More Orthopedic Physicians Sell Out to Private Equity Firms, Raising Alarms About Costs and Quality

By Harris Meyer, a freelance journalist, covering health care, business, law, culture, & wine. Originally published at Kaiser Health News

Dr. Paul Jeffords and his colleagues at Atlanta-based Resurgens Orthopaedics were worried about their ability to survive financially, even though their independent orthopedic practice was the largest in Georgia, with nearly 100 physicians.

They nervously watched other physician practices sell out entirely to large hospital systems and health insurers. They refused to consider doing that. “It was an arms race,” Jeffords said, “and we knew we had to do something different if we wanted to remain independent and strong and offer good quality of care.”

So, in December 2021, Resurgens sold a 60% share in United Musculoskeletal Partners, their own management company, to Welsh, Carson, Anderson & Stowe, a large New York-based private equity firm known as Welsh Carson. Although details of the sale were not disclosed, physician-shareholders in deals like this typically each receive a multimillion-dollar cash payout, plus the potential for subsequent big payouts each time the practice is sold to another investor in future years.

Orthopedic surgeons, long seen as fiercely independent, are rapidly catching up with other specialist physicians, such as dermatologists and ophthalmologists, in selling control of their practices to private equity investment firms. They hope to grab a bigger chunk of the surging market in outpatient surgery and maintain their position as one of the highest-paid specialties in medicine — $633,620 was the average compensation for orthopedists in 2021. For older doctors, the upfront cash payout and the potential second payout when the business is flipped offers the promise of a posh retirement.

Proponents say private equity investment has the potential to reduce total spending on musculoskeletal care and improve quality by helping physicians move more procedures to cheaper outpatient surgery centers, which have less overhead. It also could help the doctors shift to value-based payment models, in which they charge fixed amounts for whole episodes of care, such as total joint replacements and spine surgeries — receiving bonuses or penalties from insurers based on cost and quality performance.

But critics warn that profit-hungry private equity ownership alternatively could result in higher prices for patients and insurers, more unnecessary surgery, and less access to care for patients on Medicaid or those who are uninsured or underinsured. A recent study found that in the two years after a sale, PE-owned practices in three other medical specialties had average charges per claim that were 20% higher than at places not owned by private equity.

Critics also worry that PE investors will put pressure on doctors to see more patients and use more non-physician providers in ways that could lead to poorer care, as KHN has reported about gastroenterology and other specialties.

“Private equity has no interest in reducing the cost of medicine,” said Dr. Louis Levitt, chief medical officer of MedVanta, a Maryland orthopedic management company whose physician-owners have rejected partnering with private equity. “Their goal is to increase profitability in three to five years and sell to the next group that comes along. They can only do it by making the doctors work longer and reduce service delivery.”

There are now at least 15 PE-backed management companies — called platforms — that own orthopedic practices across the country, said Gary Herschman, a New York lawyer who advises physicians in these deals. The first orthopedic deals were done in 2017, and dozens of sales have occurred since then, with the pace expected to quicken. In 2022 alone, at least 15 orthopedic practices were sold to PE-owned management companies.

Dana Jacoby, CEO of the Vector Medical Group, a strategic consultancy for physician groups, said several orthopedic platforms built by private equity investors already are on the market for resale to other investors, though she wouldn’t say which ones. The government does not require public reporting of these deals unless they exceed $101 million, a threshold that is adjusted over time.

Private equity investors have rolled up orthopedic practices in at least 12 states, with concentrations in Georgia, Texas, Florida, and Colorado.

Besides United Musculoskeletal Partners, other sizable PE-owned orthopedic platforms include Phoenix-based HOPCo, backed by Audax Group, Linden Capital Partners, and Frazier Healthcare Partners, with 305 physicians in seven states; Alpharetta, Georgia-based U.S. Orthopaedic Partners, backed by FFL Partners and Thurston Group, with 110 physicians in two states; and Fort Lauderdale, Florida-based Orthopedic Care Partners, backed by Varsity Healthcare Partners, with 120 physicians in four states.

Private equity funds, with a reported $1.8 trillion to invest in health care, are attracted to the size of the orthopedic care market. Annual patient spending is nearly $50 billion alone for treating back pain. The soaring demand of aging Americans for joint replacements, the high rates insurers pay for musculoskeletal procedures — such as nearly $50,000 for a knee replacement — and the lucrative array of orthopedic service lines and ancillary businesses, including ambulatory surgery centers, physical therapy, diagnostic imaging, pain management, and sports medicine, make this a tantalizing line of business.

The standard playbook of private equity firms is to pull profits of 20% out of their physician groups each year, then reap up to a 350% return on their cash investment when they sell the platform, say experts involved in these deals.

Orthopedic surgeons “are very excited about getting a $5 million to $7 million check,” said Dr. Jack Bert, former chair of the practice management committee of the American Academy of Orthopedic Surgeons. “But some I’ve talked to say the suits come in and tell the doctors, ‘You’re not working hard enough, you’ve got to increase production by 20%.’ That can be a big problem.”

Through their sale to Welsh Carson, the Resurgens orthopedists in Atlanta got a capital partner and executive expertise to help them expand by acquiring other orthopedic practices in Georgia and other markets. Soon after the deal, United Musculoskeletal Partners acquired large orthopedic practices in Dallas and Denver, and brought in a second private equity firm as an additional investor. Several other acquisitions are imminent, said Sean Traynor, a general partner at Welsh Carson.

The investment capital and the company’s growing size in major markets will sharpen the doctors’ ability to negotiate richer contracts with insurers, get better deals on equipment and supplies, build more outpatient surgery centers, and improve quality of care for patients.

The physicians, Traynor said, retain full responsibility for clinical governance, and that is protected by a permanent contract provision binding on all future owners.

“Other physicians ask what’s changed [since the sale], and I say nothing, which is great,” said Dr. Irfan Ansari, one of the Resurgens orthopedists.

But some large employers, whose self-funded health plans pay for orthopedic care for their workers, view the trend toward private equity ownership warily. They fear the new owners will milk the current fee-for-service system, which financially rewards doctors for providing more — and more expensive — surgical procedures, rather than promoting less costly but effective services such as physical therapy for lower back pain.

“The worry we have is we’re not seeing private equity fulfilling the promise of value-based care,” said Alan Gilbert, vice president for policy at the Purchaser Business Group on Health, which represents nearly 40 large private and public employers. “We’re seeing the same short-term financial goals you see with other private equity investments, including pressure to perform non-indicated procedures.”

At least two PE-backed orthopedic groups, however, are working with insurers on cost-saving value-based care programs. U.S. Orthopaedic Partners and HOPCo tout their partnerships with insurers, boasting that they’ve built systems to deliver entire episodes of care at lower costs under fixed-payment models.

Jennifer Allen, chief financial officer at Blue Cross & Blue Shield of Mississippi, said her health plan has saved nearly 40% by collaborating with Mississippi Sports Medicine, now owned by U.S. Orthopaedic Partners, on bundled payments for hip, knee, and shoulder replacement procedures as well as several spine procedures. But Allen said the program was launched in 2016 before private equity investors bought that orthopedic group.

“We had established the protocols, the benefits, the bundle, and everything before that,” she said. “I didn’t see anything that the private equity platform brought to the table.”

Dr. David Jacofsky, HOPCo’s chairman, said private equity owners should be steering their orthopedic groups toward value-based care, but so far he’s not seeing that happening much. “Private equity has lofty goals of wanting to build these things, but the time frame it takes is much longer than private equity wants to stay in these deals,” he said. Instead, he added, most are trying to grow bigger and demand higher payments from insurers, and “that’s not good for anyone.”

Still, MedVanta’s Levitt isn’t optimistic about his orthopedic colleagues’ ability, or willingness, to resist private equity. “We’re on an island and pieces are being chipped away by piranhas in the water,” he said. “I’m not sure it’s possible to remain independent.”

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  1. Patrick M P Donnelly

    Corporatization of personal services with non compete clauses … what could possibly go wrong? Luckily, we have an endless supply of money, sorry debt, being issued by banks etc to
    fund investing in
    those investing in
    those investing …. in personal services. Derivatives or taking a cut at this take on MLM?

    ABC Learning [or similar] failed in Australia but only after floating on the ASX stock Exchange …. lots of losses as the ‘mom and pop’ operations reverted.

    Not a scam, just financial engineering.

  2. PlutoniumKun

    Its not just costs or quality, its just the sheer number of unnecessary surgical interventions.

    I read a few years an account of an Irish orthopaedic resident who worked in the US for a while. He was chastised by his colleagues for sending away patients who insisted that they need an operation for one thing or another and his belief was that it was not needed, or occasionally downright dangerous. He said the attitude was ‘we all know they don’t need the op, but if we don’t do it, someone else will, so we might as well get the money and do a good job’.

    As most NCers will know, a very high proportion of knee/hip/back problems can be addressed best through exercise and diet and losing weight. But people don’t want to hear this (its not just a US problem). With PE investors peering down the back of surgeons there can be only one result – constant pressure on docs and patients to carry out invasive operations unnecessarily. It will be increasingly difficult for any patient to know for sure if the advice they are getting from their doctor (or even from the specialist media) is untainted.

    1. Oh

      Because physicians (more often than not) recommend diagnostic tools (MRI, blood tests, etc) and surgical procedures where the get a “cut of the action”, I’m generally skeptical of their recommendations. PE ownership puts more pressure on them to perform more procedures. I’ve founds many physicians don’t “paint the picture’ for the patient. If a diagnosis finds something, what’s the next step? If it doesn’t, what is the next action? I’d like to know these things at the outset.. I’d also like to know the risks of a recommended procedure (not just the probability) so that I can research it before I go under the knife. The costs of treatment are not usually discussed by the doctor. They keep that out of the picture (by design) and punt it to the “front office”..

    2. Felix_47

      The government is funding most of this. Worker’s comp is funding a lot of this. Putting doctors on salary is the only reasonable solution. Then doctors, who are best trained to do it, can decide what procedure will work best or if no procedure is the best outcome. Otherwise you get what you incentivize.

  3. Alan Roxdale

    Another professional sector taken over by spivs in suits. In what way is this functionally different to state managed industries in the Soviet Union? Probably not a lot, especially when the government starts making deals with financial firms about what is spent where.

  4. Questa Nota

    “The worry we have is we’re not seeing private equity fulfilling the promise of value-based care,” said Alan Gilbert, vice president for policy at the Purchaser Business Group on Health, which represents nearly 40 large private and public employers. “We’re seeing the same short-term financial goals you see with other private equity investments, including pressure to perform non-indicated procedures.”

    Stop the presses! Leopard keeps its spots.

    If only there were some brave souls in Washington who would stop endorsing checks champion their constituents instead of their donors. Put that into those new House Rules.

  5. vic

    The financialization of medicine and its second and third order effects were the direct and forseeable consequences of the Affordable Care Act. A law written in its entirety by ” big health”. ACA was explicitely designed to put the small practice out of business. It did. The consequences are there for all to see. Insurance premiums from pre ACA have skyrocketed. Deductibles/ copays / internal networks – same thing. While the stocks of publicly traded health insurance companies skyrocketed well beyond the S&P bubble.As a consumer of the product it is evident that the product sucks. As a former ( retired ) physician, the ACA began the process that culminated in my retirement… couldn’t take the perennial make work nonsensical, non evidence based evidence based medicine bullshit. Incentives change, people accommodate to the new garbage incentives. You wanted this- you got it.

    1. Ben Joseph

      It technically started with union requested private insurance then medicare. Accepting insurance created an unsustainable cost for Doc Baker type solo practitioners, who had to hire insurance biller to nurse and receptionist. So you have a group practice. Hospitals wanted a guaranteed referral base, so they offered sweet deals to early adopters. But selling multi physician practices for a one time payout, whether to hospitals or PE, is a betrayal to the profession. Doctors will never regain control. After a tipping point you had to either maintain a hospital affiliation or a local monopoly to not be cut out.

      Some psychiatrists use the stigma by being off the grid. Otherwise, dentists and dermatologists caving to buyouts are the final nail in the coffin of private practice.

      Which means there is no professional autonomy reason not to go single payer

    2. Ben Joseph

      Okay I forgot to point out that electronic health record requirements were the added cost that mimics the earlier insurance clerk to force more consolidation. Which is why dentists are outlasting dermatologists in maintaining private practice despite their lower income

      1. Vic

        I agree- single payer medicare for all – is the best solution. In its place they have this obscenity. O’s singular accomplishment. :)

        1. Vic

          Professional autonomy is long gone. The physician is now the lumpen-prole of the healthcare system.

  6. Rip Van Winkle

    What’s the price of an MRI?

    – US with insurance
    – US without insurance
    – US without insurance, but stating you are on to the game and will pay cash upfront upon agreement of price
    – in any first world country like Japan

    1. Vic

      “Price” in American healthcare is pure fiction. In a doctor’s office you may have 10 consecutive patients, who get exactly the same procedure, but they all pay different amounts. No one actually pays” list” price. When the patient leaves the doctors office, neither the patient or the office know what will be actually be paid. So, what is the price ??? What does it even mean? I worked as a physician for 40-ish years- I am confused. This is a BS clownshow, with a lot of middlemen skimming the cream. Not an accident- designed to be so.

  7. Arizona Slim

    Quoting from the post: “They fear the new owners will milk the current fee-for-service system, which financially rewards doctors for providing more — and more expensive — surgical procedures, rather than promoting less costly but effective services such as physical therapy for lower back pain.”

    Four years ago, I was in the throes of back and leg pain that darn near drove me crazy. It was that bad.

    Among other things, I tried a physical therapy clinic, and, to be perfectly honest, it wasn’t of much help. What did help me?

    1. The McKenzie press-up, which is considered to be the gold standard for sciatica exercises. It drove the sciatica right out of my body in all of six days. And it has never returned.

    2. Visiting a massage therapist for a one-hour session. During that session, I had plenty to say about all of the things that were going on in my life and their relationship to my pain. She recommended Dr. John Sarno’s book, Healing Back Pain, and it was one of the most life-changing books I’ve ever read.

    In summary, Sarno suggests that a lot of back pain has psychological origins. Yes, a medical evaluation is a darn good idea — I had one — but it did nothing to alleviate the pain.

    While reading Sarno’s book, I started following his advice: Stop special treatments and resume normal activities.

    That. Was. FUN. I let go of physical therapy. I started sitting down again. I got back on my bike. And I stopped taking Advil. I did other things, but these four are the highlights.

    I also started a daily writing practice. I write about what’s bothering me, what makes me feel anxious, angry, whatever. I also write about the good things.

    The writing practice requires scratch paper, a pen, and some place comfortable to sit. That’s all — and it’s free! No therapist needed!

    BTW, Dr. Sarno said that 95% of his patients didn’t need therapy. I didn’t either.

    Hope this is helpful.

  8. CHW

    Recently I was going through a box of my late mother’s papers, something I’ve put off for a long time. I thought it would be quick work, but it wasn’t. One letter I found was from one of my father’s physicians, who had performed surgery on my father, which wasn’t successful, and my dad died shortly after the procedure. This was in 1960. The doctor’s typewritten note said that he was sorry to hear that my dad’s financial situation was so bleak, and that the enclosed bill was what he was submitting to an insurance company, and that if the company didn’t pay he would adjust it favorably for my mom, which was what he did regularly in such instances.
    The doctor group in New Jersey which I have seen for the last 20 years (but try to avoid now as much as possible) is owned by Warburg Pincus and the “CEO” is a former insurance company executive.

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