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Issue: February 2021
Source: Anoushiravani AA, et al. J Bone Joint Surg Am. 2020;doi:10.2106/JBJS.20.00557.
Disclosures: Barsoum, Jacofsky and Scalise report they are employees of and shareholders in HOPCo. Blom, Duralde and Herschman report no relevant financial disclosures.
February 17, 2021
11 min read

Pandemic, changes in health care spur practice consolidation

Issue: February 2021
Source: Anoushiravani AA, et al. J Bone Joint Surg Am. 2020;doi:10.2106/JBJS.20.00557.
Disclosures: Barsoum, Jacofsky and Scalise report they are employees of and shareholders in HOPCo. Blom, Duralde and Herschman report no relevant financial disclosures.
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Published literature has shown the postponement and cancellation of elective procedures during the COVID-19 pandemic had a substantial financial impact on orthopedic practices and hospitals.

In a study in International Orthopaedics, Matthew J. Best, MD, and colleagues estimated hospital losses of $10.9 to $11.9 billion in reimbursement and $2.6 to $3.5 billion in net income due to canceled elective musculoskeletal surgery during 8 weeks of the COVID-19 pandemic. Orthopedic practices, which spend more than $33,000 per month per surgeon to maintain overhead in addition to ancillary, medical malpractice and capital expenditures, also experienced a financial loss with the pandemic, according to publications in the Journal of Bone and Joint Surgery.

Although the Coronavirus Aid, Relief and Economic Security Act provided various economic stimulus options for small businesses with less than 500 employees, sources who spoke with Orthopedics Today said the economic effects of the pandemic along with the increased pressures of added regulatory requirements, cost of doing business, challenges of working with hospitals and a decrease in overall reimbursement may cause struggling orthopedic practices to merge or consolidate with more financially stable practices and systems.

Increased strategic partnerships

Jason Scalise

“Historically, the feeling has been, by combining forces or combining resources, that practices can, as a larger overall entity, in theory, have greater ways of fending off some of those ... downward pressure forces,” Jason Scalise, MD, vice chair of Healthcare Outcomes Performance Company (HOPCo), told Orthopedics Today. “That is then enhanced by what we have seen over the last 12 months with a massive and unexpected downward force in the form of the pandemic, where people were already having discussions and thinking about [consolidations and mergers, the pandemic] brought [those thoughts] to bear.”

Gary Herschman

Gary W. Herschman, JD, of Epstein Becker & Green PC, said the number of independent medical groups exploring private equity and other strategic partners has roughly doubled during the last 1.5 years. Although there was a slowdown in this activity for several months at the beginning of the pandemic, it has resumed at an even more robust pace since last fall, he said.

“[The COVID-19 pandemic] has woken them up because many specialty groups struggled during the pandemic, even with the stimulus and [Paycheck Protection Program] PPP loans,” Herschman said.

André Blom

While consolidation of orthopedic practices was an increasing trend prior to the COVID-19 pandemic, André Blom, CEO of Illinois Bone and Joint Institute, said the pandemic “accelerated the exposure of strengths and weaknesses within a multitude of practices.”

“The way orthopedics was practiced maybe 20 years ago, you could still get away with not having a clinically integrated type of practice or vertical integration mindset,” he said. “But today, the consumers of health care and the direction that payment design is going demands that you are more efficient at creating a scaled opportunity tied to excellence in measured clinical outcomes along with a great customer experience.”

A transition, not endgame

Changes in today’s health care landscape have led physicians to consider different strategic options for an uncertain future, according to Herschman. He noted many physicians have concluded there are benefits to being part of a larger organization that has a more professional corporate infrastructure and greater capital, both of which are important to practices in effectively managing through and weathering difficult times.

“Although many physicians may consider consolidation as an endpoint for a practice, merging should be viewed as a transition point where practices come together and commit to economies of efficiency that serve the needs of patients appropriately,” Blom said.

“If the driving force [of the merger] is just to come together and you do not have an agreed upon and fully supported purpose beyond just coming together, then the merger is not going to work out well,” he told Orthopedics Today.

According to Herschman, orthopedic practices have options when looking to consolidate with a larger organization. He noted joining a big, independent orthopedic or multispecialty group can provide the advantages of a professionalized management team, but may not provide “monetization” of the practice’s value or anywhere close to where it may be with a private equity investor or large national company.

Herschman said another option would be joining a hospital system that is looking to acquire physician practices. However, many physicians do not trust that a hospital system will be focused on their practice enough to help them grow. Furthermore, hospitals also generally do not recognize the full value of groups in connection with acquisitions to the same extent as other potential purchasers, he said.

More lucrative options include private equity investors, national health care companies and payer-affiliated organizations, Herschman said. However, although there are many benefits of partnering with an experienced private equity investor (including high valuations and rollover equity in the venture), one major downside is the short-term nature of such a partnership, because private equity firms will generally look to “exit” an investment within 3 to 7 years (5 years on average) by selling to a larger private equity investor or national company or possibly going public, he said.

“When you do a transaction with an investor partner ... they are not in this forever. They are in this to help build [the practice] and grow it, make it more profitable and then they want to cash out and recognize the enhanced value they have created,” Herschman said. “Notably, physicians with rollover equity also benefit from such a ‘second bite’ transaction by cashing out all or part of their ownership interest, usually at a much higher value than when it was issued to them in their initial partnership deal with the investor.”

Improved outcomes

When executed appropriately, consolidations and mergers should enhance the “quality and outcomes of the product you are able to supply to those in need,” according to Blom.

He said “quality” consolidations and mergers can, for example, lead to better consolidated management teams, timely access to appropriate level of care, technology enhancements and guardrails around safety and compliance that afford physicians more time to focus on their patients and to achieve better clinical outcomes.

“In our mind, medicine is an infinite game,” Blom said. “...[We] look at it as what do we need to do in order to provide the best possible services in the best possible environment toward the best possible outcome for any given patient?”

Orthopedic practices that consolidate with another group can improve patient care by collecting patient and outcomes data through electronic medical record systems, a task which may not be easily accomplished by smaller practices that lack the appropriate workforce Xavier A. Duralde, MD, a sports medicine physician at Peachtree Orthopedics in Atlanta, said.

Xavier A. Duralde, MD, said orthopedic practices should determine where they want to be in the next 10 years and position themselves accordingly, either through consolidation or partnering with a private equity investor or hospital system.

Source: Peachtree Orthopedics

In addition to workforce and sophisticated management, larger practices have more substantial capital, which Herschman said can enable the practice to provide better value-based care by investing in advanced IT/EMR systems and data analytics, as well as new or expanded ancillary services and care access locations.

“The biggest orthopedic groups are providing the full continuum of musculoskeletal care within their practices ... orthopedic urgent care (with extended hours), ambulatory surgery centers, imaging services, such as MRI, CT and X-ray; physical therapy, seeking to help patients get better without surgery or help them recover post-surgery; occupational health clinics at or near worksites; and durable medical equipment, like crutches and braces,” Herschman told Orthopedics Today. “In a nutshell, they are trying to provide a full array of orthopedic care for patients, focusing on both high quality and cost-effectiveness, so as to better compete and to attract favorable health plan contracts.”

Larger practices are also better positioned and flexible to use back office resources compared with smaller practices, which may not have the bandwidth or expertise to handle complex scheduling changes, interactions with community hospitals and human resource issues that have arisen during and related to the pandemic, according to Scalise.

“All of those things can be potentially enhanced if you have a larger organization,” Scalise said. “Not just larger in size, but an organization that is outfitted with the proper personnel and resources to do such things.”

Better position with payers

Payers and consumers of health care are seeking a more consistent clinical environment in an industry known for high costs where outcomes are not always guaranteed or transparent, according to Blom.

“Our advancement toward partnering with other like-minded physicians and groups was partially driven by patient and payer comments and further reenforced by our experience with the emergence of value-based products, such as the CMS Bundled Payments for Care Improvement program,” Blom said. “By achieving successful partnerships in risk- and value-based products across a larger service area or geography, we are solving a problem that will clearly be welcomed by patients and payers alike.”

David J. Jacofsky

However, David J. Jacofsky, MD, chair and CEO of HOPCo, said it is no longer a given that consolidation and scale alone provide leverage with payers. Orthopedic groups must show they can provide good patient outcomes and cost savings, as well, he said.

“Payers are looking to reward groups that can document outcomes, manage claims data to objectively prove cost savings, and that practice evidence-based medicine,” Jacofsky told Orthopedics Today.

Wael K. Barsoum

Consolidating with other practices solely to create stronger negotiation rates with insurance companies does not align with value-based care principles and is not the best reason for growing a practice, according to Wael K. Barsoum, MD, president and chief transformation officer of HOPCo.

“We should all be focused on how to provide the highest quality care for the lowest cost,” Barsoum said. “Now, that does not mean that orthopedic surgeons should not do well financially. In fact, quite the opposite. I think a well-run practice allows orthopedic surgeons to do well regardless of their reimbursement rates.”

Scalise added that growing larger to leverage with payers is not a model that is sustainable, despite the hypothetical possibility of near-term benefits. Instead of using a standard fee-for-service model and demanding higher reimbursement rates from payers, Scalise said orthopedic practices should focus on delivering the best possible product at the best value in an accessible, reproducible and measurable way.

“That different model is truly the value-based care or population health model, which is the only one in musculoskeletal care that we have ever been able to prove that has actually bent the cost curve in a way that is driving better quality care but at a decreasing overall trend in spending,” Scalise said.

Challenges of consolidation

Duralde noted practices may experience several challenges when consolidating with another practice, including loss of income due to putting money into the investment and a decrease in productivity while the investment is underway. However, the hope is the consolidation will rectify itself by allowing for higher productivity once it is complete, he said.

Practice consolidation can also lead to changes in the personality of the group, as well as changes in governance, according to Duralde, who noted the bigger the practice grows, the less say each individual physician has in governance of the practice.

“One of the reasons people go into private practice is to be able to ... control their resources and be involved in the decision-making process,” Duralde said. “That becomes much more distant to the average person in the group. A lot of decisions are made by an executive committee.”

Some physicians, however, no longer want to be involved in management decisions and the “business of medicine,” and would prefer to focus solely on providing quality care to their patients, according to Herschman.

In addition, Duralde noted practices may be concerned that consolidating may create inefficiencies that would increase overhead.

“If you are going to expand, you have to expand in a way that creates more profit centers,” he said. “You want to build a space that is going to produce, so you do not want to be building administrative offices. You want to be building operating rooms and physical therapy units that produce something to justify the increase in overhead.”

A practice’s future

Overall, it is important that practices enter a merger for the right reasons and not become “swept up in the merger wave,” according to Blom.

“There are a lot of groups that do not need to consolidate,” he said. “Sometimes physicians feel they have to do something because others are rushing toward the exit and that is simply not true.”

When deciding whether consolidating might benefit a practice, Duralde said it is important to determine the goals of the practice for the next 10 years and how to best position it to reach those goals, whether that means partnering with a private equity investor, a hospital system or neither.

“If [the future of your practice] involves growth, then do it,” Duralde said. “Do whatever it takes to grow. You always have to take some risk, or you are never going to make it. But forget about the upfront money. It is all about what you foresee in the future and, basically, who controls the patient.”

Efficiencies, marketing strategy

Practices struggling financially that decide not to consolidate should review their operations for areas to improve efficiencies, according to Duralde. Practices should also review their marketing strategy and form a stronger allegiance with their hospital and others for more patient referrals, he said.

“There are a lot of different things you can do to improve the efficiency of your practice and usually that means working harder and working more efficiently,” Duralde said. “You want to look at all of those efficiencies and it may mean bringing a consultant in to look at the way you run your practice.”

Orthopedic private practices that choose to remain independent still must understand the purpose of the practice and not “make an island out of” it, according to Blom.

“With the resources that are available, I think you could still connect to your left and to your right without having to consolidate,” he said.

Keep an open mind

If a practice believes consolidation is in its future, Blom said it is important for physicians to be patient because the consolidation process takes time.

Despite the concept of “bigger is better,” Jacofsky said “scale alone will not be enough to thrive.” Practices should strategically merge with entities that offer a robust and informed goal around a long-term strategy for transformation, he said.

“The future of growth and success lies with those that have a proven infrastructure for efficiency, have made significant investments in IT security and best-in-class integrated IT systems and clinical decision support, and also have a proven leadership team of business experts with a track record for driving value-based care [and] the ability to partner uniquely with payers,” Jacofsky said.

Practices should also seek consolidation with practices or groups that add complementary specialties to those of the overall practice, according to Duralde. Barsoum said orthopedic practices should consolidate with other practices that have the same cultural alignment, which is a key for success.

Orthopedic surgeons and musculoskeletal care providers “tend to be among the most independent-minded individuals. There are still a lot of small orthopedic groups around the country as opposed to other specialties which have already come together,” Barsoum told Orthopedics Today. “We, by nature, tend to be more independently minded, so finding that cultural alignment or a type of agreement or type of contract that allows independence within your own practice is key for many [in the orthopedic specialty].”

Physicians should be secure in their ultimate goal, but also be open-minded and actively contribute to the new practice, Blom said.

“The most important thing for groups merging is [to] be willing to contribute to something new,” he said. “Be willing to give up a little bit of yourself, be willing to be open-minded about some of your blind spots and what the things are that you can do better. Be a little bit introspective in terms of that, because every successful merger means every willing party brings something to the table.”