboard might 00:01:05.861 --> 00:01:07.263 actually look like. 00:01:07.602 --> 00:01:09.325 So Larry, let's start here. 00:01:10.146 --> 00:01:11.628 EBITDA, what is it? 00:01:11.847 --> 00:01:13.549 Because I'm sure clinicians out there 00:01:13.590 --> 00:01:15.072 probably heard their director say it, 00:01:15.531 --> 00:01:16.834 but if you were going to explain it 00:01:16.853 --> 00:01:18.756 to an eighth grader, how would you? 00:01:26.706 --> 00:01:27.507 Yeah, thanks, Jimmy. 00:01:28.768 --> 00:01:30.768 EBIT was born, first of all, 00:01:30.787 --> 00:01:33.248 EBIT is a non-accountant accounting term 00:01:33.289 --> 00:01:34.629 because it's not a generally accepted 00:01:34.650 --> 00:01:35.530 accounting principle, 00:01:35.569 --> 00:01:36.769 but we'll get to that maybe. 00:01:36.810 --> 00:01:38.671 But it was born out of a legitimate 00:01:39.031 --> 00:01:41.552 need when private equity really started 00:01:41.591 --> 00:01:43.772 rolling up fragmented industries well 00:01:43.813 --> 00:01:45.873 before physical therapy got in the mix. 00:01:46.293 --> 00:01:47.853 We're talking like in the eighties and the 00:01:47.914 --> 00:01:49.474 nineties, cable companies, 00:01:49.534 --> 00:01:50.295 those kinds of things. 00:01:51.334 --> 00:01:52.536 you know, basically healthcare, 00:01:52.575 --> 00:01:53.796 then dental, then PT. 00:01:53.855 --> 00:01:54.715 PT was a lagger. 00:01:55.016 --> 00:01:57.356 They needed a common, you know, language. 00:01:57.376 --> 00:01:59.837 Think of it as a currency to compare 00:01:59.897 --> 00:02:01.459 different businesses, you know, 00:02:01.478 --> 00:02:03.198 a small practice, for example, 00:02:03.239 --> 00:02:06.239 in rural Texas and a twenty location group 00:02:06.280 --> 00:02:07.561 in New York have very, 00:02:07.661 --> 00:02:10.161 very different tax jurisdictions, 00:02:10.221 --> 00:02:11.622 different financing structures, 00:02:11.662 --> 00:02:13.042 different depreciation schedule. 00:02:13.201 --> 00:02:15.603 If I buy a computer versus I have 00:02:15.622 --> 00:02:17.663 a fifteen-year-old chair, for example, 00:02:18.282 --> 00:02:20.544 What EBITDA does is it strips the noise 00:02:20.604 --> 00:02:22.346 out of that and lets you make as 00:02:22.385 --> 00:02:24.147 best you can an apples to apples 00:02:24.647 --> 00:02:27.871 comparison across that portfolio. 00:02:27.911 --> 00:02:29.671 So that's sort of the narrow context. 00:02:29.752 --> 00:02:31.193 It's genuinely useful. 00:02:32.433 --> 00:02:34.355 And our lenders requirement, 00:02:35.015 --> 00:02:36.978 our leverage covenants are demonstrated 00:02:37.157 --> 00:02:39.360 based on EBITDA multiples or the capital 00:02:39.400 --> 00:02:40.941 structure uses that language. 00:02:41.764 --> 00:02:41.924 You know, 00:02:41.943 --> 00:02:43.705 the shift happened when the metrics 00:02:43.745 --> 00:02:45.887 stopped being descriptive and became 00:02:45.967 --> 00:02:48.408 prescriptive or became what people chase. 00:02:48.429 --> 00:02:49.669 That's when I started noticing it. 00:02:49.688 --> 00:02:52.050 When everybody was using that language is 00:02:52.091 --> 00:02:53.211 when you start to notice it. 00:02:54.092 --> 00:02:55.832 When clinic directors stopped being asked, 00:02:55.873 --> 00:02:58.794 how's the clinic performance doing? 00:02:58.835 --> 00:03:00.036 And they were starting to be asked, well, 00:03:00.056 --> 00:03:00.877 what's your EBITDA? 00:03:01.317 --> 00:03:01.537 You know, 00:03:01.576 --> 00:03:02.918 like that's the end thing to say. 00:03:02.957 --> 00:03:04.538 And that's the moment the tool became the 00:03:04.579 --> 00:03:04.960 mission. 00:03:05.800 --> 00:03:08.141 And that usually happens when compensation 00:03:08.181 --> 00:03:09.643 structures get tied to it. 00:03:10.082 --> 00:03:11.223 And once you pay people... 00:03:11.968 --> 00:03:14.072 you know, to produce against the metric, 00:03:14.092 --> 00:03:15.533 you've told them what the organization 00:03:15.634 --> 00:03:18.138 actually, you know, values. 00:03:18.217 --> 00:03:19.820 I think, you know, as a whole, 00:03:19.941 --> 00:03:21.502 EBITDA is a great common language, 00:03:21.543 --> 00:03:22.925 but if it's the only language that you 00:03:22.966 --> 00:03:23.346 speak, 00:03:23.385 --> 00:03:26.110 you're going to have a lot of misdiagnosis 00:03:26.189 --> 00:03:27.111 over a lot of problems. 00:03:27.699 --> 00:03:28.419 Yeah. 00:03:28.438 --> 00:03:29.780 In the article that you just wrote, 00:03:30.240 --> 00:03:31.479 you can find it on LinkedIn and on 00:03:31.500 --> 00:03:32.259 your sub stack. 00:03:32.841 --> 00:03:35.020 You talk about how adjusted EBITDA has 00:03:35.121 --> 00:03:37.461 almost become what you call this fiction 00:03:37.882 --> 00:03:38.461 contest, 00:03:38.882 --> 00:03:41.062 where companies start adding back more and 00:03:41.103 --> 00:03:43.943 more things to make the number look 00:03:44.123 --> 00:03:44.704 stronger. 00:03:44.804 --> 00:03:47.564 So what kind of adjustments are we talking 00:03:47.604 --> 00:03:47.844 about? 00:03:47.865 --> 00:03:49.384 And why does that make the number even 00:03:49.465 --> 00:03:51.045 less reliable than you just mentioned? 00:03:53.197 --> 00:03:53.456 Yeah, 00:03:53.477 --> 00:03:56.060 so if you walk into any kind of 00:03:56.099 --> 00:03:57.461 management presentation, 00:03:58.020 --> 00:03:59.122 what they're going to try and show you 00:03:59.181 --> 00:04:01.364 is I think it's mostly referred to as 00:04:01.383 --> 00:04:02.044 a bridge. 00:04:02.604 --> 00:04:04.866 It's effectively a slide that starts with 00:04:04.907 --> 00:04:06.467 sort of the gap net income, 00:04:06.527 --> 00:04:07.810 not to get too much in the weeds 00:04:07.849 --> 00:04:08.090 here, 00:04:08.110 --> 00:04:10.171 but it walks you through step by step 00:04:10.211 --> 00:04:11.453 to the adjusted EBITDA. 00:04:11.932 --> 00:04:13.895 Then it has the add backs and they 00:04:13.955 --> 00:04:15.096 sound reasonable. 00:04:16.353 --> 00:04:18.694 and isolation, restructuring charges, 00:04:18.875 --> 00:04:21.776 M&A transaction, audit fees, you know, 00:04:21.817 --> 00:04:24.197 de novo losses during kind of an initial 00:04:24.237 --> 00:04:25.819 time period while they ramp up, 00:04:25.879 --> 00:04:27.718 management fees, COVID impacts, 00:04:27.778 --> 00:04:30.300 storm impacts, you know, snowstorm, 00:04:30.461 --> 00:04:32.601 owner comp that's considered above, 00:04:32.622 --> 00:04:34.281 you know, normal compensation. 00:04:36.254 --> 00:04:39.737 And some of these obviously are entirely 00:04:40.237 --> 00:04:40.817 legitimate. 00:04:40.858 --> 00:04:42.059 The problem is that there's no 00:04:42.098 --> 00:04:43.860 standardized definition of adjusted 00:04:43.899 --> 00:04:44.081 EBITDA. 00:04:44.100 --> 00:04:45.480 It's a non-GAAP measure. 00:04:45.541 --> 00:04:47.242 Every sponsor defines it a little bit 00:04:47.302 --> 00:04:47.783 differently. 00:04:48.083 --> 00:04:49.704 Everybody takes liberties with that. 00:04:50.064 --> 00:04:52.406 Your covenants from the bank allow certain 00:04:52.446 --> 00:04:54.146 things and don't allow certain things very 00:04:54.187 --> 00:04:54.987 inconsistently. 00:04:55.528 --> 00:04:56.548 Even USPT, 00:04:56.588 --> 00:04:58.209 which is a company that I love and 00:04:58.329 --> 00:05:00.071 have been big fans of them and their 00:05:00.110 --> 00:05:03.434 founders and now their CEO, Chris, 00:05:04.694 --> 00:05:07.836 And it's one of the only publicly traded 00:05:07.875 --> 00:05:08.937 PT companies we have, 00:05:08.976 --> 00:05:10.396 and soon with select medical going 00:05:10.416 --> 00:05:11.538 private, the one, 00:05:11.697 --> 00:05:14.199 is they're legally required to disclose 00:05:14.218 --> 00:05:15.879 that this adjusted EBITDA number should 00:05:15.920 --> 00:05:19.302 not be considered in isolation from GAAP 00:05:19.781 --> 00:05:20.322 measures. 00:05:20.382 --> 00:05:21.663 And they would never say that, 00:05:21.762 --> 00:05:23.524 and almost nobody in the room would pay 00:05:23.543 --> 00:05:24.343 any attention to it, 00:05:24.384 --> 00:05:26.786 but it's required because, as I said, 00:05:26.846 --> 00:05:27.245 GAAP 00:05:27.906 --> 00:05:29.629 generally accepted accounting doesn't 00:05:29.689 --> 00:05:31.072 recognize EBITDA. 00:05:31.293 --> 00:05:32.815 And then I love the other term, 00:05:32.935 --> 00:05:33.958 adjusted EBITDA. 00:05:34.338 --> 00:05:35.721 It's like a double entendre. 00:05:39.473 --> 00:05:41.454 So one of the more uncomfortable ideas in 00:05:41.473 --> 00:05:41.915 your piece, 00:05:41.935 --> 00:05:44.115 and I know you're not shy about making 00:05:44.136 --> 00:05:44.896 people uncomfortable, 00:05:44.956 --> 00:05:46.298 especially when you have the receipts, 00:05:46.939 --> 00:05:48.379 is that EBITDA doesn't just measure 00:05:48.420 --> 00:05:48.980 performance. 00:05:49.060 --> 00:05:51.161 It can actually change behavior. 00:05:51.262 --> 00:05:52.463 This is where I feel like it starts 00:05:52.502 --> 00:05:53.343 to get dangerous. 00:05:53.865 --> 00:05:56.346 What kinds of decisions start happening 00:05:56.447 --> 00:05:59.588 inside clinics when EBITDA is the main 00:05:59.649 --> 00:06:02.612 target and not clinical care or clinician 00:06:02.632 --> 00:06:05.954 health? 00:06:05.995 --> 00:06:07.536 Yeah, that's the question. 00:06:08.978 --> 00:06:11.180 start making decisions based on EBITDA. 00:06:11.220 --> 00:06:12.920 So EBITDA is a lag measure. 00:06:13.040 --> 00:06:14.482 And typically what we like to see in 00:06:14.502 --> 00:06:16.302 physical therapy are lead measures. 00:06:16.343 --> 00:06:17.783 As I say to all my managers, 00:06:18.863 --> 00:06:20.264 I'm a data guy as well, 00:06:20.345 --> 00:06:22.646 but you can't have a quantitative data 00:06:22.786 --> 00:06:24.747 without also giving me qualitative data. 00:06:24.826 --> 00:06:26.627 And you can't have a lag measure like 00:06:26.767 --> 00:06:29.709 EBITDA without a lead measure like call 00:06:29.750 --> 00:06:31.050 rate, acceptance rate. 00:06:32.791 --> 00:06:33.711 And we can talk about that. 00:06:33.732 --> 00:06:35.673 But what I see people happening is chasing 00:06:35.692 --> 00:06:36.233 the target. 00:06:36.312 --> 00:06:37.293 EBITDA results 00:06:38.108 --> 00:06:40.130 from doing other things right, 00:06:40.730 --> 00:06:42.172 rewarding your clinicians, 00:06:42.232 --> 00:06:44.494 being centric around the physical 00:06:44.514 --> 00:06:46.154 therapist and PT assistants, 00:06:46.915 --> 00:06:47.896 or in the dental world, 00:06:47.935 --> 00:06:48.976 our dental professionals, 00:06:49.016 --> 00:06:50.237 our dentists and our hygienists, 00:06:51.033 --> 00:06:53.136 And how do you enable them? 00:06:53.196 --> 00:06:54.255 How do you gauge them? 00:06:54.355 --> 00:06:56.218 What is your retention rate? 00:06:56.257 --> 00:06:57.639 How are they, you know, 00:06:57.699 --> 00:06:59.300 how many owners do you have in the 00:06:59.319 --> 00:07:00.560 particular clinics? 00:07:00.620 --> 00:07:02.081 And so when you start chasing EBITDA, 00:07:02.401 --> 00:07:03.341 you're chasing a number. 00:07:03.382 --> 00:07:05.303 And so what I've seen unscrupulous CEOs do 00:07:05.324 --> 00:07:06.584 is, you know, 00:07:06.625 --> 00:07:08.565 I heard about one recently that got rid 00:07:08.586 --> 00:07:09.706 of their PTO policy. 00:07:09.747 --> 00:07:10.086 In other words, 00:07:10.127 --> 00:07:11.408 if you leave or you get fired, 00:07:11.487 --> 00:07:12.889 you take no PTO with you. 00:07:13.168 --> 00:07:14.009 Well, why is that? 00:07:14.029 --> 00:07:15.750 Because now you could take the PTO, 00:07:16.110 --> 00:07:17.172 adjust it back, 00:07:17.211 --> 00:07:18.692 and all of a sudden your EBITDA climbs, 00:07:18.713 --> 00:07:18.812 right? 00:07:19.781 --> 00:07:21.442 The good news is the sophisticated 00:07:21.502 --> 00:07:24.141 investors, the sophisticated buyers, 00:07:24.822 --> 00:07:26.403 they can now sift through this. 00:07:26.463 --> 00:07:27.603 And now what I hear is a new 00:07:27.663 --> 00:07:27.882 term. 00:07:27.903 --> 00:07:29.303 And it's a term I actually use. 00:07:29.324 --> 00:07:30.863 It's called clean EBITDA. 00:07:31.204 --> 00:07:33.704 Clean EBITDA is without all these bullshit 00:07:33.745 --> 00:07:42.367 and all these other kinds. 00:07:42.447 --> 00:07:45.108 Obliquely, you know, by not paying it. 00:07:47.701 --> 00:07:48.723 of other things right. 00:07:48.762 --> 00:07:50.845 And as you saw from my article, 00:07:50.865 --> 00:07:53.005 there was a hat that Greg White, Dr. 00:07:53.026 --> 00:07:54.007 Greg White gave to me and say, 00:07:54.026 --> 00:07:56.629 you know, people over EBITDA. 00:07:56.649 --> 00:07:58.790 You get what you emphasize in business. 00:07:58.930 --> 00:07:59.190 You know, 00:07:59.250 --> 00:08:00.432 everybody says you get what you measure. 00:08:00.451 --> 00:08:02.213 You actually get what you emphasize. 00:08:02.314 --> 00:08:03.415 If you emphasize EBITDA, 00:08:03.435 --> 00:08:04.595 you're not going to get EBITDA. 00:08:04.735 --> 00:08:07.096 Every CEO that I know that chased EBITDA 00:08:08.278 --> 00:08:08.759 has failed. 00:08:09.319 --> 00:08:10.600 Everybody who's chased, 00:08:10.639 --> 00:08:12.740 and this is why PTs make great 00:08:12.901 --> 00:08:15.382 entrepreneurs and make great leaders of PT 00:08:15.442 --> 00:08:16.262 organizations, 00:08:16.742 --> 00:08:18.583 because they know in order to keep their 00:08:18.622 --> 00:08:19.262 clinicians, 00:08:19.283 --> 00:08:21.103 they got to approach things clinically. 00:08:21.124 --> 00:08:22.644 They got to approach what drives a 00:08:22.685 --> 00:08:23.165 clinician. 00:08:23.665 --> 00:08:25.526 No physical therapist, no dentist, 00:08:25.605 --> 00:08:28.266 no doctor ever went into business to chase 00:08:28.387 --> 00:08:28.786 EBITDA. 00:08:29.148 --> 00:08:30.327 They did it to do meaningful, 00:08:30.367 --> 00:08:31.209 impactful work. 00:08:31.249 --> 00:08:34.110 They did it because they wanted to help 00:08:34.149 --> 00:08:34.429 people. 00:08:35.028 --> 00:08:36.590 And so that's what we have to remember. 00:08:36.649 --> 00:08:38.629 It's really the basics and common sense. 00:08:38.710 --> 00:08:39.971 And we have to make common sense, 00:08:39.990 --> 00:08:40.770 common practice. 00:08:41.571 --> 00:08:41.671 Now, 00:08:41.691 --> 00:08:42.951 you make a pretty strong argument that 00:08:43.072 --> 00:08:46.513 EBITDA treats clinicians as a cost line, 00:08:46.633 --> 00:08:48.933 when in reality, they're the business. 00:08:48.974 --> 00:08:51.495 They're the thing providing the service 00:08:51.534 --> 00:08:52.956 that is our profession. 00:08:53.416 --> 00:08:57.336 So how does that disconnect show up inside 00:08:57.677 --> 00:08:58.998 physical therapy organizations 00:08:59.018 --> 00:08:59.577 specifically? 00:09:00.802 --> 00:09:02.842 Yeah, no, that's the real question. 00:09:02.863 --> 00:09:04.464 You know, physical therapy companies, 00:09:04.484 --> 00:09:06.004 their assets wear shoes. 00:09:06.043 --> 00:09:06.924 They go home at night. 00:09:06.985 --> 00:09:07.985 They go to bed at night. 00:09:08.105 --> 00:09:08.385 Right. 00:09:08.806 --> 00:09:10.326 And they're the ones that produce 00:09:10.787 --> 00:09:11.466 revenues. 00:09:11.506 --> 00:09:13.148 That is the first start of the equation. 00:09:13.168 --> 00:09:14.408 You know, I used to have this sign. 00:09:14.467 --> 00:09:17.110 I'd have all clinics put on their wall. 00:09:17.129 --> 00:09:19.870 It was a picture of our patients. 00:09:20.643 --> 00:09:21.783 And underneath, as it said, 00:09:21.842 --> 00:09:23.604 we eat because of you. 00:09:23.964 --> 00:09:25.565 The patients come in. 00:09:25.845 --> 00:09:27.044 We produce the revenue. 00:09:27.085 --> 00:09:28.065 It's a conduit. 00:09:28.565 --> 00:09:31.625 And then we produce enough profits to keep 00:09:31.666 --> 00:09:32.506 everybody employed, 00:09:32.606 --> 00:09:35.086 keep the lights on and everything else. 00:09:35.126 --> 00:09:36.988 And what you see start to happen is 00:09:37.028 --> 00:09:38.889 they start to have morning productivity 00:09:38.908 --> 00:09:39.288 meetings. 00:09:39.308 --> 00:09:40.448 They start to have morning meetings. 00:09:40.749 --> 00:09:43.451 optimization, units per visit, 00:09:43.610 --> 00:09:44.871 all of these metrics, 00:09:45.131 --> 00:09:46.452 they're not qualitative, 00:09:46.493 --> 00:09:47.493 they're quantitative, 00:09:47.913 --> 00:09:49.554 and they frankly drive physical therapists 00:09:49.615 --> 00:09:49.934 nuts. 00:09:50.014 --> 00:09:50.235 Now, 00:09:50.554 --> 00:09:52.235 the art and science of all this is 00:09:52.275 --> 00:09:53.317 how do you balance it? 00:09:53.817 --> 00:09:55.337 I'm not by any means suggesting you 00:09:55.378 --> 00:09:57.980 shouldn't use sound rationale, dashboards, 00:09:58.653 --> 00:10:00.472 and appropriate metrics to drive your 00:10:00.533 --> 00:10:02.514 business or to measure your business. 00:10:02.573 --> 00:10:04.274 It's when the measurement becomes the 00:10:04.333 --> 00:10:06.975 driver of the business rather than the 00:10:07.014 --> 00:10:10.635 driver being the absolute embodiment of 00:10:10.995 --> 00:10:13.255 caring for your employees and caring for, 00:10:13.375 --> 00:10:13.975 in turn, 00:10:14.336 --> 00:10:16.277 your patients that drive the results. 00:10:16.317 --> 00:10:19.177 So I just see this all the time. 00:10:19.217 --> 00:10:20.798 They create these committees. 00:10:21.398 --> 00:10:24.818 They terminate founders and PTs that drive 00:10:24.859 --> 00:10:25.418 the business. 00:10:26.359 --> 00:10:28.600 And all it becomes is a dumbing down 00:10:28.639 --> 00:10:29.419 of the profession. 00:10:29.440 --> 00:10:31.360 They make PTs into widget makers, 00:10:32.000 --> 00:10:34.581 and they forget that PTs are the drivers 00:10:34.642 --> 00:10:35.462 of the business, 00:10:35.582 --> 00:10:37.783 not the standby byproducts of the 00:10:37.803 --> 00:10:39.203 business. 00:10:39.244 --> 00:10:39.403 Well, 00:10:40.024 --> 00:10:42.144 you pulled out a story and an analogy 00:10:42.164 --> 00:10:43.166 that I'd never heard of, 00:10:43.225 --> 00:10:44.826 but it's pretty simple to follow, 00:10:44.846 --> 00:10:47.126 which is the Soviet nail factory story. 00:10:47.667 --> 00:10:48.827 Can you explain that idea? 00:10:48.888 --> 00:10:50.567 I love it because it's pretty obvious, 00:10:50.587 --> 00:10:51.349 it's pretty quick, 00:10:51.849 --> 00:10:53.570 and I feel like it applies really well 00:10:53.610 --> 00:10:54.570 to healthcare metrics. 00:10:55.791 --> 00:10:56.150 Yeah. 00:10:56.191 --> 00:10:58.131 So the Soviet nail factory is a really 00:10:58.192 --> 00:10:59.951 interesting one because I used it 00:11:00.032 --> 00:11:00.272 actually, 00:11:00.292 --> 00:11:02.131 I think in my last Substack post to 00:11:02.211 --> 00:11:04.153 illustrate the point about Goodhart's law. 00:11:04.932 --> 00:11:07.193 And it's the perfect illustration of it. 00:11:07.634 --> 00:11:09.894 The Soviet factory managers were basically 00:11:09.913 --> 00:11:12.955 given a production quota, make nails. 00:11:13.434 --> 00:11:14.595 So they made the quota work. 00:11:14.715 --> 00:11:16.655 When the target was the number of males, 00:11:16.755 --> 00:11:18.395 they produced thousands of tiny, 00:11:18.556 --> 00:11:19.416 useless nails. 00:11:20.196 --> 00:11:22.716 We're producing hundreds of patients that 00:11:22.756 --> 00:11:22.976 aren't 00:11:23.600 --> 00:11:25.381 coming back because they were moved too 00:11:25.422 --> 00:11:26.741 quickly because they were used to 00:11:26.782 --> 00:11:28.562 measuring units per visit and how much 00:11:28.623 --> 00:11:31.183 turnover in patients could I have? 00:11:31.504 --> 00:11:34.105 So the factory produced a small number of 00:11:34.186 --> 00:11:36.025 enormous, completely useless nails. 00:11:36.626 --> 00:11:38.368 And that's what happens when that's the 00:11:38.408 --> 00:11:38.827 target, 00:11:38.888 --> 00:11:40.327 but the target was hit and they were 00:11:40.427 --> 00:11:41.428 rewarded for it. 00:11:42.188 --> 00:11:44.330 We reward PTs for hitting or their 00:11:44.409 --> 00:11:47.091 managers for hitting EBITDA when EBITDA 00:11:47.110 --> 00:11:49.873 doesn't really respect free cash flow. 00:11:50.113 --> 00:11:51.793 Most of the PT platforms I know now, 00:11:51.832 --> 00:11:52.874 particularly the larger ones, 00:11:53.333 --> 00:11:55.495 aren't producing enough cash to even pay 00:11:55.514 --> 00:11:56.774 the interest on their debt. 00:11:56.855 --> 00:11:58.456 I mean, these platforms are in trouble. 00:11:59.615 --> 00:12:00.856 And so what you have to do is 00:12:01.496 --> 00:12:03.057 you have to realize it's ruining your 00:12:03.077 --> 00:12:04.177 healthcare organization. 00:12:05.298 --> 00:12:07.158 Set EBIT as the target and the rational 00:12:07.219 --> 00:12:08.500 operators will hit it. 00:12:08.740 --> 00:12:10.360 They'll do it by suppressing clinical 00:12:10.400 --> 00:12:11.140 compensation. 00:12:11.500 --> 00:12:13.621 They'll do it by really suppressing CapEx 00:12:13.642 --> 00:12:15.422 and other kinds of expenses that you need. 00:12:15.682 --> 00:12:17.082 Then they'll come up with all kinds of 00:12:17.123 --> 00:12:20.384 things to be under or non-recurring ad 00:12:20.403 --> 00:12:20.783 backs. 00:12:21.105 --> 00:12:21.845 They may even make 00:12:22.424 --> 00:12:25.027 sign-on bonuses, you know, and add back. 00:12:25.307 --> 00:12:26.967 They may even make certain benefits and 00:12:27.128 --> 00:12:27.649 add back. 00:12:27.749 --> 00:12:29.210 Now, enough years, you know, 00:12:29.230 --> 00:12:31.250 there really has been a materially large, 00:12:32.371 --> 00:12:34.133 you know, materially producing, you know, 00:12:34.173 --> 00:12:35.974 platform acquisitions in the last two 00:12:36.014 --> 00:12:36.374 years. 00:12:36.453 --> 00:12:37.475 And it's because of this, 00:12:37.514 --> 00:12:38.174 not just in PT, 00:12:38.336 --> 00:12:40.336 but in healthcare and even in dental. 00:12:40.817 --> 00:12:42.958 And so your sophisticated buyers and 00:12:42.979 --> 00:12:45.019 investors are sifting through this and 00:12:45.039 --> 00:12:46.380 they'll make their own adjustments. 00:12:47.422 --> 00:12:48.822 They won't take your word for it. 00:12:48.842 --> 00:12:50.423 That's what quality of earnings and all 00:12:50.484 --> 00:12:52.304 these checks and audits are all about. 00:12:53.566 --> 00:12:54.086 So yes, 00:12:54.126 --> 00:12:56.349 the giant useless nails in healthcare, 00:12:56.389 --> 00:12:57.769 and I would put EBITDA at the top 00:12:57.809 --> 00:12:58.370 of that list. 00:12:59.390 --> 00:12:59.811 Yeah. 00:12:59.870 --> 00:13:00.130 I mean, 00:13:00.192 --> 00:13:01.873 the people who you're looking to invest 00:13:02.212 --> 00:13:04.134 are now savvy enough to see how you're 00:13:04.154 --> 00:13:04.914 gaming the system. 00:13:06.035 --> 00:13:07.878 Hopefully this leads to less people gaming 00:13:07.898 --> 00:13:09.418 the system because it's sort of not 00:13:09.479 --> 00:13:10.279 fooling anybody. 00:13:10.480 --> 00:13:11.821 So, all right, well, 00:13:11.900 --> 00:13:13.142 then we got to hold your feet to 00:13:13.162 --> 00:13:14.222 the fire then here, Larry. 00:13:14.524 --> 00:13:15.384 Here's the last question. 00:13:15.423 --> 00:13:17.166 If EBITDA shouldn't be the North Star, 00:13:17.767 --> 00:13:19.587 the next obvious question is, well, great, 00:13:19.687 --> 00:13:20.288 what should be? 00:13:20.349 --> 00:13:21.730 What would be a healthier, 00:13:22.210 --> 00:13:23.812 what would a healthier dashboard actually 00:13:23.851 --> 00:13:26.173 look like specifically for a physical 00:13:26.214 --> 00:13:27.134 therapy organization? 00:13:28.436 --> 00:13:30.437 Yeah, so let me set some context. 00:13:30.636 --> 00:13:32.576 The business of physical therapy is not 00:13:32.616 --> 00:13:33.577 that complicated. 00:13:33.677 --> 00:13:35.118 We can make it complicated, 00:13:35.197 --> 00:13:37.558 and we do by having much too large 00:13:37.599 --> 00:13:39.000 of a dashboard, in my opinion. 00:13:39.059 --> 00:13:40.600 We have way too many BI tools. 00:13:40.639 --> 00:13:42.100 We have way too much data, 00:13:42.140 --> 00:13:43.260 but not enough caring. 00:13:43.681 --> 00:13:45.361 We have way too much numbers, 00:13:45.981 --> 00:13:47.182 but not enough compassion. 00:13:47.542 --> 00:13:48.623 We have way, way, 00:13:48.663 --> 00:13:51.244 way too many streams of emails on 00:13:51.303 --> 00:13:53.985 productivity without fundamentally 00:13:54.024 --> 00:13:56.024 listening and understanding the heartbeat 00:13:56.264 --> 00:13:57.926 of, in our case, physical therapists. 00:13:58.346 --> 00:14:00.509 but what i've proposed is what i really 00:14:00.548 --> 00:14:02.591 refer to as a four pillar you know 00:14:02.650 --> 00:14:04.433 framework because there are some 00:14:04.494 --> 00:14:06.855 differences that you can take into account 00:14:06.897 --> 00:14:09.339 amongst these four pillars and again two 00:14:09.600 --> 00:14:11.903 two premises don't give me a you know 00:14:12.062 --> 00:14:14.225 an objective data without a qualitative 00:14:14.405 --> 00:14:16.107 one and the second one is 00:14:17.447 --> 00:14:17.628 You know, 00:14:17.687 --> 00:14:19.509 don't give me a lag measure without a 00:14:19.568 --> 00:14:20.188 lead measure. 00:14:20.208 --> 00:14:21.409 And so you have to have a, 00:14:21.450 --> 00:14:23.990 you know, a flavor of all of those. 00:14:24.049 --> 00:14:25.591 But if I was defining the four pillars, 00:14:25.990 --> 00:14:27.551 and since we're talking about financial, 00:14:27.591 --> 00:14:28.751 I wouldn't put that number one, 00:14:28.792 --> 00:14:30.831 but let's talk about it first. 00:14:30.951 --> 00:14:33.552 I would lead with unlevered free cash 00:14:33.592 --> 00:14:33.972 flow. 00:14:34.472 --> 00:14:37.274 So it's EBITDA minus CapEx minus working 00:14:37.293 --> 00:14:39.534 capital, you know, now it's again, 00:14:39.575 --> 00:14:40.294 gets in the weeds, 00:14:40.335 --> 00:14:41.615 but what it really tells you is what 00:14:41.655 --> 00:14:44.096 cash you really have that is, you know, 00:14:44.255 --> 00:14:46.216 over and above, you know, your spending. 00:14:47.072 --> 00:14:47.332 You know, 00:14:47.373 --> 00:14:48.754 that's the number that tells you where the 00:14:48.793 --> 00:14:51.115 business really can sustain itself. 00:14:51.975 --> 00:14:53.037 Even it tells you what it looks like 00:14:53.076 --> 00:14:55.097 before the bills come due is how I 00:14:55.278 --> 00:14:55.898 refer to that. 00:14:55.918 --> 00:14:57.318 So that's kind of the financial side I 00:14:57.339 --> 00:14:58.720 would use on lever-free cash flow. 00:14:59.159 --> 00:15:00.780 On the operational side, there's a lot, 00:15:00.821 --> 00:15:03.562 but I like same growth, store, you know, 00:15:03.743 --> 00:15:04.703 increased organic. 00:15:04.943 --> 00:15:06.205 Everybody talks about wanting to buy 00:15:06.225 --> 00:15:06.504 things. 00:15:06.544 --> 00:15:06.684 Well, 00:15:06.705 --> 00:15:07.966 show me a company that can grow 00:15:08.025 --> 00:15:09.947 organically first and then let them buy 00:15:09.966 --> 00:15:11.967 things, right? 00:15:11.988 --> 00:15:13.970 That's the lead measure is can you grow 00:15:14.029 --> 00:15:14.610 a clinic organically? 00:15:15.173 --> 00:15:18.035 before you can buy something and then you 00:15:18.115 --> 00:15:19.836 maybe earn the right to buy things. 00:15:20.076 --> 00:15:20.397 Yeah. 00:15:20.456 --> 00:15:21.758 Now a new patient volume. 00:15:22.158 --> 00:15:24.099 I like that because it goes to throughput. 00:15:24.178 --> 00:15:24.359 You know, 00:15:24.399 --> 00:15:25.840 are you growing the number of new 00:15:25.879 --> 00:15:26.320 patients? 00:15:26.360 --> 00:15:27.880 What are the number of new patients per 00:15:27.961 --> 00:15:29.982 PT that they see in a day? 00:15:30.482 --> 00:15:31.043 As you well know, 00:15:31.082 --> 00:15:32.803 I like PlanetCare completion rate. 00:15:32.903 --> 00:15:35.046 It's it's a tough one, 00:15:35.086 --> 00:15:35.846 but it's a good one. 00:15:36.886 --> 00:15:37.606 I liked, you know, 00:15:37.647 --> 00:15:39.067 the number of patients that kept their 00:15:39.128 --> 00:15:40.969 visits, you know, 00:15:40.989 --> 00:15:42.389 that didn't that didn't you know, 00:15:42.429 --> 00:15:44.390 I think it's a proxy for quality almost. 00:15:45.159 --> 00:15:46.380 And, you know, 00:15:46.421 --> 00:15:48.241 these are sort of the leading indicators 00:15:48.261 --> 00:15:50.063 that predict the future of EBITDA than 00:15:50.104 --> 00:15:51.144 what EBITDA stands for. 00:15:51.544 --> 00:15:53.385 Then I think a third category is clinical. 00:15:53.426 --> 00:15:55.248 So again, financial, operational, 00:15:55.268 --> 00:15:56.989 and then I like to refer to it 00:15:57.109 --> 00:15:57.589 as clinical. 00:15:57.609 --> 00:15:59.311 And this is a real outcomes, you know, 00:15:59.331 --> 00:15:59.910 scorecard. 00:15:59.931 --> 00:16:02.072 You can use whatever third part validated, 00:16:02.572 --> 00:16:05.554 you know, measure you want, photo, 00:16:05.634 --> 00:16:07.417 promise, functional improvements, 00:16:07.476 --> 00:16:08.037 all these kind of, 00:16:08.057 --> 00:16:08.857 there's a bunch of them. 00:16:09.138 --> 00:16:10.177 You know, 00:16:10.238 --> 00:16:12.418 if the C-suite can't tell whether your 00:16:12.458 --> 00:16:13.860 patients are actually getting better, 00:16:14.019 --> 00:16:15.860 EBITDA number serves without a purpose, 00:16:15.980 --> 00:16:16.221 right? 00:16:16.681 --> 00:16:18.261 And so you have to live with that. 00:16:18.282 --> 00:16:19.442 You have to have that clinical one. 00:16:19.481 --> 00:16:19.741 In fact, 00:16:19.802 --> 00:16:21.383 I'd move clinical to the first of the 00:16:21.423 --> 00:16:22.062 four pillars. 00:16:22.823 --> 00:16:23.504 And then, you know, 00:16:23.524 --> 00:16:25.065 then I would call the fourth pillar 00:16:25.105 --> 00:16:25.424 people. 00:16:25.945 --> 00:16:26.565 You know, in fact, 00:16:27.225 --> 00:16:29.066 I would have people first, probably, 00:16:29.125 --> 00:16:31.267 clinical second, operational third, 00:16:31.287 --> 00:16:32.467 and financial, you know, 00:16:32.528 --> 00:16:33.687 fourth on my four pillars. 00:16:33.727 --> 00:16:35.269 And other people, it's retention rate. 00:16:36.028 --> 00:16:38.250 It's those engagement scores. 00:16:39.101 --> 00:16:41.802 um i i like to call them inspiration 00:16:41.923 --> 00:16:43.864 corey we used to measure patient set or 00:16:43.884 --> 00:16:45.423 you know employee satisfaction and i went 00:16:45.443 --> 00:16:46.804 to employee engagement now i actually 00:16:46.845 --> 00:16:49.304 think it's employee inspiration which 00:16:49.325 --> 00:16:51.446 keeps them inspired or how do they keep 00:16:51.505 --> 00:16:54.067 inspiring i like you know stay interviews 00:16:54.106 --> 00:16:56.268 how many of you completed in a given 00:16:56.288 --> 00:16:57.467 year these are people who are actually 00:16:57.528 --> 00:16:59.808 staying you finding out why these aren't 00:17:00.288 --> 00:17:02.471 exit interviews, which is very HR-ish. 00:17:02.510 --> 00:17:03.692 These are people, you know, 00:17:03.731 --> 00:17:04.972 getting to know why people stay, 00:17:05.032 --> 00:17:06.413 what's working, what's not working, 00:17:06.694 --> 00:17:08.556 what we need to start doing, stop doing, 00:17:08.596 --> 00:17:09.636 and keep on doing, you know, 00:17:09.656 --> 00:17:10.458 that kind of stuff. 00:17:12.239 --> 00:17:13.500 And all those things give you a chance 00:17:13.539 --> 00:17:15.301 to fix something before it becomes a 00:17:15.362 --> 00:17:15.761 problem. 00:17:15.821 --> 00:17:20.165 So that's the dashboard that I'm fond of, 00:17:20.246 --> 00:17:22.048 and certainly in the organizations I've 00:17:22.067 --> 00:17:23.048 been blessed to run, 00:17:24.450 --> 00:17:26.651 and I'm currently working in a leadership 00:17:26.711 --> 00:17:26.892 role, 00:17:26.912 --> 00:17:27.992 and those are the things I look at 00:17:28.032 --> 00:17:28.272 first. 00:17:28.880 --> 00:17:30.140 Yeah, I like how you flipped that, 00:17:30.319 --> 00:17:31.300 where the thing we're talking about 00:17:31.361 --> 00:17:33.320 EBITDA, or even the financial metric, 00:17:33.340 --> 00:17:34.721 that comes fourth out of four. 00:17:34.741 --> 00:17:35.561 It's got to be there, 00:17:35.942 --> 00:17:37.242 but fourth out of four. 00:17:38.163 --> 00:17:39.242 I do like this conversation too, 00:17:39.262 --> 00:17:40.644 because it's not anti-capital or 00:17:40.723 --> 00:17:41.564 anti-growth. 00:17:42.443 --> 00:17:43.964 It's really about just understanding what 00:17:44.204 --> 00:17:46.365 we're measuring, what we produce. 00:17:46.545 --> 00:17:47.125 I always like to say, 00:17:47.726 --> 00:17:49.026 what game are we actually in? 00:17:49.046 --> 00:17:50.227 Are we understanding what game we're 00:17:50.326 --> 00:17:51.067 actually in? 00:17:51.567 --> 00:17:53.047 And then what measurements are pushing the 00:17:53.106 --> 00:17:54.928 organizations to do that better? 00:17:55.307 --> 00:17:56.930 correctly or do that well, 00:17:57.109 --> 00:17:58.451 and then you get to sort of define 00:17:58.490 --> 00:17:59.392 what well looks like. 00:18:00.272 --> 00:18:00.613 Absolutely. 00:18:00.633 --> 00:18:01.814 It's all about culture and people. 00:18:01.894 --> 00:18:02.075 You know, 00:18:02.095 --> 00:18:04.636 culture is not the enemy of EBITDA. 00:18:04.737 --> 00:18:06.598 Culture is the engine of EBITDA. 00:18:06.818 --> 00:18:07.339 Absolutely.