Why private equity deals will become more common for orthopedic practices — Key thoughts from Provident's Robert Aprill

Written by Laura Dyrda | September 17, 2018 | Print  |

Although many specialties within physician services have seen years of private equity consolidation, PE firms are now setting their sights on new areas within physician services.. Over the past 18 months, private equity firms have begun investing in new specialties including orthopedics, gastroenterology and women's health.

Most recently, Washington, D.C.-based OrthoBethesda partnered with Atlantic Street Capital to grow its business. Provident Healthcare Partners served as OrthoBethesda’s exclusive financial advisor in the deal.

Robert Aprill, an associate at Provident Healthcare Partners, discussed the recent trend and the role he sees private equity playing in the healthcare space in the future.

Question: Private equity firms are beginning to acquire orthopedic practices and surgery centers at a higher rate than in the past. Why is this occurring?

Robert Aprill: This is a big trend and attractive to orthopedic physicians because it gives them the ability to grow their business and remain viable as an independent practice. They don't have to sell to a hospital or health system, which can be a death sentence. Private equity offers them the ability to consolidate their local market place and do so with the expertise and backing of a financial partner while maintaining clinical and medical autonomy.

While private equity’s impact on the orthopedic space is only in it's infancy, a growing number of groups have begun to take interest in how a private equity partner can benefit their practice. We saw the first wave of private equity investment into physician services focused on interventional pain, ophthalmology, dermatology and dental. Those areas had a lot of consolidation in the 2010s. As we consider the ‘second wave’, we expect to see new sectors like OB/GYN, women's health, urology, orthopedics and GI be key specialties private equity is interested in. I think in the next six to 18 months, you'll see a number of these investments as private equity tries to replicate its success in the previously mentioned ‘first wave’.

Q: Do you think it will become more common for orthopedics?

RA: I do think we'll see similar results in the space of orthopedics and urology because that's how physicians will be able to remain independent in the future. Reimbursement cuts are coming for all specialties and there is a belief that medicine won't be billed and collected for in the same way it is today. Independent practitioners are looking for ways to remain autonomous. Large practices have more cushion to withstand the changes in reimbursement while still being agile. Smaller groups with fewer than 5-10 physicians need to be more proactive about the changing space. Private equity can offer stability and the ability to grow through increased ancillaries, acquisitions, and impowering physicians.. It's about building a platform where they won't only survive but thrive.

Q: How does the governance of physician practices typically work after taking on private equity investors?

RA: The private equity group partners with the physicians at the board level. They are the first ones to tell you that they aren't going to manage the day-to-day of the business, how things are billed and collected for, etc. That really stays with the medical board, which is composed of the physicians and control remains with the physicians. However, the private equity team can help with board-level decisions and fund growth; they can help find the right ways to expand and decide which initiatives to fund and which to stay away from.

Typical hourly employees don't see a lot of change in the practice, it's more about the high-level decision making and expansion to new geographies and service lines. Even that continues to be an open dialogue, but the conversation is between the two groups.

Q: What are the most attractive types of groups for private equity investors?

RA: Orthopedics is the hottest of the new wave spaces and the dynamics of that space include so many private practices that a small number of physicians can have a sizable amount of collections. You could be viewed as a PE platform with four to five physicians that could generate the same profits as 20 urologists..

One of the other aspects that sets groups apart is their ability to have ancillary services. Orthopedics and urology can build out ancillary service lines and orthopedics can generate significant volume from ancillary services, including physical therapy, imaging, DME, pharmacy, and walk-in centers.. Building out those lines and diversifying the revenue streams makes the practice a strong candidate for a private equity investment.

Finally, groups that invest in growth are attractive. Whether it's investing in bringing billing and collections in-house, a new IT system to bring in different technology components or investing in management and not just having the physicians running the business; those are all things that show you are making investment in professionalizing the practice.

Q: Are you working with any orthopedic clients currently?

RA: Of the three private equity investments into the orthopedic space, we have represented two of those practices (The Southeastern Spine Institute and OrthoBethesda). Because of the increase in attention private equity is receiving in the orthopedic community, more and more practices are reaching out to us to learn about private equity and understand how these deals are structured. Practices hire us to understand why deals are being done, what a deal could look like, and ultimately represent them in a transaction process. We are currently working with a number of orthopedic practices around the country as they educate their partner-base around private equity and pursue a private equity partner.

More articles on orthopedics:
13 new orthopedic groups join Humana's bundled payment model for joint replacements
The CORE Institute welcomes 8 new orthopedic surgeons
Rothman Orthopaedic Institute adds 5 New York-based surgeons to newly opened New Jersey location: 5 things to know


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