Dr. Paul Jeffords and his colleagues at Atlanta-based Resurgens Orthopedics were concerned about their ability to survive financially, even though their independent orthopedic practice was the largest in Georgia, with nearly 100 physicians.
They nervously watched other medical practices being sold off to large hospital systems and health insurers. They refused to consider doing that. “It was an arms race,” Jeffords said, “and we knew we had to do something different if we wanted to remain independent and strong and provide good quality care.”
So, in December 2021, Resurgens sold a 60% stake in United Musculoskeletal Partners, his own management company, to Welsh, Carson, Anderson & Stowe, a large New York-based private equity firm known as Welsh Carson. Although details of the sale were not disclosed, physician-shareholders in deals like this typically receive a multi-million dollar cash payment, plus the potential for large subsequent payments each time the practice is sold to another investor for years to come. futures.
Orthopedic surgeons, long regarded as fiercely independent, are quickly catching up with other medical specialists, such as dermatologists and ophthalmologists, in the sale of control of their practices to private equity investment firms. They hope to grab a bigger slice of the growing market for day surgery and maintain their position as one of the highest-paying medical specialties: $633,620 was the median compensation for orthopedists in 2021. For senior physicians, the initial cash pay and the The potential second payment when the business changes offers the promise of an elegant retirement.
Proponents say the private capital investment has the potential to reduce overall spending on musculoskeletal care and improve quality by helping doctors move more procedures to cheaper ambulatory surgery centers, which have less overhead. It could also help doctors shift to value-based payment models, in which they charge fixed amounts for full episodes of care, such as total joint replacements and spinal surgeries, and receive bonuses or penalties from insurers on function of cost and quality of performance.
But critics warn that profit-hungry private equity ownership could lead to higher prices for patients and insurers, more unnecessary surgeries and less access to care for Medicaid patients or those who are uninsured or underinsured. . A recent study found that in the two years after the sale, PE-owned practices in three other medical specialties had average charges per claim that were 20% higher than at places not privately owned.
Critics also worry that PE investors will pressure doctors to see more patients and use more non-physician providers in a way that could lead to poorer care, as KHN has reported on gastroenterology and other specialties.
“Private capital has no interest in lowering the cost of drugs,” said Dr. Louis Levitt, medical director of MedVanta, a Maryland orthopedic management company whose medical owners have refused to partner with private capital. “Their goal is to increase profitability in three to five years and sell to the next group that comes along. They can only do that by making doctors work longer and reducing service delivery.”
There are now at least 15 PE-backed management companies, called platforms, that own orthopedic practices across the country, said Gary Herschman, a New York attorney who advises doctors on these deals. The first orthopedic deals were made in 2017, and dozens of sales have occurred since then, with the pace expected to pick up. In 2022 alone, at least 15 orthopedic practices were sold to PE-owned management companies.
Dana Jacoby, chief executive of Vector Medical Group, a strategic consultancy for medical groups, said several orthopedic platforms created by private equity investors are already on the market for resale to other investors, though she did not say which ones. The government does not require public disclosure of these deals unless they exceed $101 million, a threshold that adjusts over time.
Private equity investors have amassed orthopedic practices in at least 12 states, with concentrations in Georgia, Texas, Florida and Colorado.
In addition to United Musculoskeletal Partners, other major PE-owned orthopedic platforms include Phoenix-based HOPCo, backed by Audax Group, Linden Capital Partners and Frazier Healthcare Partners, with 305 physicians in seven states; US Orthopedic Partners, based in Alpharetta, Georgia, backed by FFL Partners and the Thurston Group, with 110 physicians in two states; and Fort Lauderdale, Florida-based Orthopedic Care Partners, backed by Varsity Healthcare Partners, with 120 physicians in four states.
Private equity funds, with a reported $1.8 trillion to invest in healthcare, are attracted by the size of the orthopedic care market. Annual patient spending is nearly $50 billion just to treat back pain. The growing demand for joint replacements by aging Americans, the high rates paid by insurers for musculoskeletal procedures, such as nearly $50,000 for a knee replacement, and the lucrative array of orthopedic service lines and ancillary businesses, including ambulatory surgery centers, physiotherapy, diagnostic imaging. , pain management and sports medicine, make this an enticing line of business.
The standard playbook for private equity firms is to profit 20% from their physician pools each year, then earn up to a 350% return on their cash investment when they sell the platform, say experts involved in these agreements.
Orthopedic surgeons “are very excited to receive a check for $5 to $7 million,” said Dr. Jack Bert, former chair of the practice management committee for the American Academy of Orthopedic Surgeons. “But some I’ve talked to say the suits come in and they tell the doctors, ‘You’re not working hard enough, you have to increase production by 20%.’ That can be a big problem.”
Through its sale to Welsh Carson, Resurgens Atlanta orthopedists gained an equity partner and executive experience to help them expand by acquiring other orthopedic practices in Georgia and other markets. Shortly after the deal, United Musculoskeletal Partners acquired large orthopedic practices in Dallas and Denver, bringing in a second private equity firm as an additional investor. Several other acquisitions are imminent, said Sean Traynor, a general partner at Welsh Carson.
Traynor said the investment capital and growing size of the company in major markets will improve doctors’ ability to negotiate richer contracts with insurers, get better deals on equipment and supplies, build more ambulatory surgery centers and improve the quality of care for patients.
Physicians, he added, retain full responsibility for clinical governance, and that is protected by a permanent contract provision binding on all future owners.
“Other doctors ask what has changed [since the sale]and I don’t say anything, which is great,” said Dr. Irfan Ansari, one of Resurgens’ orthopedists.
But some large employers, whose self-funded health plans pay for their workers’ orthopedic care, are wary of the trend toward private equity ownership. They fear that the new owners will take advantage of the current fee-for-service system, which financially rewards doctors for providing more and more expensive surgical procedures, rather than promoting less expensive but effective services, such as physical therapy for low back pain.
“The concern we have is that we’re not seeing private capital deliver on the promise of value-based care,” said Alan Gilbert, vice president of policy for the Health Buyers Trade Group, which represents nearly 40 large public employers and private. “We are seeing the same short-term financial targets that you see with other private equity investments, including pressure to do off-label procedures.”
However, at least two PE-backed orthopedic groups are working with insurers on value-based care programs that save costs. US Orthopedic Partners and HOPCo tout their partnerships with insurers and boast of having created systems to provide full episodes of care at lower costs under fixed payment models.
Jennifer Allen, chief financial officer for Blue Cross & Blue Shield of Mississippi, said her health plan has saved nearly 40% by working with Mississippi Sports Medicine, now owned by US Orthopedic Partners, on bundled payments for hip replacement procedures, knee and shoulder. as well as various spine procedures. But Allen said the program launched in 2016 before private equity investors bought that orthopedic group.
“We had established the protocols, the benefits, the package and everything before that,” he said. “I didn’t see anything that the private equity platform was bringing to the table.”
Dr. David Jacofsky, president of HOPCo, said private equity owners should steer their orthopedic groups toward value-based care, but he doesn’t see that happening much so far. “Private equity has lofty goals of wanting to build these things, but the time frame it takes is much longer than private equity wants to stay in these deals,” he said. Instead, he added, most are trying to grow up and demand higher payouts from insurers, and “that’s not good for anyone.”
Still, MedVanta’s Levitt isn’t optimistic about the ability or willingness of his orthopedic colleagues to resist private capital. “We’re on an island and the piranhas in the water are chopping it up,” he said. “I’m not sure it’s possible to remain independent.”