It’s nice to have options.
Orthopaedics is a unique specialty. Traditionally it’s among the busiest, highest-volume, and most profitable specialties. The demand for Orthopaedic procedures continues to increase and many groups have taken advantage of the opportunity to add an array of profitable ancillary services to theirs business models, including ASCs, imaging, urgent care, pain management, DME, and physical therapy.
Just over half of Orthopedic surgeons remain in private practice, unlike other physician specialties who have been flocking toward health systems and Academic institutions.
This does not mean, however, that the future of the Orthopaedic surgeon is written, and that private practices don’t have to adapt or consider their options. Nearly every Orthopedic group in the country that we speak to is formally evaluating their partnership options – options that include remaining independent, migrating to a closer relationship with health systems, including employment, merging with other private groups to form an Orthopaedic “supergroup”, aligning with other private groups in an MSO structure, and last but certainly not least, partnering with Private Equity.
Private Equity Attention is Forcing Practices to Examine their Futures
Even the most secure independent groups are exploring their options these days. The specialty’s unique nature and ancillary opportunities makes it a hot target for Private Equity interest, forcing practices to evaluate their future. Unfortunately, many are not in the best position to understand and evaluate the offers before them. If the group has not been working to understand its own needs, strengths, threats, and where it needs to innovate as a group, it’s almost impossible to compare the potential future under the options presented to them.
A Common Scenario
A group of 8-12 physicians are plugging away at seeing their patients on time, filling their OR block, and managing practice operations. They’ve had some vague conversations about how to grow the practice or what changes they might need to make to ensure long term success – but they have no clear plan. Then the private equity call comes and the deal they are offering sounds appealing – especially to some in the group. They start trying to evaluate the offer – but it leaves them with more questions than answers. How do they even begin to evaluate this offer? What are they comparing the offer to? What could the group “be” if they wisely invest in their long-term independent success vs. shoot for that “second bite of the apple”? Are there competing offers from other PE firms? How do they know if the group can deliver on PE’s assurances of “improved business operations” and what does that even mean? Are there other options? They talk to colleagues who have gone down the PE path and report it was a definite win. Others tell them it was not and they regret their decision.
Now the group is scrambling to understand what this might mean – but they don’t really have the information they need to make an informed decision.
The Critical, Missing First Step – What are Your Goals?
Often, my client starts evaluating a proposed deal or draft contract before they’ve defined specifically what they (as a group) are hoping to accomplish, or even understanding other options.
Trying to understand the long-term financial implications (which will be different for each physician), organizational implications, the degree of autonomy that will follow the consummation of a PE relationship is impossible if the physicians as a united voice have not started by fully understanding their goals and opportunities. This is not “current state” vs. “PE deal.” This is “PE Deal” vs. “several other potential future states.”
Not surprisingly, the offer can create a great deal of angst and bring up old (or create new) divisions among the group, which is the last outcome you are looking for when trying to make a critically important strategic decision.
Before a group determines what partnership strategy might be best, they need to define their practice goals and determine what they are looking for from a culturally-aligned partner. This should be unique to the practice and the resource gaps they are trying to fill, as well as fitting for the local market dynamics.
For example, many groups we work with are evaluating a closer relationship with a health system versus a PE partnership. A private equity play may not be the best option in a market in which the local hospital employs the majority of primary care physicians, has extensive payer and employer relationships that steer patients to their services and programs, and have strong non-operative service offerings that capture patients early in the care process. Conversely, if the Orthopaedic group has great relationships with independent primary care practices, strong sports medicine relationships and programmatic offerings in the community, and has independently established favorable employer and payer relationships, there may be more opportunities for private equity relationships.
FIGURE 1. What Drives Partnership Strategy?
Once you have prioritized your goals, you can, then, begin to compare options.
- Remain Independent – You may, very well, be able to achieve your goals by remaining independent. You’ll likely have to bring a heightened level of strategy and business operational expertise to the practice. This might mean investing in facilities, in people, in programs, or in technology or process improvements.
Often the physicians have been making enough money that they did not feel pressured to take a more deliberate approach. If that independence is high on your priority list, though, you’ll need to do this work to develop a strategic plan to continue a growth trajectory and enhance market relevance.
- Merge with Other Groups – Under any number of business models, many groups are merging with similarly sized groups, or rolling up to larger “super-groups” to obtain economies of scale, adequate regional coverage for patient care, and enhance their competitive position.
- Hospital/Health System Partnerships – Can you accomplish your goals through a meaningful partnership with a health system? Have you had an honest discussion with the system to outline your goals and investigate where they are willing to partner? Health systems are rarely as nimble as Private Equity firms and there will not be a big check on the front end, but a meaningful, long-term committed partnership might achieve your goals.
- Employment – In some situations, employment with a hospital or health system works for a group. If what they value is security and getting out from the headaches and ever-increasing complexity of running a practice – it may make perfect sense.
The Private Equity Deal
It is always appealing on the front end. PE firms sell for a living. It is their job to make the deal appealing. Sometimes it is as good as promised, but the devil is in the details. Seek experienced guidance in evaluating the deal and your other options. Bring a healthy degree of skepticism and ask critical questions:
- What is the length of the agreement and renewal terms (and/or how do you unwind)?
- What are the exclusivity provisions?
- How will physician compensation change?
- What are the productivity expectations?
- Who will employ the non-clinical staff and are there reductions in staff anticipated?
- How will ancillary revenue streams be handled and are there ownership changes anticipated for those business units?
- What non-competition elements are expected and for what length of time?
- How will decision-making and governance be handled?
- What non-solicitation and no-hire elements are anticipated?
- What management fees will be deducted prior to profit-sharing back to the group?
Also consider that Orthopaedics is a unique specialty and business operation. It is different from dermatology, urology, GI, primary care or other specialties. Make sure the investor is bringing you real Orthopaedics expertise and experience.
A Structure for Evaluating Options
Kristi Crowe, President, and Founder of Ambulatory Healthcare Innovations is often in the position of helping independent groups to evaluate their options. Her expertise spans both hospital Orthopaedic service lines and ortho physician group strategies and operations.
This gives AHI the unique ability to provide holistic advice on how to evaluate the options being presented to groups.
“These groups are in a unique position, but they’ve not, in the past, been forced to extrapolate out into the future, what their practice COULD be with the right investment in growth, process and technology. Similarly, hospital partnerships have not always been appealing or even successful – but the new market dynamics mean that health systems might be willing to be more innovative, aggressive, and committed to making a partnership mutually beneficial.”
AHI’s team brings structure to the process of evaluating hospital partnerships. “We start by defining the practice goals – that’s the foundation. Then we look at the market dynamics that impact those goals. Finally, we explore the resource gaps that would need to be addressed. Is there some partnership structure that can fill these gaps and achieve the practices goals?”
Similarly, before digging into the details of any proposed PE deal, AHI lays out “rules of the road” to guide the evaluation. “These are just the starting point, but groups tend to jump into the weeds of the financial arrangement – we want them to start with a deliberate structure to how they evaluate their options – starting with knowing what you are trying to accomplish.”
Certainly, given the shifting healthcare landscape, any independent group should be working from a well-thought-out strategic plan. Although Orthopaedics is a uniquely strong specialty from a business point of view, mounting pressures require increased business savvy.
The wave of Private Equity interest in the business of Orthopaedic surgery is forcing groups, and hospitals, to quickly understand what Orthopaedics means to the hospital, and to the community.