HOW ORTHOPEDIC PRACTICES CAN ACHIEVE FINANCIAL SUCCESS IN THE CHANGING HEALTHCARE LANDSCAPE
Payer reimbursements have declined by 20% while the cost of operating a medical practice has increased by 39%1. Practice overhead now accounts for about 60% of a provider’s gross income2. Running an orthopedic practice and achieving financial sustainability has become more challenging than ever. The question these practices must ask is whether it’s more advantageous to be bought out by a hospital or whether it’s better to seek a Private Equity (PE) partner. The important thing to note is that the former option essentially removes all control from the practice while the latter option enables practices to actually expand their offerings by adding vertical service lines. With PE backing, expansions are practically limitless, including integrating an ASC, DME, imaging or new innovative technology into the practice.
During the height of the COVID-19 pandemic, ASCs were seen as crucial to maintaining hospital capacity while also limiting exposure for orthopedic patients3. From January through August of 2021, an estimated 21% of orthopedic reconstruction surgeries took place in an ASC4. Yet the growth of ASCs was well underway prior to the pandemic, increasing 4.1% per year between 2017 and 20225. The total ASC market is expected to reach $117 billion by 2027, up from $75 billion in 20206.
By the mid-2020s, an estimated 68% of orthopedic surgeries will be performed in an ASC7.
Which way to turn?
The change in the orthopedic surgery landscape has many independent practice owners reevaluating their business strategy. Some are even looking for a new exit strategy. There are lots of options: Consolidating with other practices to create a larger, more competitive group practice; selling to a hospital or health system, or even becoming an ASC themselves. Each has its benefits and limitations. Yet, there is another option that should be considered, and that’s private equity (PE) funding.
Orthopedic practices are an increasingly attractive option for PE companies, primarily because of the current high demand and limited supply of orthopedic surgeons.
8Another reason is the expected steady growth in that demand. By 2030, one in every five U.S. adults will be 65 or older and by 2034 those over 65 will outnumber those under the age of 18. 9As our nation ages, the need for joint replacements and other orthopedic procedures will continue to grow. The American Academy of Orthopaedic Surgeons (AAOS) projects that knee replacement surgeries alone will increase 189% to approximately 1.2 million by 2030 and will grow to 2.6 million by 2060. 10It is easy to understand why PE companies would want to enter this high-demand, high-growth market.
Why should orthopedic practices consider partnering with a PE firm? First, for their investment benefits. An influx of funding by a PE firm can give practices the means to update their offices, add new technologies, implement new service lines, hire more staff or providers, and expand their service region through additional practice locations, thereby growing volume and revenue.
PE firms can also provide an attractive option for orthopedists who want an exit strategy, whether that’s to retire or to step away from everyday operations (and lawsuits) and just focus on caring for patients. PE firms that buy and consolidate multiple practices can be a good option.
What happens to a practice owner when they partner with a PE firm? In most cases, the PE firm will want controlling interest in the practice, which means they’ll “buy out” the majority interest from the practice owner(s). According to the Journal of Orthopaedic Experience & Innovation, practice owners typically “continue to own a minority ownership interest via “roll-over equity” in the partnership investment platform.”11 This means that both entities benefit from improvements and “upside value appreciation” after the transaction. In this scenario, the provider retains control over the clinical aspects of the practice.
“With an approximate $1.8 trillion dollars of private equity capital ready to be deployed within the healthcare services industry, private equity remains an increasingly more available option to orthopedic practices.” 12
Developing a game plan
ASCs are here to stay. Payers and patients alike see them as a positive option, one that is more affordable. The Journal of the American Academy of Orthopedic Surgeons say ASCs can reduce direct costs between 17% and 43%. 13The good news is that demand for orthopedic care will continue to grow and provide opportunities for those willing to adapt and change.
Independent orthopedic practices have a lot at stake and whatever decision they choose to make can have long-term consequences. A good option is to seek guidance from industry experts that have insight into every part of a practice’s operational and revenue cycle challenges to help you weigh the risks and benefits. Koha Health RevCycle Ecosystem is that partner.
Koha Health offers a strategic approach to help orthopedic practices achieve financial health and long-term objectives. From negotiating compensation and equity to onboarding technology, Koha can help ensure providers achieve maximum financial benefit from the partnership.