April 16, 2018
4 min read

Orthopedic groups should consider their strategic options now

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Even if your orthopedic group plans to stay the course and remain independent, your physicians should decide to do so with their eyes wide open as to what strategic options may be available. As a leader of your group, you would do your partners a disservice if you make the decision regarding practice independence in a vacuum, without fully understanding options that may be extremely lucrative to physician owners. Moreover, some options that may be offered now may not be available a few years from now if you sit on the sidelines in the short-term and do not act.

No one can deny that a transformation is well underway in the health care industry, including substantial consolidation, changing reimbursement, increasing value-based payment and risk programs (bundled payments, etc.), enhanced focus on quality and population health, and greater need for advanced electronic medical records and data analytics. This activity is or will be impacting orthopedic groups, and thus, orthopedic groups should be actively considering their strategic options now. Most potential options involve larger, well-capitalized organizations that are investing substantial capital to strategically position themselves and their partners to be successful and profitable as the industry transformation deepens.

The four, main potential strategic options for orthopedic groups to consider are hospitals and hospital-affiliated medical groups; mega-physician groups; private-equity (PE) companies; and national physician services companies.

Gary W. Herschman, JD
Gary W. Herschman

Hospitals, hospital-affiliated medical groups

There may be some comfort in becoming part of and being managed by a large health care organization, and over the years many physicians have joined hospitals through captive medical groups, faculty practice plans or other hospital-affiliated entities. Some physicians, however, are not happy being part of a hospital system and in recent years it has not been uncommon for several past physician-hospital alignment agreements to become unwound. Some complaints from groups that have partnered with hospitals include hospitals are not good at managing physician practices; hospitals often do not accept physician recommendations for improvement; and hospitals do not pay a lot to acquire medical groups due to regulatory limitations.

Mega-physician groups

Physicians may be comfortable becoming part of a well-run mega-physician group in their region and being managed by fellow physicians. Mega-groups can be multidisciplinary, supported by many primary physicians, or they can be specialty-specific, such as musculoskeletal-focused, and include different orthopedic subspecialties, such as spine, hip, knee, hand, pain, shoulder, etc. But, for orthopedic surgeons who are looking for a significant financial upside in the short-term and long-term, this option may not fit their goals, especially considering other potential options involving PE-backed companies and national physician services companies, which can be lucrative financially to orthopedic surgeons. (See reference on PE-backed and national physician services companies).


Private-equity companies

If you and your physician owners are looking for both a significant short-term and long-term financial upside, you should consider the potential option of partnering with a PE investor. Also, if you select a PE partner with a good, cultural fit, you do not lose significant control over day-to-day medical practice and operations. There are many benefits of this option, such as the following:

  • All physician owners of the group reap substantial financial benefit in the short-term when the transaction is completed, and they usually obtain “roll-over” equity in the PE platform company going forward;
  • The PE company likely will exit from its investment in 3 to 7 years by selling to a larger PE company or a national health care company. In such a future transaction, the physicians who own roll-over equity stand to reap additional financial profits, sometimes at the same level or above what they were paid when they initially partnered with the PE company.
  • Physician-owners of all ages generally enjoy the lucrative proceeds of a PE investment, without which the owners likely would not be able to fully monetize the equity value of the practice. Founder and more senior physicians, who otherwise may receive a minimal buyout of their ownership interest in the practice when they retire (eg, based on trailing accounts receivables and/or capital account), will be paid true market value for their ownership of a practice they either founded or helped to build over the years. Second, younger and middle-age physician-owners also can capitalize on the monetization of the practice’s value by funding their retirement early in their career, or making other desired investments (college, vacation home, etc.). Importantly, all physician-owners paying off medical school or other loans who sell part of their equity and continue to be employed by the practice will earn productivity-based market compensation, although this will be at reduced levels than they previously earned.
  • Physicians do not necessarily lose control over their medical practices by partnering with PE companies. Most PE companies do not want to take over the management of medical groups, but rather want to invest in groups that have impressive management teams in place, and thereafter use the PE partner’s capital to expand and improve the practice via organic growth (eg, opening new offices), acquiring other practices, purchasing new equipment and adding more ancillary services (eg, ASCs, imaging, physical therapy, durable medical equipment, etc.).
  • An online PowerPoint and webinar provide more details on how PE investments in orthopedic groups are structured and valued, as well as related legal issues.

National physician services companies

Some large national physician services companies, including public companies and affiliates of major payer groups, make competitive, market-value offers for certain physician groups, and generally have substantial experience operating physician groups across the country. Some key differences between these companies and PE investors are that they usually purchase 100% of the group, and thus, the physicians typically do not own any rollover equity; and they generally do not exit in 3 to 7 years, and instead, have a long-term growth strategy; thus there likely is no potential for another lucrative financial event for the physicians. However, this approach removes uncertainty regarding who any future partner(s) will be.

In sum, orthopedic group practices should, at minimum, explore their potential strategic options to position themselves for future survival and success and determine how each of such options impacts the short-term and long-term financial goals of their physician owners.

Disclosure: Herschman reports no relevant financial disclosures.