Competitive Advantages in Physical Therapy

[The following is pure speculative garble. My thinking could be deeply flawed on various levels. I’m sure there are things related to this topic that I haven’t mentioned, thought about, or even considered. If so, then please enlighten me.]

The Affordable Care Act is forcing healthcare changes at a very noticeable rate. Patients now incur greater out-of-pocket expenses in the form of higher deductibles and copays. Localizing this patient expense to the world of physical therapy (at least here in the US) creates new and interesting dynamics. The patient has morphed into an active medical consumer voting for their provider of choice with their money. This is where familiar circles overlap yet again.

Physical therapists now compete with more than the local chiropractors, massage therapists, and athletic trainers. The rub is now within the profession itself. If you, dear PT, haven’t felt it yet, you soon will. The question you will soon have to confront will take the form of “what would make my clinic the patients’ first choice?”

An old guy who goes by the name of Warren Buffet once said, “In business, I look for economic castles protected by unbreachable moats.”

Everyone wants a castle, but what protects their cherished castles? What keeps the competition at bay? What’s your competitive advantage?

According to Pat Dorsey (from The Five Rules for Successful Stock Investing) there are five ways a company can build a sustainable competitive advantage:

1. Real Product Differentiation – via superior technology or features

In PT terms, this would translate into techniques/modalities of treatment and specialty certifications. While this would provide a unique product, the advantage is a race against time. It’s only a matter of time before the latest treatment zeitgeist saturates the neighborhood. The virality of this differentiation will be modulated by provider and patient perception, difficulty in achieving specialized certification, etc. This temporal arbitrage could provide a nice cushion for brand-building.

2. Perceived Product Differentiation – via brand or reputation

Real Product Differentiation provides the first mover with tremendous initial potential. Given the temporal nature of such an advantage, building a brand or reputation to stack the bricks of future progress in a timely fashion is of incredible importance. Given the power of perception in terms of patient outcomes, having a strong brand or reputation will be a formidable moat.

3. Driving costs down – Walmart comes to mind.

This is always a real, but weak threat in the PT business. Retaining or increasing margins via increased volumes will likely decrease job satisfaction, increase stress levels, and result in questionable decision-making resulting in negative outcomes such as burnouts or fraud.

4. Locking in customers – via high switching costs

This was a legitimate moat until a few years ago. PT clinics basked in the bright sunshine of “in-network” status with insurance companies in hopes of greater volume of patients walking in the door. This advantage is quickly (if not already) evaporating as a result of higher and higher out-of-pocket expenses. Now it’s up to the clinic to win over the healthcare consumer. It ain’t what it used to be.

Referrals from MDs/DOs was a major driver of patients into PT clinics. However, this is already changing, and the change will likely accelerate as Direct Access provides healthcare consumers with greater perception of provider choice.

Geography plays a major role here. If travelling to another location requires greater effort, then the path of least resistance will likely be followed. Patient outcomes and experience can erode this advantage.

5. Locking out competition – via high barriers to entry or high barriers to success

I do not believe Physical Therapy clinics have high barriers to entry. This might be supported by evidence of low entry costs, increasing number of new clinics even after the recent recession, and abundance of future PTs looking to start their own practices.

Barriers to success will likely depend on network effects and brand consciousness. Geography and demographics will (and already have) provide a barbelled advantage – cities or rural areas will have inherent benefits. The middle ground (suburbs) will likely turn Darwinian, with the fittest surviving. Cities, while holding high fixed costs, will also have an relatively price-insensitive population pool. Rural regions will likely continue with first-mover advantages as a limited population cannot support many new entrants.

Of course, outsized returns will attract new players into your pond. The question is how will you maintain your competitive advantage? How will you bolster your moat?

[Again, what you just read was pure speculative garble. My thinking could be deeply flawed on various levels. I’m sure there are things related to this topic that I haven’t mentioned, thought about, or even considered. If so, then please enlighten me.]

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