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Not so private practice

John Dewar

If you’ve been in the unfortunate physical state to warrant a visit to your local physiotherapist or podiatrist recently, you may have noticed the mismatched waiting room furniture and dog-eared reading material has been replaced. Instead, you’re more likely to find thoughtfully designed lounge areas that maximise the opportunity to sell wellbeing products to a captured audience, not to mention herb-infused water served with a not-so tatty glossy. 

New caretakers

The reason for the extreme makeover is simple: Australia’s allied health system is increasingly falling under the care of big business. In the United States, the corporatisation of allied health has been the norm for some years, but locally, it’s highly fragmented with many practitioners preferring to hang their shingle at one, or maybe two, practices at most.

That is, until now. Rapid changes in technology and a progressively competitive landscape are fuelling the move away from private practice.  Corporatisation in healthcare has, to date, been particularly prevalent in disciplines that require significant capital investment to keep up with medical advancements where equipment which can cost hundreds of thousands of dollars may become obsolete in a year or two. 

Radiology and pathology are just two examples of two capital-intensive disciplines, which have been impacted significantly by corporatisation in the past two decades. Previously highly fragmented, 96 per cent of the pathology market in Australia is now held by just three parties, while in radiology, three parties now control up to 41 per cent of that market.

Just the remedy?

Given the prior success of private equity firms and listed entities in various healthcare disciplines, it’s little surprise that they are now focussing on allied health. The ability to centralise, automate and outsource corporate functions, obtain bulk discounts through enhanced purchasing power, and cross-sell opportunities between complimentary disciplines that are owned by the same overall provider, can lead to significant financial benefits.

A common thread with the major players currently corporatising the national allied health sector, has been their focus on acquiring clinics at pace and with complimentary offerings. This strategy used by private equity firms and listed entities including Healthia and Zenitas provides an opportunity to refer existing patients to other complimentary clinics and service providers which fall under their ownership. As a result, these private equity firms and listed entities acquire new customers at a lower cost than their stand-alone competitors.

For the allied health clinic owners, many of which are baby boomers that are seeking to exit to fund their retirement plans, the trend towards corporatised practices means they’re able to exit the ownership of their business with a flush of cash. They can also potentially negotiate an equity stake in their acquirer while earning a healthy pay-packet as they continue to treat their patients. 

Of course, the attraction is not one-sided. The private equity firms and listed entities are acquiring businesses which have low earnings volatility and which address the needs of an ageing population, while also generating profits which are effectively resistant to a recession. 

Smaller players will flatline 

Corporatising our allied healthcare system is not all advantageous. Private equity firms will usually have a three to five-year timeframe to improve profitability and scale before exiting. The quest for quick profits means that the consumer is the one receiving a deficit of sorts. While this is less of a problem in other sectors such as retail or transport, in healthcare it translates to the quality of care. It could mean the difference between an extended consultation or a low-margin procedure being offered to a patient, or not.

Hub arrangements with multiple disciplines will likely emerge as a preferred way of working. Currently, hubs are more likely to consist of the same speciality such as 10 physiotherapists working at the one location. Eventually, a vertical offering of practitioners such as general medical practitioners, specialist medical practitioners, physiotherapists, podiatrists, osteopaths and chiropractors all working in the same location may become more popular allowing each practitioner the ability to refer patients to each other at a low customer acquisition cost. The challenge for these set-ups will be to ensure they’re not seen as a production line and retain the personalised care that so many have come to expect from their local clinic.

Smaller practices that are resistant to the changing landscape can also expect to be squeezed. Just look at what’s happened to optometry in the past decade in Australia to get a glimpse of how corporatisation will likely play out for other allied health disciplines. For example, Specsavers was able to roll out at pace and open 100 stores in 100 days when it entered the national market in 2008, and it now has 40 per cent share of all eye care customers. 

The remaining solo players have seen their profitability significantly reduced because they find it difficult to compete on value. An OPSM or Specsavers outlet can acquire their product at a far lower price because it benefits from scale. Add to this, the very latest equipment, the best real estate locations and a highly visible brand, and these big players are a hard proposition to beat.

The prognosis

Not all allied healthcare offerings will be compelled to sell-out. Specialised niches, such as psychology and speech pathology, which require relatively low capital investment and which have a low ability to cross-refer with other healthcare disciplines would unlikely see any benefit in consolidating their services.  

And there will be those who are brave enough to go it alone in a corporatised field but to survive they will need to have either a well-established brand or a differentiated model, providing a premium service at a premium price.