Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Pediatric Therapy Clinics
Transcript
- Lucas: So last week I was looking at a deal that closed back in 2021 — KKR buying BlueSprig Pediatrics for roughly $2.8 billion. And it got me thinking about a whole corner of private equity that doesn't get much attention: pediatric therapy clinics. Luna: By pediatric therapy, you mean autism services, speech therapy, occupational therapy — that world? Lucas: Exactly. And it's been one of the fastest roll-up sectors in healthcare over the last five years. The basic thesis is simple: you have a highly fragmented market of mom and pop clinics, demand is growing rapidly, and reimbursement — especially from commercial insurance — is reasonably predictable. Lucas: BlueSprig alone went from about 50 centers in 2019 to over 260 by the time KKR bought them. And they weren't the only game in town — there's LEARN Behavioral, Cortica, Behavioral Innovations. All backed by PE. Luna: But this isn't like rolling up laundromats or car washes. These are medical services for kids with developmental delays. The quality question feels different. Lucas: It is different, and the investors know it. The key metric they watch is something called 'authorized hours' — the number of therapy hours that insurers approve per patient. If you can increase that without adding proportional cost, margins expand fast. Lucas: And the underlying demand is real. The CDC now estimates that 1 in 36 children in the US is diagnosed with autism spectrum disorder, up from 1 in 150 in 2000. That's not a fad — that's a structural shift. Luna: So PE is basically betting that the diagnosis rate keeps climbing and that insurance keeps paying. What could go wrong? Lucas: Well, let's look at the reimbursement side. Applied Behavior Analysis — ABA therapy — is the gold standard for autism. It's covered by Medicaid in all 50 states, and most commercial plans cover it too after mandates. But the rates vary wildly. Lucas: In California, Medicaid pays around $60 an hour for ABA. In Texas, it's closer to $45. Commercial insurance can pay $100 to $150 an hour. So the roll-up strategy is to acquire clinics in states with higher commercial mix and then centralize back-office functions. Luna: But the actual therapist — the one delivering care — they're usually salaried, right? So the incentive is to keep their schedule full. Lucas: Exactly. And that's where the tension lives. The industry standard is that a Board Certified Behavior Analyst — that's the BCBA credential — should handle no more than 10 to 12 patients at a time. But when you're under PE pressure to grow revenue per clinician, that number can creep up. Lucas: I talked to a former regional director at one of these platforms. He told me that after acquisition, the caseload target went from 12 to 18 within 18 months. And the BCBA turnover rate at that company hit about 40 percent annually. Luna: Forty percent churn in a clinical role — that's brutal. And it's not like you can just replace them easily. Isn't there a national shortage of BCBAs? Lucas: Massive shortage. The Behavior Analyst Certification Board reports about 60,000 certified BCBAs in the US. But to meet current demand, you'd need closer to 80,000. So the roll-up creates its own bottleneck — you acquire more clinics, but you can't staff them with qualified clinicians fast enough. Lucas: That's one reason we've seen some platforms pivot to a 'hub and spoke' model. You have a senior BCBA supervising multiple remote technicians via telehealth. It lowers cost, but it also changes the nature of care. Luna: Let's talk about the numbers that make PE interested in the first place. What does a typical pediatric therapy clinic look like on a P&L? Lucas: A well-run single clinic can do about $1.5 to $2 million in revenue with EBITDA margins between 15 and 20 percent. The multiple on those deals — pre covid — was around 5 to 6 times EBITDA. By 2021, it was pushing 8 to 10 times. Lucas: So if you buy a $2 million revenue clinic at 7 times EBITDA, you're paying maybe $2 million. Then you add a few more, consolidate billing and scheduling, and suddenly you're running a $50 million platform worth $400 million. Luna: That math works beautifully as long as reimbursement rates hold. But what if a big payer decides to cut rates? Or what if Medicaid tightens eligibility? Lucas: That's the single biggest risk. In 2023, Florida actually tried to cap ABA therapy hours for Medicaid kids. The industry lobbied hard and got most of it walked back, but it was a warning shot. If one large state cuts rates by 10 percent, the leverage on those deals gets ugly. Luna: And there's a regulatory risk on the other side too — the Department of Justice has been looking at whether some providers are billing for more hours than they actually deliver. In 2024, one of the larger chains paid a $12 million settlement over false claims. Lucas: Right — the fraud risk is real when you tie revenue to authorized hours and you've got aggressive growth targets. But the smart firms are investing in compliance infrastructure. They know that a single DOJ investigation can wipe out years of returns. Lucas: Let me give you a specific case study: the Houston market. In 2020, there were about 120 ABA therapy clinics in the greater Houston area. By 2025, that number had more than doubled to nearly 300. Luna: That is insane density. How do they even compete for patients? Lucas: They compete on convenience — locations near schools, evening hours — and on insurance acceptance. But when every clinic takes the same major insurers, the differentiation is thin. So you see marketing spend go up, which eats into margins. Lucas: One private equity firm we spoke with said they now avoid markets where the clinic per capita ratio exceeds a certain threshold. They're looking at secondary cities like Nashville, Charlotte, and Salt Lake City instead. Luna: So the playbook is shifting from 'buy everything' to 'buy the right things in the right places.' That sounds more sustainable. Lucas: It is. And the firms that will do well are the ones that focus on clinical outcomes, not just top-line growth. There's actually a few platform CEOs who've started tying BCBA bonuses to patient progress metrics — hours of sleep, communication milestones, things like that. Luna: That's a genuinely interesting development. It's a way to align financial incentives with patient outcomes, which is rare in pe backed healthcare. Lucas: Yeah, if today's conversation was useful to you in understanding how this part of healthcare finance works, the way we keep these episodes ad-free is through listener support. If you want to help keep the show going, you can find us at buy me a coffee dot com slash fexingo. Luna: It's a small gesture that goes a long way — and it means we never have to run a preroll ad for a mattress company. Lucas: Exactly. So, back to the outlook — I think the pediatric therapy roll-up story still has legs. The fragmentation is real: there are still over 10,000 independent clinics in the US. But the next phase will be about operational discipline, not just acquisition velocity. Luna: And for the clinician listening — or the parent of a child in therapy — what should you watch for? Lucas: If your clinic gets bought by a platform, pay attention to caseloads and staff turnover. If the BCBA you see keeps changing, that's a red flag. The best pe backed operators are transparent about therapist to patient ratios and invest in training. Luna: And if you're an investor, you're probably looking at those same metrics before you write a check. Lucas: Exactly. The next time you hear about a billion-dollar pediatric therapy deal, you'll know what questions to ask.