August 04, 2017
3 min read

How to look at private equity investment in physician groups: Orthopedics

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Robert Aprill
Yulian Shtern
Gary W. Herschman

In this third of six articles by lawyers from Epstein Becker & Green and the analysts from Provident Healthcare Partners LLC, Robert Aprill, Yulian Shtern, Esq., and Gary Herschman, Esq., delve into the hot sector of orthopedics, explaining how private equity investment is growing in this field.

The market for orthopedic transactions

While nearly every other specialty has experienced some level of private equity investment (e.g., dermatology, ophthalmology and pain management), the orthopedic specialty has remained relatively untouched. Having experienced several years of cashless consolidations with practices merging in an effort to leverage size and scale, outside investment into the space has remained all but nonexistent.

In April 2017, Candescent Partners, a Boston-based private equity group, made the first major investment into the orthopedic space with its acquisition of the Southeastern Spine Institute (SSI). SSI was a single-location practice in Mount Pleasant, South Carolina, which through its partnership with Candescent, will look to grow throughout the Southeast utilizing a combination of acquisitions, de novo expansion and bolstering of ancillary service offerings.

There are several shifts taking place within the industry that have made orthopedics more closely resemble specialties with a long history of private equity involvement. An increasing number of procedures are being done in outpatient/ambulatory surgery center settings, which allow private practices to sever long-standing ties to local hospitals and surrounding health systems. With the shift away from the hospital has come the need for practices to offer a more broad array of service lines. The model of a “one-stop shop” has created a drastic shift in the industry. Ancillaries, such as X-ray, MRI, physical therapy, occupational therapy, durable medical equipment (DME), sports medicine and walk-in clinics, not only provide a more patient-centric experience, but create alternative revenue streams that bolster a practice’s bottom line.

Motivated by past successes investing in other physician specialties, private equity groups are now expanding their focus to include orthopedics. Sharing a number of similar qualities to heavily consolidated sectors (eg, dermatology and ophthalmology), private equity groups are approaching orthopedics with a similar investment thesis.

A private equity group will look to make an initial investment into a “platform practice” that has a strong management team, a breadth of ancillary service offerings and a strong community presence. The group will partner with physician shareholders to grow the partnership by leveraging the current reimbursement environment to make acquisitions of high-quality, smaller practices in strategic geographic markets. In addition, where acquisitions do not make sense, the group will open de novo locations, including ambulatory surgical centers, to meet patient needs. Lastly, a private equity group will work with practice management to determine what ancillary services should be added to which locations to ensure each practice location can satisfy patient demand.


While it is impossible to predict the future, trends and past experience within other specialties suggest that mergers and acquisitions will become increasingly prevalent within orthopedics. While just one of these transactions has happened to date, the private equity community is aggressively looking for platform-ready groups in the space. As trends within the sector continue to favor large providers with scale, strong management, strategic vision and access to capital, the Southeastern Spine Institute’s partnership with Candescent Partners will surely be the first of many in a wave of outside investment into the orthopedic space.

Health care regulatory is sues

As part of a comprehensive due diligence review, major investors will evaluate an orthopedic practice’s financial information, agreements and arrangements, staffing models and operational practices. In addition to standard diligence concerns, investors will likely focus on regulatory compliance issues, such as:

Coding and billing matters, generally pertaining to documentation and medical necessity of orthopedic procedures. Recent areas of specific focus include:

  • medical necessity of joint replacement procedures;
  • billing issues pertaining to global payments for preoperative and postoperative care;
  • improper “incident-to” billing for services rendered by physician extenders, without adequate supervision;
  • E/M codes pertaining to hospital consultations that are not supported by documentation;
  • lack of documentation to support professional component for X-ray services;
  • durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) billed improperly or without adequate documentation to support necessity or the delivery of DMEPOS; and
improper CPT codes used for physical therapy billing and lack of documentation

Fraud and abuse compliance, including any potential Stark law issues (eg, whether the orthopedic practice relies on being a “group practice” and whether all the “group practice” requirements are met):

Red flags identified in regulatory due diligence can cause delays in a transaction, impact an orthopedic practice’s valuation and purchase price, and may require a corrective action plan involving self-disclosure of compliance violations and refunds of overpayments. Orthopedic practices can avoid such diligence issues by proactively reviewing these types of issues in advance of seeking a private equity partner or other investors.

Robert Aprill is an a nalyst wit h Provident Healthcare Partners LLC, focusing on advising health care businesses with an emphasis on physician groups. He can be reached at

Gary W. Herschman, Esq., is a member of Epstein Becker & Green, P.C.’s Health Care and Life Sciences practice, focusing on physician group and other health care industry transactions. He can be reached at

Yulian Shtern, Esq., is a health law attorney in the health care and life sciences practice of Epstein Becker & Green P.C. He can be reached at .