How has private equity investment in health care affected orthopedic physicians?
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Valuable, sustainable investment
Some would say that private equity in orthopedics is like adding fuel to the fire. That is a great analogy but requires some detailed explanation.
In today’s environment, many groups are smoldering. The fire is still warm, but there is no serious flame. Reimbursement rates continue to go down and have done so in the last 20 years to the tune of more than a 50% reduction. Overhead costs, including medical supplies and staffing, have continued to rise. It is getting harder to compete as a fully independent group.
Private equity can be a way to reignite the fire for physicians. With an eye toward maintaining physician leadership and focus on sustainability and recruitment to ensure growth and strength in the future, private equity can be the fuel needed to recharge groups.
A private equity investment cannot simply be pouring gas on a fire. Gas can provide a quick but unsustainable burn with huge flames (ie, senior partners taking out all the money), but ends quickly, hurting the long-term value of the group for junior and new partners. Private equity also is not sustainable if the private equity firm is focused on a quick burn through cost cutting or managing physician practices without input.
Instead, private equity needs to help groups strategically add logs onto the fire, providing a sustainable, long-term burn that satisfies all members of the group. These logs can include capital investment, strategic insights and recruitment services, all of which need to be provided in partnership with continued physician leadership and engagement.
Once the fire is burning brightly and the flames are higher through consolidation, economies of scale and contact negotiations, there may be an opportunity to continue through a second sale event or “second bite of the apple,” further strengthening the fire.
Transactions must be structured to keep the flame burning brightly through sustainability, growth and recruitment. Keeping a focus on physician leadership and patient care allow private equity and subsequent partnership models to succeed.
How has private equity involvement affected orthopedic surgeons? It has influenced them in good ways and in bad ways, but when managed correctly and led by physicians, this can be an incredibly successful model. Physicians need to be alert and aware of the shortcomings and continue to manage and lead. Private equity can affect orthopedic surgeons positively when the plan keeps adding logs (new partners, new ancillaries, new opportunities) to the fire. This creates value and sustainability.
Keith Berend, MD, is chief medical development officer at OrthoAlliance and a partner of JIS Orthopedics in Columbus.
No role for private equity
Private equity should have no role in the acquisition and management of physician practices, hospitals and other private health care organizations. Perhaps the only role private equity should have in medicine is to help fund new technologies to develop and implement these faster. The arguments against private equity are numerous, and recent trends suggest that the private equity model in medicine is failing.
Physicians are the only ones capable of placing their patients’ best interests as their top priority. Private equity groups are beholden to investors and, thus, profit is the top priority. Independent physician practices emphasize patients over profits while, by their nature, private equity emphasizes profits over patients. This emphasis leads to implementation of measures that increase utilization and cost as evidenced by economic data of private equity-owned hospitals and practices.
A recent study of private equity ownership and impact on health care outcomes and cost demonstrated that private equity ownership of medical entities is most consistently associated with increased costs to patients and payers. Cost increases as high as 30% are occurring in some communities with a high density of private equity-owned practices. In fact, this meta-analysis found no studies that lowered costs. Another study of private equity-owned hospitals showed a 25% increase in hospital acquired complications compared with pre-acquisition. While private equity groups promise lower costs, improved access to care and more efficient care, there are no data to substantiate this.
Physicians in private equity-owned practices frequently state that this model improves their autonomy. This could not be further from the truth and, if anything, private equity ownership significantly limits physician autonomy, especially for younger physicians. Most models incorporate a private equity-owned management services organization, which runs the business for a percent of revenue. This limits autonomy as an outside entity can and does influence daily business operations. This is especially problematic as cost-cutting measures will be implemented if profit margins are less than expected. These measures, including staff reduction, have been demonstrated in private equity-owned hospitals. Limiting physician autonomy is problematic as this is often cited as one of the major factors involved in physician burnout.
The private equity ownership model is also inherently flawed. It is predicated upon acquiring a practice, growing its value internally and externally with expansion then selling to another private equity entity (the “second bite”) after a short interval of 3 to 5 years. The physician receives a substantial financial reward at initial purchase and the potential for multiples of the initial buy-out with the second bite sale to another private equity firm. The problem occurs when value does not build in the practice, and it is not attractive for sale. Unfortunately, in the private equity acquisition of orthopedic practices, the second bite is not occurring, and the future of these practices is uncertain.
Trends in the private equity ownership of medical entities have been unfavorable recently. The acquisition of orthopedic practices grew significantly from 2018 to 2022 but has slowed dramatically since. The past 2 years have had the least number of new practice acquisitions, practice growth and second sales at any point since private equity became involved in orthopedics. A component of this is attributed to increased interest rates, but the larger issue is less-than-expected profitability and lack of interest from other private equity groups in the second bite purchase. There has also been an inordinate amount of private equity-affiliated health care entities filing for bankruptcy. In 2023, 20% of all bankruptcies in medicine involved private equity groups, while private equity-owned entities account for less than 5% of all health care entities.
The future remains cloudy for private equity ownership of medical entities as federal and state governments are investigating this business model further and even drafting legislation to improve transparency and monitor transactions. The HHS, Department of Justice and Federal Trade Commission recently held a forum and had numerous testimonies of the negative impact of private equity on medicine. Organizations, such as the Coalition for Patient Centered Care, have formed to expose the shortcomings of the private equity model and legislate for reform. These developments, coupled with the financial shortfalls of the private equity model and exposure of private equity failings in hospital systems, have created an environment that is unfavorable for the continued involvement of private equity in health care.
- References:
- Boddapati V, et al. J Am Acad Orthop Surg. 2022;doi:10.5435/JAAOS-D-21-00783.
- Borsa A, et al. BMJ. 2023;doi:10.1136/bmj-2023-075244.
- Bruch J, et al. Ann Intern Med. 2021;doi:10.7326/M20-1361.
- Bruch JD, et al. JAMA Intern Med. 2020;doi:10.1001/jamainternmed.2020.3552.
- Cai C, et al. JAMA. 2023;doi:10.1001/jama.2023.2801.
- Cerullo M, et al. JAMA Netw Open. 2022;doi:10.1001/jamanetworkopen.2022.9581.
- Cerullo M, et al. Research: What happens when private equity firms buy hospitals? https://hbr.org/2023/03/research-what-happens-when-private-equity-firms-buy-hospitals. Published March 20, 2023. Accessed Nov. 18, 2024.
- Record bankruptcy filings in the healthcare sector in 2023. https://gibbinsadvisors.com/record-bankruptcy-filings-in-the-healthcare-sector-in-2023. Published Jan. 25, 2024. Accessed Nov. 18, 2024.
Frank V. Aluisio, MD, is physician president at EmergeOrtho in Greensboro, North Carolina.
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