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Private equity interest in orthopedic practices expected to balloon

Orthopedic practices havent cozied up with private equity firms quite as readily as their peers in, say, dermatology and ophthalmology, but a new report says thats all changing.

The next five years will see a flurry of investment from private equity into orthopedic practices, deals that trigger further acquisitions with other practices to consolidate local or regional markets, according to the healthcare investment bank Edgemont Capital.

Jeff Swearingen, Edgemonts co-founder and a managing director with the firm, said hes aware of four or five orthopedic practices that are currently pursuing initial investments from private equity.

Physicians are warming to consolidation to counter pressures from managed care and to gain negotiating leverage with payers, Swearingen said. Physician practices with size and scale are better-positioned to counter the industry forces compared with their smaller, independent counterparts, he said.

I think physicians are becoming increasingly aware of that dynamic, he said.

The trend is being driven largely by two factors: the migration of hip and knee replacements to less expensive outpatient settings and the dramatic increase in the volume of such procedures, said Dr. Nathan Every, general partner with Frazier Healthcare Partners, a private equity investment firm that along with Princeton Ventures raised equity financing for the Core Institute, a group of 67 physicians that provide musculoskeletal and neurological care.

There is greater efficiency and greater ability basically to do more better quality and cheaper joint reconstruction through physician-led organizations, he said. Its pretty interesting. People are really thinking about how to do outpatient joints better, faster and cheaper.

Edgemonts report lists recent private equity investments in orthopedic practices, including Varsity Healthcare Partners investment in The Orthopedic Institute, an integrated orthopedic surgical care and ancillary patient treatment services provider in North Central Florida. The deal is expected to help the Institute aggressively grow its clinical footprint across Florida through a combination of acquisitions and accelerated recruitment efforts, Edgemont wrote.

Southeastern Spine Institute, the largest medical practice in South Carolina, was acquired last year in a private equity deal led by Candescent Partners. The practice has 16 physicians and 31 total providers, according to Edgemonts report. The report also mentions the acquisition of Atlantic NeuroSurgical Specialists, a group that specializes in complex brain disorders using advanced technologies, by the private investment firm Lorient Capital, a deal that has not yet been announced.

Private equity partners tend to be hands off when it comes to how doctors practice medicine, but heavily involved on the financial side of the practice, especially when it comes to increasing infrastructure and adding more practices, Swearingen said.

The practice has to be open to and embrace that opportunity for growth, if theyre not interested in embracing that growth, then there will be some level of conflict with their new partner, he said.

For physicians who aspire to hold an ownership stake in the booming outpatient hip and knee replacement market, private equity can provide the necessary capital, Every said. Getting into the business is not cheap and requires a great deal of infrastructure, especially if physicians plan to use robotics, he said.

Dr. Jack Bert, chair of the American Academy of Orthopaedic Surgeons practice management and rehabilitation program committee, said while a private equity buy-out can provide a huge boost in capital, some physicians have subsequently found they lost control of the business side of their practice. Depending on how the deal was structured, the investment firm can take total control over the business direction of the group. That said, practices are being purchased for multiples of practices earnings, and Bert said it makes sense especially for older physicians.

If youre older, its phenomenal because youll make a fortune as you exit practice, he said.

On the flip side, Bert said hes seen lots of orthopedic practices get bought by health systems that take over control of how they practice medicine, which private equity tends not to touch.

If the hospital system buys you out, you lose total control of your practice, he said.

Bert said hospitals control where physicians practice, when they practice and the volume of patients they see, among other factors.

Which is worse for the doctor? Theres no question the hospital buyouts are worse, he said.

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