Private Equity Partnerships with Orthopedic Groups: Key Considerations

At the time when we initially wrote about the early trend of private equity partnerships and investments in orthopedic groups in November 2020, the COVID-19 global pandemic had been raging for over 10 months, and vaccines were in the early phases of initial testing. We are now entering the third year of the pandemic, and while today COVID vaccines, tests and treatments are readily available, private equity’s interest in orthopedic practices has only increased substantially since the Fall of 2020. Orthopedic care remains one of the fastest growing segments of the U.S. healthcare industry, with orthopedic conditions generating more than 137 million visits to providers on an annual basis.

Unlike its industry peers in segments such as dermatology and dental services, the orthopedic sector remains relatively untouched by the professional investment community, and this high level of fragmentation continues to engender heightened degrees of interest from the private equity community, a trend which is only forecasted to increase in 2022, and beyond.

Due to orthopedic care’s utilization of numerous ancillary clinical services, such as imaging, physical therapy, durable medical equipment, and ambulatory surgery centers (ASCs), orthopedic practices can offer investors access to additional revenue streams, while offering patients an integrated approach to the treatment of the entire continuum of musculoskeletal care. Independent orthopedic practices have historically invested in many of these ancillary services, which provide an attractive alternative to traditional settings of care such as hospitals for certain surgical procedures. Further, orthopedic procedures are often accompanied by numerous advantages shared by other attractive healthcare subsectors, as insurers generally reimburse orthopedic procedures well, and providers often offer elective procedures, which are generally self-pay and not subject to industry-standard discounts by insurers.

Private equity investment in orthopedic practices also poses unique considerations. Investment in the orthopedic segment is typically characterized by a “high price of entry” by virtue of orthopedic practices commanding relatively high valuations. Further, orthopedic practices typically have numerous well-compensated physicians, who are historically used to working independently, and often with incentive-based compensation arrangements. These considerations notwithstanding, the private equity community has rationalized these elements with the organic growth possibilities, as well as with opportunities for continued growth via acquisition of smaller orthopedic groups.

Today, the orthopedic sector is optimally positioned for a continued surge of private equity transactions in the coming years. This highly fragmented market provides for a unique consolidation opportunity, as well as a significant first-mover advantage for orthopedic practices that have the size, scale and infrastructure to capitalize on these opportunities. As of the end of 2020 there were a total of eight (8) private equity (PE) firms that invested in orthopedic group platforms – and now, as of January 2022, there are fourteen (14) PE-backed orthopedic platforms seeking to consolidate musculoskeletal physician practices. ...