Beacon Orthopaedics, based in Cincinnati, recently partnered with Denver-based Revelstoke Capital Partners to launch a new network of orthopedics groups to help the practice compete in a more consolidated marketplace—a partnership that some observers warn could "produce both successes and disasters," Harris Meyer reports for Crain's Detroit Business.
Why private equity firms are buying orthopedics practices
Physician specialty groups increasingly are turning to private equity partners to better position their practices to compete in the market. Orthopedic practices are expected to see a surge of investment from private equity over the next five years, according to a report last year from investment bank Edgemont Capital.
The trend toward private equity in orthopedics is driven in part by the uptick in hip and knee replacements as well as the shift toward outpatient orthopedic care delivery, according to Nathan Every, general partner with private equity firm Frazier Healthcare Partners.
A new deal in Ohio
Last year, Beacon Orthopaedics' 18 physician shareholders decided they needed an outside investor to help them grow in the market. They interviewed about 15 private equity firms, and ultimately partnered with Revelstoke Capital Partners to launch a management services organization (MSO).
Under the deal, Revelstoke paid an undisclosed amount to Beacon for a majority share of the MSO, and Beacon now pays a fee to the MSO, which coordinates accounting, billing, credentialing, management, staffing, and other services for the practice. The deal enables the physicians to maintain ownership of the practice, and better positions the practice to expand by adding other orthopedic groups to the MSO, Meyer reports.
Peter Cha, Beacon's president, said, "The key to our decision to go with Revelstoke was the ability of physician leadership to continue to manage and be advocates for the care of our patients." He added, "Time will tell whether we can take this into national markets."
Andrew Welch, Revelstoke's managing director, said he views the deal as a win-win. "We're not in the business of telling doctors how to practice medicine; we're in the business of taking away roadblocks and making the practice easier and better for providers," he said, adding, "The experience is better for patients, and payers like it as well."
The private equity debate
Advocates of private equity health care deals say they can help physician groups improve care through better management and technology and prepare them for value-based payment models. The larger size and expanded services also give the networks more leverage in negotiating deals with payers.
While the actual impact of the deals is not yet known, Meyer reports that some industry experts have raised concerns about private equity's potential to lead to a "loss of physician autonomy, conflicts of interest, increased utilization of high-cost services and inadequate supervision of midlevel clinicians."
One editorial published in JAMA Dermatology urged private equity firms to stop acquiring dermatology practices until research publish more studies on their effects.
"My biggest concern is private equity firms aren't focused on making health care better," said Zack Cooper, an associate professor of health policy at Yale University who's studied the deals. "They are focused on hunting out narrow slivers of the health care system where they can make significant amounts of money by exploiting loopholes."
Another concern is that the business model of private equity firms is not sustainable for medical practices, especially after the first buyer sells the network, according to Meyer.
"Once you do it, you don't know what life will be like in five years, because you've given up control of your destiny," said Lawrence Casalino, a health policy professor at the Weill Cornell Medical College. "But that may be fine with some doctors, as opposed to selling to their local hospital, where they know all too well what their destiny is and they may not like it much."
At Beacon, Cha said the practice is focusing on growing the business and serving patients. "We're not speculating as to who would take over from Revelstoke," Cha said. "We're simply focused on growing the business and consolidating the market in orthopedic surgery in the best interests of our patients" (Meyer, Modern Healthcare/Crain's Detroit Business, 9/3).