Gary Herschman Quoted in “Pandemic, Changes in Health Care Spur Practice Consolidation”

Healio News February 2021

Gary W. Herschman, Member of the Firm in the Health Care & Life Sciences practice, in the firm’s Newark office, was quoted in Healio News, in “Pandemic, Changes in Health Care Spur Practice Consolidation,” by Casey Tingle.

Following is an excerpt:

Published literature has shown the postponement and cancellation of elective procedures during the COVID-19 pandemic had a substantial financial impact on orthopedic practices and hospitals.

In a study in International Orthopaedics, Matthew J. Best, MD, and colleagues estimated hospital losses of $10.9 to $11.9 billion in reimbursement and $2.6 to $3.5 billion in net income due to canceled elective musculoskeletal surgery during 8 weeks of the COVID-19 pandemic. Orthopedic practices, which spend more than $33,000 per month per surgeon to maintain overhead in addition to ancillary, medical malpractice and capital expenditures, also experienced a financial loss with the pandemic, according to publications in the Journal of Bone and Joint Surgery.

Although the Coronavirus Aid, Relief and Economic Security Act provided various economic stimulus options for small businesses with less than 500 employees, sources who spoke with Orthopedics Today said the economic effects of the pandemic along with the increased pressures of added regulatory requirements, cost of doing business, challenges of working with hospitals and a decrease in overall reimbursement may cause struggling orthopedic practices to merge or consolidate with more financially stable practices and systems.

Increased strategic partnerships …

Gary W. Herschman, JD, of Epstein Becker Green, said the number of independent medical groups exploring private equity and other strategic partners has roughly doubled during the last 1.5 years. Although there was a slowdown in this activity for several months at the beginning of the pandemic, it has resumed at an even more robust pace since last fall, he said.

“[The COVID-19 pandemic] has woken them up because many specialty groups struggled during the pandemic, even with the stimulus and [Paycheck Protection Program] PPP loans,” Herschman said. …

A transition, not endgame …

Changes in today’s health care landscape have led physicians to consider different strategic options for an uncertain future, according to Herschman. He noted many physicians have concluded there are benefits to being part of a larger organization that has a more professional corporate infrastructure and greater capital, both of which are important to practices in effectively managing through and weathering difficult times. …

According to Herschman, orthopedic practices have options when looking to consolidate with a larger organization. He noted joining a big, independent orthopedic or multispecialty group can provide the advantages of a professionalized management team, but may not provide “monetization” of the practice’s value or anywhere close to where it may be with a private equity investor or large national company.

Herschman said another option would be joining a hospital system that is looking to acquire physician practices. However, many physicians do not trust that a hospital system will be focused on their practice enough to help them grow. Furthermore, hospitals also generally do not recognize the full value of groups in connection with acquisitions to the same extent as other potential purchasers, he said.

More lucrative options include private equity investors, national health care companies and payer-affiliated organizations, Herschman said. However, although there are many benefits of partnering with an experienced private equity investor (including high valuations and rollover equity in the venture), one major downside is the short-term nature of such a partnership, because private equity firms will generally look to “exit” an investment within 3 to 7 years (5 years on average) by selling to a larger private equity investor or national company or possibly going public, he said.

“When you do a transaction with an investor partner ... they are not in this forever. They are in this to help build [the practice] and grow it, make it more profitable and then they want to cash out and recognize the enhanced value they have created,” Herschman said. “Notably, physicians with rollover equity also benefit from such a ‘second bite’ transaction by cashing out all or part of their ownership interest, usually at a much higher value than when it was issued to them in their initial partnership deal with the investor.”

Improved outcomes …

In addition to workforce and sophisticated management, larger practices have more substantial capital, which Herschman said can enable the practice to provide better value-based care by investing in advanced IT/EMR systems and data analytics, as well as new or expanded ancillary services and care access locations.

“The biggest orthopedic groups are providing the full continuum of musculoskeletal care within their practices ... orthopedic urgent care (with extended hours), ambulatory surgery centers, imaging services, such as MRI, CT and X-ray; physical therapy, seeking to help patients get better without surgery or help them recover post-surgery; occupational health clinics at or near worksites; and durable medical equipment, like crutches and braces,” Herschman told Orthopedics Today. “In a nutshell, they are trying to provide a full array of orthopedic care for patients, focusing on both high quality and cost-effectiveness, so as to better compete and to attract favorable health plan contracts.” …

Challenges of consolidation …

Some physicians, however, no longer want to be involved in management decisions and the “business of medicine,” and would prefer to focus solely on providing quality care to their patients, according to Herschman.