Four orthopedic surgeons connected with Becker's to discuss the role of private equity in the orthopedic industry.
Ask Orthopedic Surgeons is a weekly series of questions posed to surgeons around the country about clinical, business and policy issues affecting orthopedic care. We invite all orthopedic surgeon and specialist responses.
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Editor's note: Responses have been lightly edited for length and clarity.
Wael Barsoum, MD. President and Chief Transformation Officer at Healthcare Outcomes Performance Co.: Private equity transactions within the orthopedic space have grown significantly over the last several years, and there are currently more than 30 different firms with investments in orthopedic practices. The primary driver for orthopedic practices to solicit outside funding, such as private equity, is to utilize that investment as a mechanism for growth. While this can be an effective approach for practices with an existing growth strategy and infrastructure to do so, it should not be substituted for an actual strategy for growth. Private equity can provide capital, but orthopedic practice leaders should also seek to understand if the transaction being contemplated is likely to provide the operational infrastructure and leadership needed to increase practice efficiencies, align practice components around reliable data and meaningful analytics, reduce overhead, sustainably grow market share and enhance the patient experience. The "cultural fit" of the physicians with the investing organization in consideration should be a critical item to explore to ensure both short- and long-term goals are aligned with all members of the practice.
Practices exploring options for growth should evaluate the models that have been successful for similar-sized practices with a similar vision of future opportunities. In some instances, practices may find that a strategic partnership combined with an investment offers a wider array of benefits than just a financial investment alone. Such partnerships can provide infrastructure, experience and technologies that accelerate growth and sustainability.
Anthony Melillo, MD. Founder of Bay Oaks Orthopaedics & Sports Medicine (Houston):
The separation between hospitals and surgeons has now been nearly eliminated due to hospital systems "owning" their orthopedic surgeons. Prior to this, hospitals provided a place for surgeons to perform their surgeries. Each entity was independent financially. Now, independent orthopedic surgeons are being marginalized by the big hospital systems who have deep pockets (often tax-free profits). These hospitals have the power of emergency room referrals, hospital-owned primary care providers' referrals and hospital-based urgent care referrals.
No longer is the quality of the community orthopedic surgeon's ability paramount for the patients' referral. It is superseded by the affiliation to the employer (i.e., hospital). This leaves the independent surgeons to rely on word of mouth, prior patients' experiences and/or self-funded marketing. These are all difficult to maintain especially due to the cost of marketing.
Private equity can level the playing field in their capital investments in community urgent care facilities, ASCs, larger orthopedic groups, etc., since the private equity partners with the independent groups. Competition is great for the medical consumer (i.e., patients). Hospital systems are an oligarchy with little transparency of costs and profits. Private equity can shine sunlight on the true economics of medical practice.
Jay Patel, MD. Chief Strategy Officer at Hoag Orthopedic Institute (Irvine, Calif.): Private equity has a role in the restructure of how healthcare is delivered. It provides capital and helps organizations scale, much like it does for many other industries. It provides an essential role in a capitalist economy to support industries and companies that need the help. The challenge for healthcare is that being a public good, it is imperative that the quality of care delivered is maintained through the restructure. In the long run, as private equity sells its stake in healthcare companies to the next stakeholder, we need to make sure that healthcare quality and access are improved.
Scott Sigman, MD. Founder and Chief Medical Officer of OrthoLazer Orthopedic Laser Centers (Chelmsford, Mass.): Private equity in orthopedics is one of the hottest, most controversial topics in healthcare today. I liken it to black licorice and the Grateful Dead, you either love it or you hate it. The foundation in which healthcare is being delivered is rapidly changing. There are pressures from large hospital systems, primary care consolidation, commercial payer contracts and CMS, just to name a few.
Many successful private practice orthopedic groups are considering private equity to help offset these outside evolving pressures. Linking with other like-minded orthopedic groups to develop cost savings and best practices with financial backing to expand is one of the primary drivers for private equity consolidation in orthopedics.