Private Equity Driving Consolidation Across Orthopedic Healthcare - Data provided by
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Private Equity Driving Consolidation Across Orthopedic Healthcare Data provided by
Transaction volume pushes to new heights
US PE activity in orthopedic healthcare
49
46
44
38
25
22 22
17 18 17
14 15
$1.5 $1.2 $1.6 $1.3 $3.0 $2.1 $2.5 $1.7 $4.3 $5.6 $2.8 $1.2
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021*
Deal value ($B) Deal count
Source: PitchBook | Geography: US | *As of May 25, 2021
From gastroenterology and oncology to As a result, a growing number of fund $1.2 billion in overall value. The customary
urology and dermatology, financial sponsors managers have jumped on the abundant push to close ongoing transactions by
have spurred innovation and fueled investment prospects across healthcare year’s end should propel 2021 to a new
consolidation across the US healthcare sectors. And orthopedic healthcare has high for deal volume, if not value.
landscape. In 2020, private equity (PE) been no exception—rather, it has lately
deals in healthcare generated $79.2 emerged as a bellwether of PE’s appetite The professionalized corporate
billion in value—some 14% of all capital for physician-led clinical practices. infrastructure PE partnerships bring
committed—across 735 transactions, or 17% can greatly improve the overall
of all deal volume in the US. Niche areas of Despite the disruption wrought by the
financial performance of a medical
the space, comprising not just healthcare COVID-19 pandemic, 49 orthopedic
group, negotiating more lucrative
services but also devices & supplies, transactions closed in 2020—topping
managed care contracts with payors.
technology systems, pharmaceuticals, and the record set in 2019—across no less
Such a centralized management
biotechnology, represent attractive rollup than $2.8 billion¹ in aggregate deal value.
team can also obviate the need for
opportunities. As a bonus, healthcare With the back half of 2021 yet to play out,
duplicative mid-level and back-office
generally weathers macro-level downturns financial sponsors have completed an
staff at each office.
better than most industries. additional 17 deals generating another
1: Extrapolated because of undisclosed deal sizes.
Vector Medical Group, LLC conducts project management, client leadership insights, and market
research for industry, community-based medical groups, health systems, and associations. Vector
Medical Group is the preeminent leader in creating synergies between investors and healthcare provider
groups with seamless, strategic, trademarked solutions. As an intersection between investors and healthcare leaders, we work to
integrate with any health industry business at any facet of its life cycle. We work with C-Suite executives and senior leadership to
drive business performance and outcomes based on combining healthcare and shareholder value. Our global experience allows
us to assist organizations with change management and affords shareholders streamlined solutions across all departments. With
over 20 years’ experience and an unprecedented lens of the insight across the ever-changing healthcare marketplace,
there is no better option than Vector Medical Group.
2
P R I VAT E E Q U I T Y D R I V I N G C O N S O L I D AT I O N A C R O S S O R T H O P E D I C H E A LT H C A R E
Financial sponsors targeting the healthcare US PE activity (#) in orthopedic healthcare by industry group
space look to leverage multiple ancillary
100%
service opportunities as additional profit
centers, and orthopedic practices can offer
the widest variety of ancillary services to 80%
their patients, including:
• Ambulatory surgery centers 60%
• Physical and other therapies (such as
occupational or hand therapy) 40%
• Multiple imaging modalities (including
20%
MRI, CT, ultrasound, X-ray, bone
densitometry)
0%
• Durable medical equipment
2021*
2020
2010
2016
2018
2019
2015
2014
2012
2013
2017
• Prosthetics and orthotics 2011
• Injections (such as for pain Healthcare devices and supplies Healthcare technology systems
management, biologics) Pharmaceuticals and biotechnology Healthcare services
• Orthopedic urgent care centers Source: PitchBook | Geography: US | *As of May 25, 2021
• Occupational health centers US PE activity (#) in orthopedic healthcare by type
PE-backed platforms continue to expand 35
through new as well as add-on acquisitions,
and over the past several years, existing 30
orthopedic platforms have increasingly
moved across state lines. Meanwhile, new 25
orthopedic platforms are staking claims in
specific regions across the US. For example,
20
last July, Ohio-based Beacon Orthopaedics
& Sports Medicine, a Revelstoke Capital
Partners portfolio company turned national 15
management services organization (MSO),
10
According to the Association of 5
Orthopaedic Surgeons, just 12% of
orthopedic surgeons operate solo 0
private practices, per 2018 survey 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021*
data, while full-time orthopedists are
Growth & expansion Add-on buyouts Non add-on buyouts
between 40 and 59 years old.
Source: PitchBook | Geography: US | *As of May 25, 2021
Epstein Becker & Green P.C. is one of the top healthcare law firms in the country, with 150 health law attorneys in 16
offices who advise medical groups, healthcare facilities and businesses, pharma and medical devices companies, and
investors in all of the foregoing, in connection with mergers, sales and acquisitions, as well as the many regulatory and
compliance issues that are essential in connection with their operations. The firm’s healthcare attorneys have been particularly
active over the last 10 years in representing a wide spectrum of physician groups and ASCs in strategic transactions, including the
following specialties: ENT, OBGYN, Orthopedics, Neurosurgery, Podiatry, Urology, Retina, Ophthalmology, Cardiology, Primary
Care, Gastroenterology, Dermatology, Plastic Surgery, Dental, Fertility and Pain Management.
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P R I VAT E E Q U I T Y D R I V I N G C O N S O L I D AT I O N A C R O S S O R T H O P E D I C H E A LT H C A R Eacquired Reconstructive Orthopaedics & Selected orthopedic practice • Medicine to form OrthoCincy Wellington
Sports Medicine in Cincinnati. mergers completed YTD in 2021: Orthopaedics & Sports Medicine.
Such moves can capture economies of • Phoenix-based The CORE Institute • Six orthopedic groups in Texas merged
scale that could secure lucrative multiples merged with Advanced Foot and Ankle to form OrthoLoneStar.
at auction. Likewise, returns continue Specialists, a six-physician group in
to drive home the message that PE can • Longmont, CO.-based Front Range
Howell and Dexter, MI., expanding its
add real value in the healthcare market. Orthopedics & Spine merged with Fort
presence in the state.
Going forward, the tailwinds for orthopedic Collins, CO.-based Orthopaedic &
healthcare include an aging population and • Seven orthopedic practices in New Spine Center of the Rockies.
back-pain-related issues stemming from Jersey merged to form Ortho Alliance NJ.
• Leawood, KS.-based Orthopaedic
lifetimes of inactivity and obesity in the
• Cincinnati-based Wellington and Sports Medicine Consultants, and
US. These factors are likely to persist and
Orthopaedic & Sports Medicine merged Dickson-Diveley Orthopaedics merged
should encourage further PE dealmaking
with OrthoCincy Orthopaedics & Sports March 1.
across the space for the foreseeable future.
PE firms are focused on the continued tailwinds from migration to outpatient procedures, most recently knee and hip
replacements. They are focused on future growth as well as rebounding from pandemic-depressed markets. There is an
expected rebound recovery for lost procedures in H2 2021 and 2022. PE groups expect consolidation because of operational
challenges faced by private practice physicians.
Key trends to watch in 2021
Enabling technology: Mergers and acquisitions: ASCs:
Orthopedic robots drive revenue not As the pandemic depresses asset prices, Joint replacement and spine companies
only for device companies, but also for resource-rich companies are increasingly are highly focused on positioning
hospitals reliant on highly profitable joint aggressive in small acquisitions to themselves to leverage the shift of
replacement and spine surgeries. expand their portfolio or market access. producers to ASCs.
*Methodology
All datasets are sourced from PitchBook, and all traditional healthcare industry codes correspond to existing industry codes
for healthcare in the PitchBook Platform. The orthopedics-specific data was derived by using a combination of keywords and a
primary industry code tag of healthcare to identify companies within the orthopedics space.
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P R I VAT E E Q U I T Y D R I V I N G C O N S O L I D AT I O N A C R O S S O R T H O P E D I C H E A LT H C A R EQ&A with Dana Jacoby and Gary
Herschman
In this series, we’ve chronicled how PE Sellers in the orthopedic services sector
firms have grabbed a growing share of face many of the same challenges as in Dana L. Jacoby
CEO
overall dealmaking in healthcare. What other physician specialties, as well as
Vector Medical Group
do financial sponsors find so appealing some unique issues. Some of the unique
about the orthopedic space and which challenges include:
opportunity sets are unique to this
corner of the market? • Because certain orthopedic
subspecialists are highly compensated, Gary W. Herschman
Board of Directors /
Financial sponsors find the orthopedic space it can be more challenging to
Member of the Firm
very appealing due to a variety of factors: “normalize” (i.e., reduce) their pay Epstein Becker Green
in a manner that is acceptable to
• Hospitals lost an estimated $10.9 to investors, who do not want too large of
$11.9 billion in reimbursement and a reduction in provider compensation
$2.6 to $3.5 billion in net income due for fear of not being aligned with
to canceled elective musculoskeletal physician productivity post-closing. orthopedic physician associates and
surgery during 8 weeks of the COVID-19 As a result, there is a wide disparity other clinicians (e.g., mid-levels, PTs);
pandemic.1 Orthopedic practices, which in collections—and therefore (iv) making specific commitments
spend more than $33,000 per month per compensation—among physicians in to other aspects of growth, such as
surgeon to maintain overhead in addition many orthopedic groups. This, in turn, new offices and expanded ancillary
to ancillary, medical malpractice, and results in major differences among services; (v) finding a partner that is
capital expenditures, also experienced a physician owners with respect to the a good “cultural fit” with the group
financial loss with the pandemic.2 proceeds they receive in a partnership with respect to management and
transaction with investors. Such governance and who will not interfere
• The physician services subsector within
financial differences can cause tension with clinical aspects of the practice.
the musculoskeletal space is extremely
among the shareholders of a group,
fragmented, with multiple medium and How are financial sponsors achieving
making it difficult to achieve consensus
small orthopedic practices in most efficiencies through scale by rolling up a
on proceeding with the deal. Although
major regions throughout the country. number of physician-led ortho practices?
such disparities can be addressed
• Demand for orthopedic services has in various ways, if the practice is a Being part of a larger organization with many
grown consistently over the years and corporation, the options for doing so physicians throughout a state (or many
is expected to rise at an even faster may be extremely limited depending on states) allows physicians to substantially
pace over the next decade as baby various factors. benefit from economies of scale and other
boomers aging through retirement practice enhancements, such as:
• Orthopedic groups also face many
require substantial orthopedic care.
other challenges that are common • Migrating to an advanced EMR system
• Large orthopedic practices offer a wide to all physician group deals, such that provides advantages regarding
range of subspecialty care, including as (i) structuring transaction terms clinical care and population health, as
sports medicine, joint replacement, so that early-, mid- and late-career well as turbocharged revenue cycle
pain management, bone cancer shareholders are all treated fairly and capabilities. These advanced EMR
treatment, or physical therapy. are appropriately incentivized and systems are inordinately expensive for a
aligned moving forward; (ii) including mid-sized or large practice (and not even
What are the chief investment risks terms that align the interests of existing considered by small groups) but can
and related challenges for both buyers associate physicians; (iii) ensuring cost-efficiently be acquired and operated
and sellers involved in transactions that post-closing the group can still be by consolidated groups with dozens of
across ortho? competitive in recruiting highly talented
2: “Economic Implications of Decreased Elective Orthopaedic and Musculoskeletal Surgery Volume During the Coronavirus Disease 2019 Pandemic,” International Orthopae-
dics, Matthew J. Best, et al., July 17, 2020.
3: “Economic Impacts of the COVID-19 Crisis: An Orthopaedic Perspective,” Journal of Bone and Joint Surgery, Anoushiravani AA, et al., April 21, 2020.
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P R I VAT E E Q U I T Y D R I V I N G C O N S O L I D AT I O N A C R O S S O R T H O P E D I C H E A LT H C A R Ephysicians across many offices. These The professionalized corporate 1. Enabling technology: Orthopedic
systems also provide crucial data to infrastructure PE partnerships bring robots drive revenue not only for device
better position the practice to succeed in can greatly improve the overall financial companies, but also for hospitals reliant
bundled payment and other value-based performance of a medical group, on highly profitable joint replacement
reimbursement programs, which are negotiating more lucrative managed and spine surgeries. With ASC
becoming more prevalent. care contracts with payors. Such a evolution, the growth of orthopedic
centralized management team can also robotic surgeries will continue to flourish.
• Real cost savings in a variety of high- obviate the need for duplicative mid-level
end purchases like health insurance, and back-office staff at each office. 2. M&A: As the pandemic depressed
malpractice insurance, major imaging asset prices and group resources,
equipment, biologics, website & What do you see on the horizon for revenue-rich companies have become
other marketing, population health, dealmaking in ortho as the back half of increasingly aggressive toward small
capabilities, data analytics, and care 2021 unfolds? orthopedic acquisitions to expand their
management staff. platforms or access new markets.
The COVID-19 pandemic brought
• Benefits of an experienced senior unprecedented disruption to orthopedics 3. ASCs: Joint replacement and spine
management team, including a complete in 2020. Despite these challenges, the companies are highly focused on
C-suite, a managed care executive, industry recovered quickly. As a result, we positioning themselves to leverage the
a human resources executive, a have seen three trends playing a crucial shift of high-volume surgeons to ASCs.
compliance officer, and many more. role as we move into the back-half of 2021:
There are various pros and cons of orthopedic groups “partnering” with a financial
sponsor vs. corporate acquirer. The following summarizes some of these key differences.
Hospitals: Payors and National Healthcare Financial Sponsors (PE firms):
Companies:
The biggest upside of becoming part Financial sponsors usually provide the
of a hospital or health system is that Physician groups are increasingly highest valuations and financial terms to
they are large organizations in the local being approached by payors and physician groups, while providing “rollover
region serving the same population their affiliates, as well as national equity” to ensure strong alignment of
as the group. The downsides are: (i) healthcare companies. Although these financial interests among the investors
they often do not value practices as “buyers” oftentimes offer competitive and physicians. One of the other key pros
highly as financial sponsors, as the financial terms, many of them do of PE partnerships can also be one of the
terms they offer must be fair market not offer “rollover” equity, which major cons, however. Although sponsors
value to comply with the Stark and allows physicians to benefit from usually exit within three to seven years,
anti-kickback laws (because physicians the growth and increased value of which can be very lucrative to physicians
can refer patients into them), as well the organization (e.g., through “exit” holding rollover equity, this inevitable
as legal restrictions on tax-exempt transactions in the future). Although change in the financial partner presents
organizations; (ii) many hospitals these buyers are very experienced in some level of uncertainty as to when or,
are not adept at managing physician population health, data analytics, and even more so, who the new investor will
practices and instead focus on filling value-based reimbursement programs, be. On the flip side, the next investor will
beds, providing tertiary healthcare many physicians don’t want to be be valuing the platform at a higher level
services, and negotiating rates for these aligned with payors due to their heavy- that it likely won’t change much and will
high-end services; and (iii) in some handed dealings with physicians over instead focus on investing in additional
markets, physicians do not trust hospital the years. growth. Moreover, it won’t want to upset
executives and, even if they do, they are the platform’s physician partners, who
concerned about the next management will always be the key drivers of the
team given their frequent turnover. company’s ongoing value and success.
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