Orthopedists turn toward private equity for desired growth
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The projected increase in expenditures related to orthopedic care and the shift to ambulatory orthopedic procedures has drawn the attention of investors looking to boost economic value by consolidating practices to orthopedics.
Although physician practice consolidation can also occur through consolidation by hospitals or other orthopedic practices, the published literature has shown an increase in consolidation through private equity-backed acquisitions in the last several years. Between 2004 and 2019, Venkat Boddapati, MD, and colleagues found 41 orthopedic practices and surgeon groups were acquired by 34 private equity and other investment firms. In addition, 70.7% of total transactions during the study period occurred between 2017 and 2019, with a statistically significant upward yearly trend.
Desired growth
One reason for this spike in private equity-based acquisitions in orthopedics may be due to the combination of a desire for growth while maintaining autonomy among orthopedic practices. Keith R. Berend, MD, noted that after expanding their successful total joint replacement practice to include other orthopedic subspecialties, the partners of JIS Orthopedics found it difficult to continue to grow ancillaries in their practice while maintaining the growth and strength of a small to medium-sized practice.
“We were interested in what options there were for maintaining our autonomy, maintaining our clinical presence and our 50-year reputation, and it seemed like a private equity [management services organization] MSO-based transaction was the only way to potentially maintain a growth trajectory sustainability and successful model without losing that autonomy,” Berend, of JIS Orthopedics, which partnered with OrthoAlliance, told Healio.
Kevin B. Fricka, MD, hip and knee arthroplasty surgeon at Anderson Orthopedic Clinic, also noted that a key driver of partnering with a private equity group was that it would be a partnership in which the physicians would have an ownership stake. He said while it may have been difficult for the 13-physician group to open a physical therapy office, urgent care office or a four-room surgery center on its own, that partnering with a private equity group would provide the management, expertise and capital to make it happen while allowing the opportunity for a partnership.
“With private equity, we would have a partner, which at a hospital level you’re not as much of a partner, and potentially joining a 100-physician orthopedic group, you may not get as much control over it as you would like,” Fricka, whose practice partnered with M2 Orthopedics, told Healio.
Similar cultures
In addition to providing a way to grow while staying autonomous, practices interested in consolidating may search for a group with a similar culture.
“For us, it was always about partnering with an organization that clearly shared our practice’s culture, dedication to physician independence and had a proven track record of driving growth and positive change,” Jeffrey Malumed, MD, president of Premier Orthopaedics, told Healio about its partnership with Healthcare Outcomes Performance Company (HOPCo).
Malumed noted the consolidation model of HOPCo differs from other companies in that Premier Orthopaedics will not have to engage with new teams due to leadership changes every few years after a transaction.
“HOPCo is committed to our long-term sustainability and growth, and they have not and will not have leadership changes every few years after transactions, which was particularly important for our younger physicians with long careers remaining,” Malumed said. “We will still benefit from future and multiple financial transactions, the so-called ‘second bites,’ just as HOPCo’s other physician practice partners have already done, but the key people and teams will remain consistent during our growth with HOPCo.”
Additional advantages
Knowledge in the current local market or field can also provide advantages in consolidation. Berend said not only was OrthoAlliance already a local, regional player in the market, but it also had the strongest background in orthopedics.
“[Orthopedics surgeons] are different than other people and having a partner that lived in the orthopedic space to start with was comforting,” he said.
OrthoAlliance also had established significantly better relationships with payers and employers in the market that would allow JIS Orthopedics to grow.
“OrthoAlliance already had those relationships allowing us to better serve our patients with lower costs and better outcomes,” Berend said.
He added OrthoAlliance was able to discuss realistic and approachable ways to continue to bring in young surgeons and partners, as well as what will happen in the future when partners of JIS Orthopedics decide to retire.
“We’re fortunate that we don’t have anyone retiring or planning on retiring, but I think that the willingness and ability to be agile, much like we are as a practice, was attractive both with hiring or bringing on new partners and with consideration of what to do when a partner retires,” Berend said.
Daunting change
As with any change in business, Malumed noted undergoing an MSO or private equity transaction presents new concepts and considerations that physicians may not be well versed in and may lead to physicians finding the transaction process daunting.
“Combining that with a large number of physicians with different voices can sometimes lead to increased confusion and even worry,” Malumed said.
When speaking with different MSOs, Malumed said that HOPCo understood the complex nature of orthopedic practices, the complex cultural issues and the value of maintaining independence and high clinical quality for patients.
“They also demonstrated clear and logical solutions for every contingency and potential concern, which gave our physicians great confidence in their ability to proactively address such items,” he said. “They were part of our team before we even closed the transaction.”
Even when a transaction may seem relatively straightforward, there may be some changes after the close of the transaction that practices may have to adjust to. For JIS Orthopedics, Berend noted the biggest adjustment was switching electric medical record systems.
“From a staff standpoint and from a day-to-day practice point, transitioning from our EMR to OrthoAlliance’s EMR was difficult,” Berend said.
He added, “Most of us have lived through [implementation of an EMR] before and you’ll live through it again, but that was a pain point, for sure.”
Know your partner
When considering a transaction with an MSO or private equity firm, Berend said it may be helpful to have one person in the company designated as the main voice of the group.
“Not necessarily having the ability to make the decisions independently but having a singular voice that’s agreed upon by the partners or by the executive committee can be helpful and make things move faster,” Berend said.
He also does not think it is necessary to hire a consultant to negotiate the transaction deal or to vet different options if the company has a good lawyer to understand the legalese and a good accountant to understand the tax implications.
“You do not need a consultant to come in and tell you what the deal means because each MSO is going to tell you what the deal means,” Berend said. “I’ve watched groups put a lot of money and a lot of energy and effort into consultants or bankers that come in and, at the end of the day, it doesn’t do them any good. They don’t get a better deal because a deal is a deal.”
Fricka also noted orthopedic practices have different needs when it comes to a private equity transaction depending on where each physician is in his or her career, and that it is important for physicians to understand the contract terms and what it is laying out for the next 5 years of their career.
“What I would say for the orthopedic surgeon going into [a private equity transaction] is to figure out where they are in their career and what safeguards they want in place to deal with the next 5 to 7 years of your practice,” Fricka said.
Physicians should also validate the success of the company they are considering as a partner, according to Malumed. He said this includes understanding who the partners are going to be, making sure they have solutions for any concerns, that they can lay out and prove that income repair will occur, as well as the path to get there, and understand how the company addresses and solves possible friction points.
“Growth and partnership strategies are now top of mind for many practices. However, the experience and leadership of those who may be promoting partnership opportunities can vary, and it is important to know what resources, with meaningful experience in the musculoskeletal space, the partner can provide, as well as their successes across a variety of situations,” Malumed said.
References:
Boddapati V, et al. J Am Acad Orthop Surg. 2022;doi:10.5435/JAAOS-D-21-00783.
Growth in orthopedics increases private equity interest. https://www.healio.com/news/orthopedics/20220412/growth-in-orthopedics-increases-private-equity-interest. Published April 20, 2022. Accessed Jan. 20, 2023.
Mikhail C, et al. J Am Acad Orthop Surg Glob Res Rev. 2021;doi:10.5435/JAAOSGlobal-D-21-00162.
Patel AA, et al. J Am Acad Orthop Surg. 2021;doi:10.5435/JAAOS-D-21-00058.
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