---
title: 'Private Equity in Orthopaedic Groups'
type: 'lesson'
url: 'https://doc.social/courses/the-joei-journal-club-series/private-equity'
course: 'The JOEI Journal Club Series'
course_url: 'https://doc.social/courses/the-joei-journal-club-series'
position: '1 of 3'
author: 'Ira Kirschenbaum, MD'
transcript: 'yes'
---

# Private Equity in Orthopaedic Groups

Private Equity in Orthopaedic Groups: Current State and Key Considerations Authors and Participants: Gary Herschman, JD and Hector Torres, JD, MBA Moderator: Ira H. Kirschenbaum, MD Link to full artic…

## Summary

## Private Equity in Orthopaedic Groups: Current State and Key Considerations

**Authors and Participants: ** Gary Herschman, JD and Hector Torres, JD, MBA

**Moderator:** Ira H. Kirschenbaum, MD

Link to full article in JOEI: [https://journaloei.scholasticahq.com/article/17721](https://journaloei.scholasticahq.com/article/17721)

Link to obtain CME for this article: [https://ccimeded.com/courses/private-equity-partnerships-in-orthopedic-groups-current-state-and-key-considerations/](https://ccimeded.com/courses/private-equity-partnerships-in-orthopedic-groups-current-state-and-key-considerations/)

**Abstract:**

The orthopedic physician group sector remains an attractive area of investment for private equity because the demand for orthopedic care is high, yet the supply of orthopedic surgeons in the U.S. is relatively low. This supply and demand imbalance provides for long-term sustainable growth of orthopedic services within a highly fragmented clinical specialty. With an approximate $1.8 trillion dollars of private equity capital ready to be deployed within the healthcare services industry, private equity remains an increasingly more available option to orthopedic practices. While partnerships among and between orthopedic groups and private equity firms can result in significant benefits, in today’s environment, private equity may also serve as an advantageous pathway for independent orthopedic groups to bolster their financial strength and better position themselves to weather the post-COVID-19 storm.

## Transcript

7,779 words · 50 min · 5 speakers · automatically transcribed (aws-transcribe) and not checked by a person; it may contain errors, particularly in names, drugs and dosages. The recording is the source.

[0:39] Speaker 1: Hello, I'm Doctor Ira Kircherbaum. I'm the editor of the Journal of Orthopedic Experience and Innovation, and welcome to this Journal Club.
[0:49] Speaker 1: To learn about future events and CME just go to www.joeyI.pub. That's www.joey.pub.
[1:02] Speaker 2: So with that said, uh, I'm gonna start with the, uh, with the uh discussion and sort of uh ask uh.
[1:13] Speaker 2: Uh, the both of the authors to, uh, introduce, introduce themselves, OK, I'm gonna stop my share.
[1:20] Speaker 2: Uh, and let's start with an introduction. Uh, I guess we'll start with, uh, uh, Gary F, G4H, you know.
[1:30] Speaker 3: OK. Thank you very much, Ira, and thanks to the, the Journal Club for, for having us on this um event. Um, so I, I am a healthcare transactions attorney. I've been practicing for over 30 years, primarily and definitely exclusively in the last 10 years, uh, representing physician Practices, mainly, and, and some Other organizations like ambulatory Surgery centers.
[1:57] Speaker 3: And the like on strategic Transactions. I'm part of Epstein, Becker, and Green.
[2:04] Speaker 3: Which is a national healthcare firm with over 170 healthcare lawyers.
[2:10] Speaker 3: And we have offices all over the country. And like I said, we've been representing a lot of physicians, including most recently, the last two years, we've represented uh 7 orthopedic groups in transactions with private equity firms, and we're currently in process with another 8.
[2:31] Speaker 3: Uh, right now. So this is, um, we're gonna talk a little bit more about this, um, shortly, but that's, that's what I do. I help guide through legal advice, uh, physicians and groups through these transactions.
[2:46] Speaker 2: All right.
[2:48] Speaker 2: And uh Hector
[2:50] Speaker 4: Yes, good evening, everyone. Pleasure to be with you. Um, uh, I am a managing director and the co-leader of Healthcare investment banking for Focal Point Partners, which is a fully diversified investment banking and financial advisory, uh, services platform. Um, and I've specialized my entire career in being at the service, uh, of healthcare providers of all types.
[3:15] Speaker 4: Uh, my Primary area of focus is in working with single specialty and multi-specialty physician Practices, and really, uh, charting the course and, and outlining the various strategic transactional alternatives available to them. Um, but my role is, is, is largely to, to drive, curate, and execute upon the actual MNA advisory process, uh, from ideation, uh, to sitting down many, many years ahead of even
[3:44] Speaker 4: Uh, any physician group contemplating a deal all the way through, obviously, you know, processing every singular aspect and facet of the, of the MNA process. That's really our role as the financial advisor and for the last several years, Gary and his team, and, and, and our team uh within the healthcare practice have worked hand in glove and really providing that 360-degree perspective, point of view, and capability, uh, because healthcare is very complicated.
[4:13] Speaker 4: Uh, you have to really understand the legal, the financial, the clinical, and the regulatory aspects, uh, within a, a, a innately complex, uh, infrastructure that is mergers and acquisitions. So, that's a little bit of background and it's a pleasure to be here with you all.
[4:30] Speaker 2: That's a good deal. All right. And again, if anyone has questions along the way, um, I very much, uh, would like you to just put them in the chat. So first I'm gonna ask, um, well, I'll ask both of you and whoever wants to pop up with the answer. Um, why is this currently.
[4:51] Speaker 2: Such a trend right now. Why this is, this seems to have come out of the woodwork, like out of nowhere, the, the idea of private equity and, and, and groups, and it, it seems to have taken on like a firestorm of interest. So what's going on in the climate now?
[5:14] Speaker 2: That, that's, that's driving this.
[5:18] Speaker 3: So, maybe I'll take a stab at that first and then let Hector chime in too. So,
[5:25] Speaker 3: Just so you know, the, the, the concept of, of consolidation among singles specialty groups has been going on for 20 years. Um, with, you know, it started with dental Practices, then ophthalmology and eye care Practices, then dermatology, Pain management, and, and more recently, gastroenterology, urology, OBGYN. It's really all over.
[5:54] Speaker 3: Um, mainly, mainly, um, surgical subspecialties. And, and the reason for that is they're, you know, like Orthopedics, they're all fragmented, there's so many groups, you know, hundreds, thousands of groups around the country. And, um, consolidation has, has certain benefits, and the, there are investors that are
[6:19] Speaker 3: are, are, are pushing this consolidation because they see the benefits and have been very successful at it. So Orthopedics really started um going very strong about, you know, in terms of popping up through the ground. You know, I would say about, about 21.5, 3 years ago, I actually represented the Steadman Clinic in its transaction, which was the 2nd group to go with orthopedic Care partners.
[6:48] Speaker 3: And HOPCo was out there, and then, in that same year, in 2018, 2019, there's a couple of more orthopedic platforms that, that sprouted, if you will. And from the end of, of, of 2020, there were 8 platforms. And then at the end, as of now, there's, there's 15. So,
[7:13] Speaker 3: It's almost doubled in one year. Um, and, and, uh, I think the reason is both
[7:19] Speaker 3: The desire to make groups better and more competitive, um, by investors. They, investors like surgical subspecialties because there's ASCs involved, and there's Other ancillaries. In fact, I think Orthopedics has the most ancillaries, you know, not only surgical centers, but imaging, Physical therapy, durable medical equipment.
[7:45] Speaker 3: Orthopedic urgent care,
[7:48] Speaker 4: post-surgical Rehabilitation, I mean, there, there really isn't uh another specialty that has so many revenue drivers, right? Because thinking about it, empirically, uh, they, they view it with an investor's mind, right? How defensible, how much of a moat do you have around?
[8:04] Speaker 4: Around the Business vis a vis multiple revenue streams, and the ability to um scale those revenue streams uh with, you know, either, either de novo sites of care or growth via acquisition of, of smaller Practices, uh, oh, and usually it's both of those avenues of growth, but yeah, absolutely.
[8:24] Speaker 3: Yeah, and that, and that's
[8:25] Speaker 3: one reason, you know, I just wanted to, to lay out what, um, another kind of macroeconomic factor, which is a lot of physicians are
[8:35] Speaker 3: You know, facing a lot of headwinds, a lot of challenges, if you will. Um, you know, it's hard being a small practice.
[8:43] Speaker 3: Yeah, we, we're working with Practices of 3 or 5 doctors. We're also working with Practices of 70 to 80 doctors, and everything in between. I mean, even the large Practices are, are facing challenges. You would think, 00, they're big, they'll be OK. Well, they're OK longer, but they also see challenges with reductions in Reimbursement, and moving to value-based care, and all these things that bigger is better, and, and, and better in the sense that
[9:12] Speaker 3: A bigger organization has more access to capital for expansion and competing. And when you talk about competing, a lot of, a lot of physicians that we've worked with have started to feel the pressure, the pressure of hospitals, competition with hospitals, who, who already have consolidated Primary care physicians. And now, they're bringing into the hospital specialists. So, once hospitals have
[9:38] Speaker 3: You know, 5 or 6 orthopedic surgeons, where do you think all those referrals from all of their Primary care physicians are gonna go to, or most of them. And then there's the big, the big organizations like Optum, that are also have bought up all the large Primary care Practices of 100 or more doctors in the top 23 or 24 metropolitan areas around the country. And now they're bringing in,
[10:04] Speaker 3: Orthopedists and specialists. So there's just a lot of competition going on, and I think that's, that's really, you know, seeing the risk and the future uncertainty, you know, I think is a big factor too.
[10:17] Speaker 5: Yeah, I, I have a question, you know, you talked about the concept of a platform, and then in the update, you talked about, there seems to be two parts of the anatomy in the sense of a private equity deal. There's a private equity people, I will call them the people with money, and then there's these, it's not a bad way to put it, and then there's these people like HOPCo Inspire, and so explain that.
[10:45] Speaker 5: Like Hoco is not really uh a private equity company. They, they, are they more like a convenor? I mean, what is the in that? Explain those definitions for us.
[10:57] Speaker 4: Yeah.
[10:59] Speaker 4: Yeah, happy to take a first class at that. Um, uh, so, so, so you're right. There are really, when you think about the landscape and transactional types, a platform really represents the initial investment by a pri a private equity firm in a particular specialty or segment of the healthcare industry. In this instance, musculoskeletal and orthopedic care.
[11:22] Speaker 4: Now, as they move out into the marketplace, and it's usually begins locally, very quickly, then it expands rapidly into a regional strategy, with the ideation of, of, of saying, we can build and scale and, and, and, and transfer best Practices to eventually a platform that is national. Uh, that's sort of the ideal state, uh, if you sort of put it in, in, in, in a Harvard Business School case study of how do you get from point A to point B optimally.
[11:52] Speaker 4: Um, to be determined for orthopedic care, we have seen certainly in, in dermatology, certainly in dental services, and, in Other segments that have been consolidating for the last 10 to 15+ years, we have seen those models be successful, uh, but certainly very early innings relative to, to orthopedic care. Um, but, but in, in terms of, uh, what's, what's the optimal end state, whether
[12:19] Speaker 4: You're a platform or a bolt-on, uh, it, I'll give you a very good, uh, lawyerly law school answer. The, the answer is it depends, right? It depends on what are your organizational and practice-related goals and objectives. You know, to be a bolt-on to a very strong partner that has very strong cultural, clinical, and quality of Medicine alignment is not necessarily a bad thing, uh, whether that's what you
[12:45] Speaker 4: Strive to be versus being a platform, and are there considerations structurally, uh, and otherwise, sure. Uh, but, but it really, really begins with what are the challenges and potential opportunities that you see in your particular market, um, and how could a potential partner organization help catalyze, effectuate, and secure what, what any clinical enterprise strives for, which is
[13:12] Speaker 4: Market, market relevance, but ideally market sustainability over the long term, right? And there are many ways to do that. There are exams just as that there are as many examples of Practices that have partnered with private equity, there are just as many, if not more examples of Practices that have remained independent. Um, Illinois Bone and Joint is a great example.
[13:34] Speaker 4: Um, they've developed a great brand, they developed the infrastructure, they, they now have the size and scale that access to capital can be realized as a, at a reasonable cost of capital. Uh, I, you know, if they went private equity, they could probably do even better, but, but, but there are a lot of case studies on both sides. It really comes down to, you know, what are the imperatives, challenges, and opportunities ahead of you, and how could a
[14:00] Speaker 4: Potential partnership. And we, we, we always say partnership is a, is a, is a, is a, is a capital P because that could be an affiliation with your hospital and your health system, some form of a strategic joint venture with a, a for-profit ASC operator. Uh, it could be a a myriad of alternatives. Um, this one just happens to have a lot of compelling attributes and, and we, we're hopeful to speak to, to many of those tonight.
[14:27] Speaker 3: Yeah, and,
[14:27] Speaker 3: and Ira, let me just add to that, Hector.
[14:30] Speaker 3: Explained really well whether a practice would be a platform investment, meaning it's big, it would be an investor's first foray into consolidating, as opposed to a smaller practice, which would be an add-on to that first one. But I wanted to answer the Other part of your question, which is that
[14:52] Speaker 3: The private equity company, um, firm invests in, in like a, when you, when we use the word platform like an MSO, in Other words, they're owners of this management company that, that is the one that um has the relationship where all the executives are and all the billing and CEO CFO managed care contracting, all of that goes into like a mega MSO.
[15:20] Speaker 3: That's the company that the, the private equity company invests in. So like, like ONS, right, uh, in Connecticut they were the platform investment, um,
[15:36] Speaker 4: for Pero Ira HOPCo and the Core Institute. That's, that's the vehicle, the MSO vehicle that
[15:42] Speaker 4: Um, Addax and Linden are invested in. That's also, by the way, the vehicle that to the extent that there's applicable rollover equity in these transactions, meaning, you know, 75% of the purchase price is in cash, 25% is in rollover equity. The physician shareholders are rolling.
[16:00] Speaker 4: Over and becoming owners of that entity alongside the, the private equity investors as well. So like
[16:06] Speaker 3: in,
[16:06] Speaker 3: in the example of Spier, so Kohlberg is the, is, is the private equity investor. OK. They started with ONS. They changed the name to of the platform to Spire, and you have ONS and you have Other groups that they've added since then, um, and, and, and Spire is like the MSO platform.
[16:26] Speaker 5: So Spire runs the Practices.
[16:29] Speaker 5: With the equity backup of with the, with the equity from the private equity company.
[16:37] Speaker 3: Exactly, exactly, and there's, and, and all of the 15 or 16 platforms are, are the same way. So with HOPCo, it's Audex and Lindon and, and, and with, with, uh, orthopedic Care Partners, it's Varsity is the private equity investor. So that's,
[16:53] Speaker 4: that's the way it works, yes. But I wanna make it.
[16:56] Speaker 4: And I don't want to go down too far, the, the, the, the structural technical rabbit hole unless everyone wants to cause we're happy to. We, we love this stuff. Um, but, but you said something, Ira, that I want to make sure we clarify that, you know, that, that's the company that owns the practice. I mean, technically, that is the company that, that
[17:15] Speaker 4: That owns the the 100% of the equity ownership of the MSO that has a strategic and unambiguously uh uh uh uh clear relationship with the PC entity. There is always a clinical
[17:33] Speaker 4: Practice entity because in most states, there are states like Arizona that don't have corporate practice of Medicine laws, but in most states, non-physicians cannot own an equity ownership or stake in a clinical entity, uh, alongside, alongside doctors. In most states, you cannot do that. So the MSO.
[17:52] Speaker 4: Becomes the vehicle with which you can then recapitalize with a non-physician owner like a private equity firm. But the, the, the PC and the clinical Protocols, and the management and autonomy of those clinical Protocols, 100% of the time, stay within the physicians.
[18:11] Speaker 4: Um, there's always the biggest, one of the biggest questions we always get is, is someone on Wall Street wearing a pinstripe suit going to call me to tell me that I need to see more patients, or that I need to see less patients, or that I need to use this spinal implant instead of the one I know how to use because it's more clinical.
[18:29] Speaker 4: efficacious? The answer is no. Uh, and, and in most instances, we codify where it would be outside the boundary, it would basically be, you know, outside of the boundaries of the scope of the, the partnership and the transaction that you're, you're consummating and working to pro to protect,
[18:46] Speaker 5: yeah.
[18:47] Speaker 5: So I have a question. Um, oh, there's a, um, hold on, there's a question I got here. Uh,
[18:55] Speaker 5: OK, um,
[18:58] Speaker 5: How does one attract the attention of a larger entity in order to be, OK, so how
[19:05] Speaker 5: How does a let's say you have a five-person practice in Allentown, Pennsylvania.
[19:11] Speaker 5: OK, how does, how does that group attract the attention of a, of a Hopko or Spire and say, we want to be a bolt on and we want to be an add-on, um, or we want to get, we want to get into the game. Mhm. OK, you know, we were, we want, as I say in Hamilton, you know, we want to be in the room, you know. How, how does that five person group in Allentown.
[19:38] Speaker 5: Or in Springfield Road, Massachusetts.
[19:42] Speaker 4: Oh, well, well, first they have to come, they have to come to the Physicians Transactions Conference on March 23rd and 24th in Chicago, Illinois. I'll be the heels of the AAOS meeting. We'll all be there, uh, at least come on the 23rd cause we're gonna host everyone at the gauge and, and you'll have some great food and some drinks at a minimum. But, uh, uh, no, all joking aside, it, it really, uh, it, it really goes down to.
[20:06] Speaker 4: Um, coming in contact with the right team of advisors, you know, if they have local accounting firms or even consultancies that they, that they've worked with in the past, it's really an outreach to those immediate term resources because if they don't have the, the requisite knowledge or expertise, they'll usually look to their network. Uh, and, and, and that's very much in, in, in the way that we get formally introduced to a lot of the groups that we've worked with and continue to work on behalf of today.
[20:35] Speaker 4: Um, but it is a very specialized group of advisors. So you always need your, your transaction lawyer, your counsel. That's what Gary and his team do. Um, then in combination with that, you need a financial advisor, also known as an investment banker, that is really the one that, um, is the tip of the spear for every single aspect of the process, and at the same time, it's helping to negotiate, optimize, and fine-tune the outcome of every single process element.
[21:03] Speaker 4: And, um, always in concert with the attorney at every, every single step of the way. But, um, you know, how do they get in the game is, you know, doing a little bit of Research, um, understanding, you know, why is this happening, and it comes to, you know, coming to segments like this and, and learning what are the drivers and, and pros and cons, and, and, and getting more information, and, and how could that potential pathway, um, help enable growth, sustainability, and long-term success.
[21:31] Speaker 4: Of our clinical enterprise. And um in, in, in most instances, when we sit down and, and have an initial discussion with the practice, um, we come prepared with a, a preliminary estimation of value, a preliminary strategic alternatives analysis of what's happening in your market, you know, what, what are the market share trends and the shifts and considerations, what are some external variables? uh Gary mentioned Optimum, and Other vertically integrated, um, um, acquires.
[22:00] Speaker 4: Uh, and consolidators, that's becoming more prevalent in markets that 5 years ago, like, like, you know, Northwest Georgia, Rome, Georgia, that wouldn't be something that any healthcare provider would be worried about. That's a market that we're, we're seeing optimum in today, uh, and, and will continue to be more and more of those non-urban and, and rural environments. So, uh, let me, let me add to
[22:24] Speaker 3: what Hector's saying, um, to, to, to hone in on the question.
[22:29] Speaker 3: So if you have a 5 physician orthopedic practice in, you know,
[22:34] Speaker 3: Just a small town USA or even in Lehigh Valley, um, Pennsylvania, you know, a smaller practice may or may not initially get the attention of, you know, now there's 16 platforms. So what we're seeing is that a lot of groups
[22:53] Speaker 3: are getting phone calls, repeated phone calls, reach out to, uh, the CEO of the group or the head doctor or
[23:01] Speaker 3: whatever,
[23:02] Speaker 4: or administrator.
[23:05] Speaker 3: There's
[23:06] Speaker 3: so many now that there's a lot of incoming. So I would say if you're a group of more than 10 doctors.
[23:12] Speaker 3: You probably have gotten numerous phone calls and emails, either from investment bankers wanting to help you or from directly from these 16 platforms that are looking to try to add on. A smaller group, like 3 to 53 to 6, you know, might not get as much attention, although they still are getting phone calls. If somebody's in the vicinity, like in your example, Lehigh Valley, if someone's in Philadelphia region.
[23:40] Speaker 3: You know, they're gonna start to look around, you know, an 1 hour drive, you know, 100 miles. So, I do think that, um, you know, the platforms that are in the article, in the, in the update blog, we have a list of the 15 current platforms, and there's one even additional that is, is coming out any day now, so that's why there's 16. But,
[24:02] Speaker 3: You could reach out to them. The Other part of the question was, how do you know they won't go reach out to Other groups in the area? And the answer is, well, there's nothing that stops them from doing that. There's 15 different platforms, and there might only be 3 or 4 that are looking in your geography, right, although a lot of these are looking nationally. So, um, that's what you have to do is you have to reach out to them if they haven't reached out to you or speak to an investment banker.
[24:30] Speaker 3: And, and some groups might be too small for an investment banker, but start with an investment banker that can give you direction as to what your value is, whether they can help you or someone else. Now,
[24:42] Speaker 5: if you're a group, uh, uh, Marty Nichols asked this question, um, and, uh, I think it's a really good one. So let's assume you're a group and you're maybe a 10 to 12-person group. You own, you own an ASC, um, you may own radiology, you may own 3 Physical therapy places.
[25:01] Speaker 5: Is everything all in, or do you just buy part of the practice, the whole practice, the, the doctors, do the doctors have to give up every part of their ownership and things they have?
[25:14] Speaker 5: Well, how does that work in the field?
[25:18] Speaker 4: Yeah, I mean, you have supreme optionality and that goes into the, the, the transaction planning and structuring phase early on, but we've seen it be Practices that own the real estate, every single clinical site, they have an ASC, uh, footprint that's owned. They even have, you know, in Other specialties, pharmacies and Other, Other site of care assets. They can.
[25:40] Speaker 4: Monetize all of that, and we can package it up as one singular vehicle, or we can do some of the parts, and if Other, most, sometimes the only derivative that we see consistently is that folks don't necessarily want to sell the real estate for whatever reasons. Um, in that case, it's actually, it could be even more beneficial if you don't have a need to liquidate the real estate, because what
[26:05] Speaker 4: What you end up doing is you end up doing a, a, a long-term lease with a, with a much bigger entity that's a much more secured credit at even more preferential market lease terms. So there, there, there, there's a lot of ways, but it really comes down to what, what do you want to do and why, and then we can help, help inform what, what, what are the alternatives. And let
[26:26] Speaker 3: me add to that, I, so, so, so Physical therapy and imaging.
[26:31] Speaker 3: Uh, just as examples, durable medical equipment, they all need to be part of the practice entity.
[26:37] Speaker 3: Under the StarkC rules, right, so it, it, it, it, so if, if you have imaging, you have Physical therapy, that means it's all billed under the same tax ID as your practice. So in those instances, it's all, you're, you're not selling all, you're partnering on everything. And what's good about that is it adds value and you still have 30% or, or thereabouts going forward. But on ASCs, I wanna talk about ASCs.
[27:04] Speaker 3: ASCs are a little bit different. I've seen three different approaches. If the ASC is entirely owned by the practice, it will be part, and, and that's good because it, it's a big value driver. It will be part of the transaction. However,
[27:19] Speaker 3: If the ASCs, a, a lot of Practices, doctors own in different ASCs and they don't own the whole thing. There's doctors from Other orthopedic groups, urologists, whatever, gastroenterologists, multi-specialty. In those cases, it's kind of like a fork in the road. Um, on a bunch of deals I've worked on very recently.
[27:39] Speaker 3: They don't even touch that because the doctors own fractional ownerships. But in some cases, if, if it's a big enough fractional ownership, the, the private equity, uh, investor may want to take like a piece of that, like a half of that, um, and, and that's just a separate negotiation in the case that, that, that the, that the, that the orthopedic surgeon's own fractional interests.
[28:04] Speaker 3: we
[28:04] Speaker 4: have.
[28:04] Speaker 4: The Other thing to put them on the real estate, most private equity firms don't wanna be in the real estate Business. So they're, they're not really necessarily looking to monetize it, but there is a market for those real estate assets. So if the PE firm doesn't necessarily want to sell it, buy it, and the, the physicians own it and, and do want to sell it, um, we usually do a two-step transaction, but that's a separate one, relative to the PE option.
[28:29] Speaker 5: So we have a question from, uh, well, Ramirez, that they have a PSA agreement with the hospital system and now they're tasked to grow the group to staff 5 or 6 of their regional hospitals. Yeah, OK. Is private equity still an option if you're under a PSA and maybe describe a PSA to everybody.
[28:50] Speaker 4: Yeah, yeah, that's your, that's, that's your power out,
[28:54] Speaker 3: yeah, let me take the first step on this because we are working now with a couple of our orthopedic groups have PSAs
[29:01] Speaker 4: and that.
[29:04] Speaker 3: That could be, it could, it could be a challenge, but we're, we're making it work, OK? So the hospitals usually are very negative. They don't want the
[29:13] Speaker 2: doctors define PSA for everybody.
[29:16] Speaker 3: A PSA is a professional services organization where the orthopedic group remains as an independent orthopedic group.
[29:23] Speaker 3: And has a PSA with the hospital, whereby all of the doctors are essentially leased over, even though it's called the PSA. Uh, all of their professional services are provided under the hospital, or it's captive-friendly PC faculty practice plan, and it's billed that way, and the doctors get paid, usually a certain $1 per RVU or some Other financial arrangement that is unrelated to collections. It's based on their, on their services they provide.
[29:52] Speaker 3: So they're very good for doctors, but it, it does, it, it can have the impact of limiting the ability to do a private equity transaction, but not necessarily. We're, we're seeing two potential avenues. One is
[30:08] Speaker 3: To Approach the hospital, well, well, first of all, we've reviewed PSAs to see whether hospital consent would be required for a private equity transaction with the group, which would essentially be like a change of control, partial change of control of the group. And a lot of contracts, but not all PSAs that we've reviewed.
[30:32] Speaker 3: Do require consent from the hospital. Now, one way of looking at that is, wow, the hospital should be happy. Someone else is paying these doctors a lot of money, and they're still contracted with us and still aligned with us. But,
[30:46] Speaker 3: A lot of hospitals use PSAs really as a long-term stepping stone to trying to get them to be employed by the hospital.
[30:54] Speaker 3: And in that
[30:55] Speaker 3: case, in that case, the hospitals, and we've seen a number of cases where hospitals are resistant. So what you need to do if they're resistant to it is, or if you think they're gonna be, you, you might not wanna ask, but if you think they're gonna be resistant to it, then you look at your options to terminate. And a lot of PSAs have.
[31:15] Speaker 3: Uh, uh, you know, like a clause, 90 days, 180 days, some are a one-year notice to terminate, or maybe the next term is gonna, is gonna expire at the end of this year. So, what you could do is you can hire an investment banker like Hector to market the group, um, even though, and
[31:35] Speaker 3: As it comes out of the PSA, and if you get a contract with um a private equity investor, once you ink that contract, then you give a notice to terminate if there's a 180-day clause or you have that deal effective December 31st, the last day of the expiration of the term of the PSA. So there's different ways to look at it. The challenge though is that
[31:59] Speaker 3: It's hard. It, it, it takes a lot of modeling for the investment bankers to try to show how this group is going to operate independent of the hospital. That's why it would be better to have them continue with the PSA because you know what.
[32:15] Speaker 3: Revenues they're generating and it's a little bit hard to project what it would be like if we were separate from the hospital and independent. So it's a long-winded answer, but we're
[32:25] Speaker 4: working on a bunch of
[32:26] Speaker 2: those. I have another question. Uh, so let's assume you're a particularly large group, um, uh, doing maybe let's say, uh, 3, 4000 joint replacements, you know, 2000 spines, you know, you, you're a big group in your area. What is, um,
[32:44] Speaker 2: What is your advantage? What, what, so, and then what is your advantage to bolt on Other groups, you know, 5-person groups. How diluted do you get when, you know, you're, you're the, you have the platform and then these 5-person groups come on board.
[33:02] Speaker 2: You know, what's the, do, do you, is your group getting fit is your because you're the platform, so do you get a bigger piece of the pie and the bolt-ons get less? I mean, how, how is the how is the equity determined? How do you make, how do you make money?
[33:19] Speaker 2: As a practice
[33:21] Speaker 4: I can take that. Um, well, it really comes down to the equity capitalization of the enterprise, right? Let's not distinguish between the NFL. Let's just think about the whole sort of entity. So, it, it, it's always beneficial to begin as early as possible, right? Uh, for, for, for, for many reasons, but, but, but certainly, you know, being dollar one, first investor, you're typically gonna be on parity.
[33:45] Speaker 4: With the private equity firm. Although, you know, in the last few years, even some of the bolt-ons and even some of the smaller bolt-ons, um, have been granted sort of what's called perry pursue or, or on equal footing with all of the initial shareholder positions as well as the private equity firms. So that's, it used to be that those, the, the, the, the later in the game you came onto the platform, the more subordinated and
[34:09] Speaker 4: Less beneficial or, or, or less potentially valuable your rollover equity was, uh, but, but those days sort of the cap table has kind of sort of right sized itself, uh, today in this market, uh, because physicians are demanding it and rightly so. Everyone, if, if we're all gonna be participatory in the contributions to growth, everyone should participate, participate in the upside, uh, vis a vis equity, vis a vis equity.
[34:33] Speaker 3: And me, from a, a lawyer perspective, not a financial advisor perspective, the way I look at it is
[34:42] Speaker 3: These, these investors, and, and, and
[34:46] Speaker 3: You really are talking about investors who are in physician services. They've done dermatology, ophthalmology, whatever. They're not just starting with their first, I'm, I, you know, foray in, into Orthopedics, they have the experience. These investors are very, very smart, like Wharton MBAs and Chicago MBAs. They're very, very smart kind of Wall Street guys. And when they start with a big platform, and let's say they have 700 shares, and the doctors have 300 shares.
[35:16] Speaker 3: You know, when they decide to add on smaller groups.
[35:20] Speaker 3: They're doing it because they, they know that even though it, it might be dilutive of both the private equity 700 shares, and then the 300 shares of the first big platform group, it makes sense. The private equity firms wouldn't be doing it.
[35:37] Speaker 3: You know, Hector said Perry pursue. If they think it's good, it's good for them, then it's good for us too.
[35:43] Speaker 4: So and let me, let me just do like a very as simple of an example as we could provide in terms of how, how does, how does the value of your equity appreciate? How do you make money in these partnerships? Yeah, so the platform investment is made, right, and the enterprise is valued at $100 million right? Um, the, the physician shareholders elected to
[36:05] Speaker 4: Um, monetized 80% of that $100 million purchase price, so $80 million to the physician partners at the closing. There's a great party afterwards. Awesome. $20 million of it is going into the new co-entity, this Toco, this new enterprise, and um they will own a 20% stake, and in exchange for the $80 million and the 20% rollover, uh, the private equity investor now owns an 80% stake, right?
[36:34] Speaker 4: In the equity capitalization. So now we go out into the universe, initially locally, then regionally, eventually nationally, and we're aggregating more groups. That same structural alchemy of 80% of the cash to the doctors that sold, 20% rollover equity in UCCO is happening, but at a much smaller level. Now you're not looking at another $100 million practice. Maybe it's a $25 million purchase, maybe it's a 15 million.
[37:02] Speaker 4: million dollars dollar purchase. Maybe now you see that it makes sense to bring in a $5 million group, right? And now, but that same bid map is happening, and what's happening to those initial physician investors alongside with the private equity firm is that their percentage ownership is being diluted as more shareholders are being brought on in the form of rollover equity. So you're saying, well, that's not good, Hector, because I own less of the company.
[37:31] Speaker 4: Yeah, correct. But you own something at a less percentage that's worth so much more, right? So you're diluted on a percentage basis, but that instead of owning 20% of something that's worth $100 million you might end up owning 18% of something that's worth $500 million. So that's sort of how the bid math, the equity dilution, and the monetization of that rollover equity works.
[37:56] Speaker 4: What the private equity community in this market environment is targeting is anywhere between 3 and 4 times what's called MOIC, multiple of invested capital. So alongside them in this instance, that 20% rollover, that's $20 million is being targeted at a return back to the physicians of $100 million on
[38:19] Speaker 4: average.
[38:19] Speaker 2: Now, you get, let's say you get a group, you got all your people. What happens when someone
[38:26] Speaker 2: At age 55 or 65 or 60 retired.
[38:31] Speaker 3: Yeah. So, so, let, let me talk about that, because that goes back, if you just give me two minutes to one of your first questions is why are doctors doing this? And, and one of the Other factors I call monetization. Right now, when that doctor you just described leaves the practice, retires, or maybe God forbid, becomes disabled.
[38:54] Speaker 3: The buyouts that doctors get in Practices nowadays are not very significant. It doesn't reflect the true value of the practice. And, and, and so, what happens is by doing a transaction,
[39:08] Speaker 3: They, the true value of your practice is determined. You get 70 to 80% of that in cash, and the rest in rollover equity. And now to answer your question, and that rollover equity is at that true value, not what's in your shareholder agreement that you get your capital account or 50% of trailing accounts receivable. This is the real value, and when you retire, you get bought out for the fair market value of that.
[39:36] Speaker 3: Let's say it's 30% or 20% ownership that you hold, you're gonna get bought out at fair market value, not what your old practice agreement says. So it's really um a double whammy, lots of risks ahead.
[39:52] Speaker 3: And uncertainties, we want to be part of a bigger practice. Let's monetize while the market's hot, take chips off the table, like 70% of that real value, and then we get back that 30% down the road, which increases in value over time as the platform increases in value.
[40:12] Speaker 2: There
[40:12] Speaker 2: was another question that was asked, uh, do these platforms qualify for the exemption granted?
[40:18] Speaker 2: At $75 million and publicly traded company, I'm assuming that meant stock exemption.
[40:26] Speaker 3: Yeah, the platforms are not, are, are, are not, um, looked at that way under STAR. They're just not, um, the Practices themselves have to comply with STARC. Remember, this is a, you know, a management organization platform that's got the executives and the contracts to manage and whatnot. So, if they're talking about the STARk exemption, um,
[40:51] Speaker 3: My unders, I, I've never come across that being important because of the way most of these deals are worked with the practice itself.
[41:00] Speaker 3: Separately complies with Stark, and the MSO um entity where the doctors have rollover equity is what grows in value.
[41:09] Speaker 4: Mhm.
[41:10] Speaker 2: OK, what would be, uh, and again, if anyone has questions just type them in.
[41:16] Speaker 2: Give me a reason, give me a situation where a particular group that is strong in an area, maybe you're in a part of Ohio or that you dominate that region anyway.
[41:29] Speaker 2: Um, what would be a reason for you not to go down this path, because the way I'm hearing it is, I mean, I, I'm, I'm employed by a hospital in a safety net hospital, and, and I feel like taking my, uh, my department into private equity, but we can't, of course. I'm just kidding, you know, I don't think, I don't think in all Medicaid practice is, is that is interested in that, but
[41:52] Speaker 2: I would
[41:52] Speaker 5: say,
[41:53] Speaker 2: I would say that, you know, if you're a solid group that really dominates in a.
[41:59] Speaker 2: You know, part of what would be, what would be a reason not to get involved.
[42:05] Speaker 3: So, I think Hector, you know, Hector pointed out towards the beginning, his comments were very insightful, and I'm gonna, I'm gonna reiterate them. It depends on the group's goals and objectives. And, you know, if the, if the group is facing some of these headwinds, and thinks, hey, 35 years from now, are we still gonna be able to, to be doing this well, even though that we're the, we're the biggest group in
[42:31] Speaker 3: In this, you know, western part of Ohio, you know, and I just think a lot of groups are thinking that there's more and more challenges, and, and, and, and being part of a large, even a larger group could be beneficial. But again, this is not right for everybody, and, and we're not here waving the flag, hey, everyone do private equity.
[42:53] Speaker 3: Um, that's uh, what, what I do think though is important because there are some negatives, right? It's not, I mean, there's, you know, they take over the Business aspects of the practice, which could be a big positive, but for micromanaging doctors, if depending on the personalities, it might not be. And the Other thing is you gotta make sure you find the right cultural fit. This is not just about money. This is about meeting the.
[43:19] Speaker 3: These people, and truly, we use the word partnership, but partnering with them, that they have, that, that they have a good vision for how they're gonna grow this and you trust them and you meet them a lot and have dinner several times and cross-examine you, and they cross-examine um you and you cross-examine them. So, again, there's, there, there could be good reasons, there, you know, but again, it's not right for every group, but what I always say is, get the information.
[43:46] Speaker 3: Don't just say, uh, private equity. A lot of groups 3 years ago were like, private equity, I wanna hear about it. More groups now are at least saying, OK, I'll listen, show me the facts, and then let us decide whether or not this is right for our group or whether we want to stay independent. Uh, you know, and, and, and, and deal with these Other issues, these local competitive issues and Other risks that we're facing.
[44:10] Speaker 4: And I would just say there's a, there's a, a practical, but, but a nonintuitive aspect that that's fascinating, which is
[44:18] Speaker 4: The groups that command the best terms and conditions are, are, are inevitably the ones that don't have to do anything, that have a very strong market share. They're relevant, they have great managed care rates, they have strategic affiliations that are beneficial to them with the hospitals and the health systems, but they say, you know what, the market environment is hot, and now it's white hot. Um, what would be the, you know, wouldn't it be
[44:45] Speaker 4: Imperative on us as fiduciaries and owners to explore a potential pathway from a position of consummate strength, because we really work with two types of Practices. The ones that are like the one I just described, very forward-thinking and have the luxury that we all should strive for, which, which is the ability to not have to do anything, right? Um, to have the ability to say, no, if it, it's not in our best interest and it doesn't align with our goals and objectives, we can remain a very strong.
[45:13] Speaker 4: viable, long-term independent going concern. That's a great place to be. That is the consummate position of strength from a negotiating perspective. But the Other, Other client type is where the wolf's at the door, it's a day late, the practice is $1 short, and now they're saying, hey, can, can you, can you all get us those premium terms and conditions that we keep hearing about in your press releases? Well, you know, it's a very active market environment, but you're, you're a rescue mission.
[45:41] Speaker 4: Right. And, and it's very hard to gain premium terms and conditions when, when you're in that sort of paradigm. So, yeah, there's that dynamic.
[45:50] Speaker 2: Yeah, it's, it's,
[45:52] Speaker 2: it's absolutely amazing, and, and I think sometimes the 800 pound gorilla in the room is what are the Primary care people in your region.
[46:03] Speaker 2: Going to, how are they going to respond? Well, they form a 250 person Primary care group and hire 6 orthopedic surgeons.
[46:13] Speaker 4: Mhm.
[46:14] Speaker 4: Yeah
[46:15] Speaker 2: You know, so you really want a strong orthopedic group that doesn't probably burn those relationships.
[46:23] Speaker 2: Exactly, um,
[46:26] Speaker 4: and by the way,
[46:26] Speaker 3: it could be, it could be like I said before.
[46:30] Speaker 3: You know, I'm sure your hospital has a lot of Primary care where, uh, employed docs where you and your Other orthopedic surgeons, uh, get a lot of their work versus sending it out to a group in the community and a multi-specialty group in the community, yeah, if they bring in like Optum's doing, if they, if they even stay independent and bring in their own specialists, um, yeah, that could hurt the Other orthopedic groups in the community, so.
[46:56] Speaker 3: Yeah, that's what the
[46:57] Speaker 2: like, like in the Northeast, there's a group, you know, the, the, uh, Summit City MD, yeah, so that, that is merging with a number of big Primary care
[47:09] Speaker 4: groups. Yeah, now it's called Summit Health. The company is called Summit Health, yeah, Sumit and they
[47:13] Speaker 3: purchased orthopedic
[47:14] Speaker 4: groups. Yeah, yeah, yeah, they're, they're they're, they're a portfolio company, one of the larger private equity firms, a firm called Warbert Pincus.
[47:24] Speaker 2: Oh yeah, Warra Pincus, yeah, they were. So, uh, just a couple of comments, uh, before we close up on how is this gonna affect the orthopedic device industry in a sense. What are your thoughts? What are your thoughts about that, Hector? What are your thoughts about that, you know, to a farm, uh, an ortho farm or ortho device.
[47:44] Speaker 2: You know what,
[47:46] Speaker 4: what, you know, there's a, there's a, there's an inverse relationship between, uh, uh, consolidation and, and, and the pricing of any service or product, right? Uh, so, um, my long-term prognosis prognosis, uh, to put my economist's hat on is, you know, any industry, uh, that consolidates as orthopedic and musculoske skeletal care will.
[48:11] Speaker 4: is being uh in front of our eyes, uh, purchasing power and purchasing power parity shifts, right? Uh, to some degree, right? But, uh, I think as we're seeing today, margin compression on, on, on medical device Technology and in particular, those going into the orthopedic care continuum, um, is already sort of seeing margin compression to some degree. I think we'll just see that play out over, over a much longer term and, and to a much higher degree.
[48:39] Speaker 2: All right, um, well, I'm gonna ask for any final questions. I don't wanna keep anyone too much longer. I strongly recommend, uh, anyone going to the AOS, uh, to go to this event. I think it's gonna be a high point that I really mean that, um, no matter what your status is now, status has changed tomorrow. Um, it's no question, so I, I wanna thank everyone who showed up today.
[49:04] Speaker 2: Um, and, um, and especially thank Gary and Hector for, uh, amazing article, just remarkable, uh, kind of put Joey on a map, and,
[49:16] Speaker 4: uh,
[49:17] Speaker 2: um, I think it's great, and I want to thank you guys sincerely and
[49:21] Speaker 3: everybody. I put up my Ukrainian flag in solidarity. Thank
[49:25] Speaker 4: you. Thank you all, an honor and a pleasure, and we're at your service in any way. Thank you so much. We'll see you all in Chicago.
[49:32] Speaker 4: Thank you. Bye-bye. Bye bye now. Bye now.

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