7 considerations for private equity investments in orthopedics

While private equity investments have historically focused on recapitalizations in hospital-based practices such as anesthesiology and ophthalmology, Foley & Lardner partner Roger D. Strode anticipates a future wave of orthopedic practice acquisitions. 

Here are seven things for investors and physicians to consider regarding orthopedic practice consolidation. Mr. Strode shared the considerations on Mondaq

1. Aging population. An aging population, which is primarily covered under Medicare, has resulted in a rise in the number of orthopedic procedures.

2. Alternative payment initiatives. Orthopedics is conducive to alternative payment arrangements, which Medicare and private payers are increasingly interested in. Those arrangements include the recently introduced BPCI-Advanced model, which covers nine orthopedic procedures including spinal fusions, upper and lower extremity major joint replacements and back and neck procedures.

3. Transition to outpatient settings. Payers are also pushing effective use of outpatient settings such as ASCs. CMS continues to approve procedures for the outpatient setting, making an ASC investment attractive to private equity investors. ASCs will continue to gain prominence while also creating negotiating leverage through surgeon-generated facility fees.

4. Leverage created through ancillaries. Orthopedics and its multiple ancillary service lines have the ability to generate significant cash flow. Services such as imaging, physical therapy durable medical equipment and ambulatory surgery will increase the purchase multiples private equity investors will pay when recapitalizing orthopedic practices.

5. Hospital relationships. Outside investors are likely to favor orthopedic practices with health system owners or practices with deep relationships to local healthcare systems and hospitals.

6. Appeal to physicians. Capital makes recapitalization transactions appealing to orthopedic surgeons, who are known for being strongly independent. These transactions may generate a better return for older physicians than a traditional retirement buyout would.

7. Importance of diligence. Investors will diligently assess orthopedic practices for several reasons. Regulators could begin to focus on orthopedic surgeons' ownership of ASCs in the coming years. In addition, the ownership of and referral to ancillaries can violate the Stark Law and others if not structured properly. Orthopedic physicians' increasing use of extenders can potentially create billing issues. Investors will likely assess relationships with hospitals to determine the legal and regulatory risk of an investment. This assessment can influence the purchase price an investor will pay.

More articles on orthopedics/TJR:
'This will be the national standard of care': 3 Madison Physician Surgery Center leaders discuss outpatient TJR
Virginia couple donates $6M to Cleveland Clinic Florida for orthopedic surgery improvements — 4 insights
Dr. Kenneth Sands profiled for outpatient knee replacement work — 4 insights

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