Private equity investment firms are setting their sights on orthopaedic care as federal regulators and the industry at large look to move more of these treatments away from hospitals and into outpatient settings.
Healthcare experts are predicting a surge of private equity deals in practices that perform hip and knee replacements in the coming months as transactions are finalized.
"We're right on the precipice of seeing a big wave of these deals," Michael Cole, managing director at Alvarez & Marsal Transaction Advisory Group, told Healthcare Dive. He said his group is working on four deals right now.
So far this year, there have been 17 private equity deals across the globe related to orthopaedics, according to data with Preqin, an industry research firm. Four of the deals were located outside the U.S. Many involved physical therapy practices, an ancillary service to orthopaedic services.
For example, Cora Health Services, and its owner Gryphon Investors, have been active scooping up physical therapy practices across the country this year, according to data with Preqin. Orchid Orthopedic Solutions, a Michigan medical device company with a specialty in joints, was sold to a private equity firm for $933 million, according to data with Pitchbook.
The number of private equity deals centered around orthopaedic practices so far this year already matches all of 2018. And there were just seven in 2017. Although many figures for orthopaedic deals in 2019 were not disclosed, the ramp up comes as private equity interest in healthcare beyond just orthopaedics trails 2018, which was a blockbuster year.
Healthcare has seen its share of private equity investment in recent decades, in particular in dermatology and nursing home care. Critics say the investors' sole focus on return on investment and eye to selling within a few years risks patient health.
More recently, Congress launched an inquiry into some firms' role in lobbying around surprise billing legislation. Key physicians staffing firms, which oppose some of the proposals to ban surprise bills, are backed by private equity.
Orthopaedics is a potential lucrative area for private equity as the number of joint replacements is expected to increase. The population of older Americans continues to grow rapidly, and they will require fixes for their worn out joints — typically an expensive procedure.
More than 1 million joint replacements are performed each year, according to data from the Centers for Disease Control and Prevention's National Center for Health Statistics.
In 2010, there were nearly 693,000 total knee replacements conducted in hospitals on those aged 45 and older. It was the most frequent inpatient procedure for that age group in 2010, NCHS reported. Total hips for the same age cohort reached nearly 311,000 that same year.
And a new regulatory push makes the market even more attractive.
Come Jan. 1, CMS wants to remove total hip replacement from the inpatient only list. In other words, it would move the procedure away from inside a hospital and allow the surgery to be done in an outpatient setting.
The move threatens hospitals' bottom lines as orthopaedics can be one of the most profitable service lines.
CMS also wants to allow total knee replacements to be done in ambulatory surgical centers, moving them even one step further hospitals' control.
These changes are a threat to hospitals, experts told Healthcare Dive.
For hospitals, there will be some "flat out losers" as they compete with private equity groups to attract orthopaedic surgeons to form a partnership, Chad Beste, healthcare advisory partner at consulting firm BDO, told Healthcare Dive.
To combat the competition, the hospital's pitch will be simple: Let's build an ambulatory surgical center together and partner so we both win. That strategy is gaining traction as hospitals try to woo orthopaedic groups, Cole said.
Yet, orthopaedic groups typically are looking to partner with the "must-have" or market leader in a given region, which poses a real threat to hospitals that are in the second or third position in a local market.
Private equity will offer a sizable buyout, typically between 10 and 15 times annual earnings. It's also about taking over the business functions, which are getting more complex in the move from volume to value.
Even though many are predicting a rise in these deals, they have yet to show up in the data. Instead, it seems private equity has been interested in ancillary services such as physical therapy practices so far this year.
That's not surprising, Cole said. Given the amount of doctors in an orthopaedic practice, these deals typically take longer to get done than those of dermatology practices.
Private equity deals in healthcare overall seem to be pacing behind 2018, a blockbuster year for transactions.
Across the healthcare sector, there have been 454 global private equity deals with an aggregate value of more than $30 billion in 2019. Last year there were 733 deals with an aggregate value of nearly $63 billion, according to figures with Preqin.
Traditional providers are not the only ones jockeying to expand their outpatient presence. Some of the nation's largest health insurers have already captured a large share of ambulatory surgical centers.
In 2017, a unit of UnitedHealth Group acquired one of the nation's largest providers of outpatient surgery centers, Surgical Care Affiliates. The company has more than 210 facilities across the country that perform more than 1 million surgeries each year. UnitedHealth is well known for its insurance arm, the nation's largest commercial carrier, UnitedHealthcare.
Surgical Care Affiliates will be the strongest competitor in this space, Beste said. He said he has his eyes on SCA and what Optum, its parent company, acquires next.