Private equity investments in orthopedics expected to surge in 2019 — Avoid these risks

Law firm Foley & Lardner expects to see more private equity recapitalization transactions in orthopedics in 2019, according to JDSupraand Provident Healthcare Partners Analyst Robert Aprill supports the prediction.

"Although the space has yet to see significant outside investment, there are a number of factors that make orthopedics a highly attractive opportunity for private equity groups," Mr. Aprill said in a post. "Given the wide breadth of ancillary services offerings, increasing outpatient surgical volume, aging population and the growing importance of orthopedics to overall healthcare, there is significant opportunity in [the] space for private equity-led consolidation."

With the anticipated increase, there will be regulatory risks to consider. Five takeaways:

1. Deals involving ASC investments by the group or its physician must comply with anti-kickback statute.

"We often see private equity investors take substantial stakes in ASCs owned by practices or physicians, thus making the [anti-kickback statute] risk something relevant to those investors," according to the report.

2. The law's safe harbor regulations offer  protection as long as the arrangement meets certain requirements regarding the investor type, relationship of the ASC to the physician investor's practice, and financing details.

3. Arrangements that don't meet at least one of the safe harbor requirements may be subject to investigation, prosecution or sanction.

4. Investors may ask the following questions:

  • How did the physician acquire the interest?
  • Was the interest granted in exchange for referrals?
  • Does the physician frequently perform procedures that are done in an ASC?
  • What is the ASC's ownership structure?
  • Are the ASC's out-of-network billing and collection processes compliant with state law?

5. Relationships the ASC has with local hospitals through medical directorships, on-call arrangements or co-management agreements also involve risks. Arrangements should meet fair market value compensation for services.

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