Private Equity Swallowing Ortho Practices

Challenges of Acquisition

William Eck, a partner at Seyfarth Shaw LLP in Washington, D.C., wrote on April 20, 2018 that there’s been a resurgence in the acquisition of physician practices, both by hospitals and by private equity firms.

“Hospitals and health systems are increasingly looking for clinical integration. Private equity firms see the advantages of large, integrated groups. Independent physician groups are faced with significant challenges, including continued reimbursement rate pressure and reimbursement methodology challenges, such as the Medicare Access and CHIP Reauthorization Act of 2015, popularly known as MACRA, that demand implementation of sophisticated and expensive technology that small groups can ill afford.”

Structure and Legal Pitfalls

In view of the heavy regulation of the health care industry, Eck says acquiring a physician group carries special challenges. “Once it is decided to acquire a physician practice, among the questions the acquirer and its counsel must consider are the optimal structuring approaches and how to avoid the legal pitfalls that are particular to this sort of transaction.”

In those states that prohibit the corporate practice of medicine, Eck notes the transaction may take more complex forms, such as asset purchases followed by long-term management relationships. “In some states, hospitals may own practices, but private equity firms may not. In others, even hospitals may not own physician practices. In such states, it is common for the transaction to take the form of a purchase of assets other than goodwill, coupled with a practice management agreement.”

Attorneys performing diligence must also address the federal health care anti-kickback statute and its state counterparts. Those statutes prohibit direct or indirect remuneration in return for or to induce referrals for items or services for which federal health care program (i.e., Medicare or Medicaid) payment may be made.

Eck says the critical review consideration is “whether it appears that inappropriate remuneration in return for or to induce referrals is involved in the agreement.”

Then there is the Stark Law and its state counterparts. “With certain limited exceptions, the Stark Law prohibits physicians from making referrals for specified designated health services, where the physician or an immediate family member of the physician has a compensation relationship or investment interest in the provider or supplier of the designated health service.”

To this list, Eck adds, Compliance Policies and Procedures, Coding and Billing Practices, HIPAA and State Privacy Law Compliance, Licensing Regulations, and more.

Eck notes that private equity firms will become more specialty-oriented and will focus their investments in the dermatology, pain management, anesthesia and dental practice. And now, we note, orthopedics.

Greater Scrutiny

There will be greater scrutiny by Boards of Medical Examiners and other regulatory bodies regarding how the deals are structured. “This is especially true after last year’s Allstate v. Northfield decision, which essentially raised the spectre about how medical practices are owned and professionally managed by those outside the medical profession,” added Eck.

We were not able to read the terms of the Atlantic Street Capital/OrthoBethesda deal and have no reason to believe all legal and regulatory hurdles have not been met. But as further private equity deals with orthopedic practices are announced, William Eck’s prediction of greater scrutiny will undoubtedly follow along. We’ll keep an eye out.