Consider private equity options to move forward on value-based continuum of care
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Orthopedic practice consolidation is rapidly accelerating. External influences are numerous and include the financial stress of the COVID-19 pandemic, as well as hospital and health care system investments in musculoskeletal care.
There has also been a reduction in reimbursement from payers, increasing overhead costs, the need for advanced data analytics, complex revenue cycle management and increasing involvement of third-party investors such as private equity firms. More than half of orthopedic surgeons remain in some form of private practice. Many of these surgeons are in the process of deciding on their best partner to survive and grow during the next5 to 10 years.
Define the vision
Orthopedic surgeons have many options to consider when looking for a partner with the attributes needed to achieve a vision. Unfortunately, some groups may fail to clearly define their desired results by focusing on the immediate finances of the transaction. The complexity of these business transactions is rarely understood by the practice leadership and often requires investment bankers, financial advisors, health care attorneys and advisors who have intimate knowledge of the business models of hospitals, private equity firms and merger and acquisition proposals from physician groups.
While the process may be heavily biased toward financial rewards and increase in capital, orthopedic surgeons should focus on a strategy that allows the group to achieve practice goals and the ability of a business partner, while assessing past accomplishments of the potential partner that provide insight on corporate behavior.
Enter private equity
The involvement of private equity in orthopedics is relatively new. While private equity firms may verbally offer solutions to an agreed strategy, the track record of most firms is predicated by their ability to acquire, grow and sell investments in 3 to 5 years. Private equity firms are attracted to the changing environment related to moving high-value cases, such as joint replacement and spine procedures, from the hospital setting into the ASC. This provides revenue from surgical care that is often done in facilities owned by an orthopedic practice. It also boosts revenue from multiple ancillaries, including physical therapy, imaging and DME.
The ability of private equity firms to participate in a process that leads to a better model to deliver improved patient care, population health and clinical experience, as well as reduced per capita costs, has yet to be established. Most orthopedic private practice groups have focused primarily on a fee-for-service model. However, bundled payments and other alternative payment models encourage a transition to a value-based model that can participate in population health strategies facilitated by additional capital.
Private equity firms are established to acquire capital from wealthy investors, then use the capital to provide significant profits to investors. They are not directly involved in the medical practice, however, financial strategies and diverting profit from the medical practice may indirectly affect the ability of the practice to provide an environment for its providers to operate at their full potential if not properly balanced. It may seem counterproductive to create an environment where the providers are compromised from their best-in-class practice, however, these behaviors may occur because private equity firms typically have a short-term outlook on the overall investment.
In private equity deals, it is important that health care groups do not lose focus on the physician side of the relationship. While there needs to be an acceptable profit margin to satisfy the investors’ goals, a model where the entire focus is on maximum efficiency and operating a lean practice in terms of staffing, operations and capital investments is not sustainable. Physician leaders of the medical practice may decide to compromise resources, reduce overhead and improve the balance sheet, if the primary focus is on potential short-term reward of another sale, leaving less influential members of the practice in challenging situations.
Additional capital spent wisely can allow for improvements in the management of complex business functions. A private equity partnership can allow the continued growth and inspiration of the entrepreneurial spirit of private practice physicians in a way that could not have been accomplished in a hospital or health care system. For many high-performance orthopedic practices, the cultural fit is better with private equity partners than with hospital administrators.
Assess partnerships
When assessing potential partnerships, the goals should be to grow the orthopedic practice and invest wisely in resources to drive a value-based model with success measured by the ability to effectively manage the entire continuum of musculoskeletal care. The true “win” will be when a practice can negotiate contracts that allow it to assume the risk of taking care of a patient population and provide the care at a lower cost without compromising outcomes or experience.
An increasing number of practices have merged to form state-wide supergroups to leverage the scale for better payer reimbursement and more efficient management. These practices must transform into a system that can provide high-quality patient outcomes, outstanding patient experience, cost savings and physician satisfaction. Private equity options should be strongly considered by orthopedic groups looking to move forward with value-based continuum of care while sustaining desired outcomes and avoiding the decision to surrender their entrepreneurial spirit.
- For more information:
- Anthony A. Romeo, MD, is the Chief Medical Editor of Orthopedics Today. He can be reached at Orthopedics Today, 6900 Grove Road, Thorofare, NJ 08086; email: orthopedics@healio.com.
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