Like it or not, healthcare industry consolidation is a fact of life for medical professionals.
What’s driving this trend? More complex and uncertain reimbursement practices, increasingly burdensome administrative duties inflicted on physicians and a deep and abiding desire to return to the practice of medicine.
Adding to these factors are changing models of care delivery that require financial resources and an investment of capital unavailable to most physician practices.
In the first six months of 2018, 94 physician groups elected to sell or merge their practices, up 45% from the record setting transaction volume of 2017. More are on the way.
The good news for orthopedic practices is that the specialty has become a very attractive investment for private equity (PE) firms that see value in the consolidation trend and will pay well to participate in this trend.
Benefits for Physician Owners
Private equity investors bring two important benefits for orthopedic practice owners:
- The ability to cash out a portion of their practice equity at historically attractive valuations; and,
- The ability to access additional capital and expertise to accelerate further practice growth.
Outside investor participation can accelerate growth in several ways, including providing capital and expertise for mergers and acquisitions, resources and relationships for market expansion, and capital for facility growth and information technology (IT) investment.
Mounting Capital Requirements and Operating Pressures in Orthopedics
Patients and commercial payors like ambulatory surgery centers (ASCs).
They offer lower costs per case, improved technology, patient preference, 23-hour stay programs, and significant improvements in anesthesia and postsurgical pain management.
If payors had their way, a significant portion of orthopedic procedure volume would move to outpatient settings. Centers for Medicare and Medicaid Services (CMS) is also changing incentives to favor ASCs.
Orthopedic groups interested in expanding and building a state-of-the art ASC however, require capital. The cost of building an ASC averaged $413 per square foot in 2013. It’s probably higher now. A small center with two surgical suites will range from $2 to $3 million, while a larger orthopedic ASC with integrated imaging, physical therapy (PT), and other ancillary capabilities can cost more than $10 million to develop.
Beyond the cost of facility expansion, orthopedic groups face several other demands for scarce capital and management time. CMS and other payers expect orthopedic physicians to practice medicine within a bundled reimbursement scheme. These programs typically employ pre-negotiated rates and fixed price services and shift risk and cost burdens to the orthopedic physician from pre-op through a post-op and the 60-90-day rehab period.
Successfully navigating this outcome-based reimbursement and population management requires a substantial investment in data analytics—to say nothing about a new IT infrastructure to control all the variables including post-op PT and outcome metrics.
The Merit-based Incentive Payment System (MIPS) reporting requirements create additional uncertainties and risk to future incomes (tying reimbursement levels to performance metrics on a relative scale). Costs are bound to rise.
