All right,
today we're going to talk about a phrase
that everyone who's ever worked inside a
large healthcare organization has heard at
least once.
And maybe you Googled it to see what
it meant.
also usually a little bit of dread
attached to it.
And the phrase is,
what's the EBITDA impact?
Now, if you're a clinic director,
a regional operator,
or someone working inside a PE-backed
healthcare organization,
the size doesn't matter.
You know exactly what that question means.
It means the conversation has just shifted
from clinical care to financial
performance.
Now,
Larry's been watching this happen across
healthcare for years, not just in PT,
but in dental service organizations and
other consolidated healthcare models.
And his argument is simple and pretty
provocative and likely to make some people
uncomfortable.
EBITDA was supposed to be a reporting
tool.
And somewhere along the way,
it became the mission.
So today, let's unpack how that happened,
what it's doing in physical therapy,
and what a better scoreboard might
actually look like.
So Larry, let's start here.
EBITDA, what is it?
Because I'm sure clinicians out there
probably heard their director say it,
but if you were going to explain it
to an eighth grader, how would you?
Yeah, thanks, Jimmy.
EBIT was born, first of all,
EBIT is a non-accountant accounting term
because it's not a generally accepted
accounting principle,
but we'll get to that maybe.
But it was born out of a legitimate
need when private equity really started
rolling up fragmented industries well
before physical therapy got in the mix.
We're talking like in the eighties and the
nineties, cable companies,
those kinds of things.
you know, basically healthcare,
then dental, then PT.
PT was a lagger.
They needed a common, you know, language.
Think of it as a currency to compare
different businesses, you know,
a small practice, for example,
in rural Texas and a twenty location group
in New York have very,
very different tax jurisdictions,
different financing structures,
different depreciation schedule.
If I buy a computer versus I have
a fifteen-year-old chair, for example,
What EBITDA does is it strips the noise
out of that and lets you make as
best you can an apples to apples
comparison across that portfolio.
So that's sort of the narrow context.
It's genuinely useful.
And our lenders requirement,
our leverage covenants are demonstrated
based on EBITDA multiples or the capital
structure uses that language.
You know,
the shift happened when the metrics
stopped being descriptive and became
prescriptive or became what people chase.
That's when I started noticing it.
When everybody was using that language is
when you start to notice it.
When clinic directors stopped being asked,
how's the clinic performance doing?
And they were starting to be asked, well,
what's your EBITDA?
You know,
like that's the end thing to say.
And that's the moment the tool became the
mission.
And that usually happens when compensation
structures get tied to it.
And once you pay people...
you know, to produce against the metric,
you've told them what the organization
actually, you know, values.
I think, you know, as a whole,
EBITDA is a great common language,
but if it's the only language that you
speak,
you're going to have a lot of misdiagnosis
over a lot of problems.
Yeah.
In the article that you just wrote,
you can find it on LinkedIn and on
your sub stack.
You talk about how adjusted EBITDA has
almost become what you call this fiction
contest,
where companies start adding back more and
more things to make the number look
stronger.
So what kind of adjustments are we talking
about?
And why does that make the number even
less reliable than you just mentioned?
Yeah,
so if you walk into any kind of
management presentation,
what they're going to try and show you
is I think it's mostly referred to as
a bridge.
It's effectively a slide that starts with
sort of the gap net income,
not to get too much in the weeds
here,
but it walks you through step by step
to the adjusted EBITDA.
Then it has the add backs and they
sound reasonable.
and isolation, restructuring charges,
M&A transaction, audit fees, you know,
de novo losses during kind of an initial
time period while they ramp up,
management fees, COVID impacts,
storm impacts, you know, snowstorm,
owner comp that's considered above,
you know, normal compensation.
And some of these obviously are entirely
legitimate.
The problem is that there's no
standardized definition of adjusted
EBITDA.
It's a non-GAAP measure.
Every sponsor defines it a little bit
differently.
Everybody takes liberties with that.
Your covenants from the bank allow certain
things and don't allow certain things very
inconsistently.
Even USPT,
which is a company that I love and
have been big fans of them and their
founders and now their CEO, Chris,
And it's one of the only publicly traded
PT companies we have,
and soon with select medical going
private, the one,
is they're legally required to disclose
that this adjusted EBITDA number should
not be considered in isolation from GAAP
measures.
And they would never say that,
and almost nobody in the room would pay
any attention to it,
but it's required because, as I said,
GAAP
generally accepted accounting doesn't
recognize EBITDA.
And then I love the other term,
adjusted EBITDA.
It's like a double entendre.
So one of the more uncomfortable ideas in
your piece,
and I know you're not shy about making
people uncomfortable,
especially when you have the receipts,
is that EBITDA doesn't just measure
performance.
It can actually change behavior.
This is where I feel like it starts
to get dangerous.
What kinds of decisions start happening
inside clinics when EBITDA is the main
target and not clinical care or clinician
health?
Yeah, that's the question.
start making decisions based on EBITDA.
So EBITDA is a lag measure.
And typically what we like to see in
physical therapy are lead measures.
As I say to all my managers,
I'm a data guy as well,
but you can't have a quantitative data
without also giving me qualitative data.
And you can't have a lag measure like
EBITDA without a lead measure like call
rate, acceptance rate.
And we can talk about that.
But what I see people happening is chasing
the target.
EBITDA results
from doing other things right,
rewarding your clinicians,
being centric around the physical
therapist and PT assistants,
or in the dental world,
our dental professionals,
our dentists and our hygienists,
And how do you enable them?
How do you gauge them?
What is your retention rate?
How are they, you know,
how many owners do you have in the
particular clinics?
And so when you start chasing EBITDA,
you're chasing a number.
And so what I've seen unscrupulous CEOs do
is, you know,
I heard about one recently that got rid
of their PTO policy.
In other words,
if you leave or you get fired,
you take no PTO with you.
Well, why is that?
Because now you could take the PTO,
adjust it back,
and all of a sudden your EBITDA climbs,
right?
The good news is the sophisticated
investors, the sophisticated buyers,
they can now sift through this.
And now what I hear is a new
term.
And it's a term I actually use.
It's called clean EBITDA.
Clean EBITDA is without all these bullshit
and all these other kinds.
Obliquely, you know, by not paying it.
of other things right.
And as you saw from my article,
there was a hat that Greg White, Dr.
Greg White gave to me and say,
you know, people over EBITDA.
You get what you emphasize in business.
You know,
everybody says you get what you measure.
You actually get what you emphasize.
If you emphasize EBITDA,
you're not going to get EBITDA.
Every CEO that I know that chased EBITDA
has failed.
Everybody who's chased,
and this is why PTs make great
entrepreneurs and make great leaders of PT
organizations,
because they know in order to keep their
clinicians,
they got to approach things clinically.
They got to approach what drives a
clinician.
No physical therapist, no dentist,
no doctor ever went into business to chase
EBITDA.
They did it to do meaningful,
impactful work.
They did it because they wanted to help
people.
And so that's what we have to remember.
It's really the basics and common sense.
And we have to make common sense,
common practice.
Now,
you make a pretty strong argument that
EBITDA treats clinicians as a cost line,
when in reality, they're the business.
They're the thing providing the service
that is our profession.
So how does that disconnect show up inside
physical therapy organizations
specifically?
Yeah, no, that's the real question.
You know, physical therapy companies,
their assets wear shoes.
They go home at night.
They go to bed at night.
Right.
And they're the ones that produce
revenues.
That is the first start of the equation.
You know, I used to have this sign.
I'd have all clinics put on their wall.
It was a picture of our patients.
And underneath, as it said,
we eat because of you.
The patients come in.
We produce the revenue.
It's a conduit.
And then we produce enough profits to keep
everybody employed,
keep the lights on and everything else.
And what you see start to happen is
they start to have morning productivity
meetings.
They start to have morning meetings.
optimization, units per visit,
all of these metrics,
they're not qualitative,
they're quantitative,
and they frankly drive physical therapists
nuts.
Now,
the art and science of all this is
how do you balance it?
I'm not by any means suggesting you
shouldn't use sound rationale, dashboards,
and appropriate metrics to drive your
business or to measure your business.
It's when the measurement becomes the
driver of the business rather than the
driver being the absolute embodiment of
caring for your employees and caring for,
in turn,
your patients that drive the results.
So I just see this all the time.
They create these committees.
They terminate founders and PTs that drive
the business.
And all it becomes is a dumbing down
of the profession.
They make PTs into widget makers,
and they forget that PTs are the drivers
of the business,
not the standby byproducts of the
business.
Well,
you pulled out a story and an analogy
that I'd never heard of,
but it's pretty simple to follow,
which is the Soviet nail factory story.
Can you explain that idea?
I love it because it's pretty obvious,
it's pretty quick,
and I feel like it applies really well
to healthcare metrics.
Yeah.
So the Soviet nail factory is a really
interesting one because I used it
actually,
I think in my last Substack post to
illustrate the point about Goodhart's law.
And it's the perfect illustration of it.
The Soviet factory managers were basically
given a production quota, make nails.
So they made the quota work.
When the target was the number of males,
they produced thousands of tiny,
useless nails.
We're producing hundreds of patients that
aren't
coming back because they were moved too
quickly because they were used to
measuring units per visit and how much
turnover in patients could I have?
So the factory produced a small number of
enormous, completely useless nails.
And that's what happens when that's the
target,
but the target was hit and they were
rewarded for it.
We reward PTs for hitting or their
managers for hitting EBITDA when EBITDA
doesn't really respect free cash flow.
Most of the PT platforms I know now,
particularly the larger ones,
aren't producing enough cash to even pay
the interest on their debt.
I mean, these platforms are in trouble.
And so what you have to do is
you have to realize it's ruining your
healthcare organization.
Set EBIT as the target and the rational
operators will hit it.
They'll do it by suppressing clinical
compensation.
They'll do it by really suppressing CapEx
and other kinds of expenses that you need.
Then they'll come up with all kinds of
things to be under or non-recurring ad
backs.
They may even make
sign-on bonuses, you know, and add back.
They may even make certain benefits and
add back.
Now, enough years, you know,
there really has been a materially large,
you know, materially producing, you know,
platform acquisitions in the last two
years.
And it's because of this,
not just in PT,
but in healthcare and even in dental.
And so your sophisticated buyers and
investors are sifting through this and
they'll make their own adjustments.
They won't take your word for it.
That's what quality of earnings and all
these checks and audits are all about.
So yes,
the giant useless nails in healthcare,
and I would put EBITDA at the top
of that list.
Yeah.
I mean,
the people who you're looking to invest
are now savvy enough to see how you're
gaming the system.
Hopefully this leads to less people gaming
the system because it's sort of not
fooling anybody.
So, all right, well,
then we got to hold your feet to
the fire then here, Larry.
Here's the last question.
If EBITDA shouldn't be the North Star,
the next obvious question is, well, great,
what should be?
What would be a healthier,
what would a healthier dashboard actually
look like specifically for a physical
therapy organization?
Yeah, so let me set some context.
The business of physical therapy is not
that complicated.
We can make it complicated,
and we do by having much too large
of a dashboard, in my opinion.
We have way too many BI tools.
We have way too much data,
but not enough caring.
We have way too much numbers,
but not enough compassion.
We have way, way,
way too many streams of emails on
productivity without fundamentally
listening and understanding the heartbeat
of, in our case, physical therapists.
but what i've proposed is what i really
refer to as a four pillar you know
framework because there are some
differences that you can take into account
amongst these four pillars and again two
two premises don't give me a you know
an objective data without a qualitative
one and the second one is
You know,
don't give me a lag measure without a
lead measure.
And so you have to have a,
you know, a flavor of all of those.
But if I was defining the four pillars,
and since we're talking about financial,
I wouldn't put that number one,
but let's talk about it first.
I would lead with unlevered free cash
flow.
So it's EBITDA minus CapEx minus working
capital, you know, now it's again,
gets in the weeds,
but what it really tells you is what
cash you really have that is, you know,
over and above, you know, your spending.
You know,
that's the number that tells you where the
business really can sustain itself.
Even it tells you what it looks like
before the bills come due is how I
refer to that.
So that's kind of the financial side I
would use on lever-free cash flow.
On the operational side, there's a lot,
but I like same growth, store, you know,
increased organic.
Everybody talks about wanting to buy
things.
Well,
show me a company that can grow
organically first and then let them buy
things, right?
That's the lead measure is can you grow
a clinic organically?
before you can buy something and then you
maybe earn the right to buy things.
Yeah.
Now a new patient volume.
I like that because it goes to throughput.
You know,
are you growing the number of new
patients?
What are the number of new patients per
PT that they see in a day?
As you well know,
I like PlanetCare completion rate.
It's it's a tough one,
but it's a good one.
I liked, you know,
the number of patients that kept their
visits, you know,
that didn't that didn't you know,
I think it's a proxy for quality almost.
And, you know,
these are sort of the leading indicators
that predict the future of EBITDA than
what EBITDA stands for.
Then I think a third category is clinical.
So again, financial, operational,
and then I like to refer to it
as clinical.
And this is a real outcomes, you know,
scorecard.
You can use whatever third part validated,
you know, measure you want, photo,
promise, functional improvements,
all these kind of,
there's a bunch of them.
You know,
if the C-suite can't tell whether your
patients are actually getting better,
EBITDA number serves without a purpose,
right?
And so you have to live with that.
You have to have that clinical one.
In fact,
I'd move clinical to the first of the
four pillars.
And then, you know,
then I would call the fourth pillar
people.
You know, in fact,
I would have people first, probably,
clinical second, operational third,
and financial, you know,
fourth on my four pillars.
And other people, it's retention rate.
It's those engagement scores.
um i i like to call them inspiration
corey we used to measure patient set or
you know employee satisfaction and i went
to employee engagement now i actually
think it's employee inspiration which
keeps them inspired or how do they keep
inspiring i like you know stay interviews
how many of you completed in a given
year these are people who are actually
staying you finding out why these aren't
exit interviews, which is very HR-ish.
These are people, you know,
getting to know why people stay,
what's working, what's not working,
what we need to start doing, stop doing,
and keep on doing, you know,
that kind of stuff.
And all those things give you a chance
to fix something before it becomes a
problem.
So that's the dashboard that I'm fond of,
and certainly in the organizations I've
been blessed to run,
and I'm currently working in a leadership
role,
and those are the things I look at
first.
Yeah, I like how you flipped that,
where the thing we're talking about
EBITDA, or even the financial metric,
that comes fourth out of four.
It's got to be there,
but fourth out of four.
I do like this conversation too,
because it's not anti-capital or
anti-growth.
It's really about just understanding what
we're measuring, what we produce.
I always like to say,
what game are we actually in?
Are we understanding what game we're
actually in?
And then what measurements are pushing the
organizations to do that better?
correctly or do that well,
and then you get to sort of define
what well looks like.
Absolutely.
It's all about culture and people.
You know,
culture is not the enemy of EBITDA.
Culture is the engine of EBITDA.
Absolutely.