Health care comprises close to 20 percent of the U.S. gross domestic product. It is projected to result in total spending of about $4.0 trillion in 2020, up from $3.8 trillion in 2019. Although already high, spending is only projected to increase in the coming years. Accordingly, healthcare investment as future capital has become a lucrative business for both individuals and institutions. An example is private equity acquisitions of physician practices.
What is private equity?
In contrast with public equity, which is characterized by trading in public stocks or equity in the stock market, private equity is defined as the investment of capital by individuals or corporations into private companies. Investors offer a private company a capital infusion expecting a multiplicative return on that investment after several years. Often, a positive return on investment is achieved through cost reduction, which can take the form of layoffs or fragmentation of services as well as consolidation between practices and specialty clinics. At the same time, groups also may increase margins by providing more services at increased prices. Investment groups also can improve efficiency and provide expertise on running a profitable business model. Private equity firms have shown a wide interest in health care, from skilled nursing facilities to partnership deals with physician-led practices. Due to the projected rapid increase in future valuation, medical practices have a large financial upside for investors.
Private equity has demonstrated increasing interest in orthopaedic surgery in particular. As the population ages and there is increasing demand for elective procedures, such as knee and hip replacements, orthopaedic surgery practices have become increasingly attractive. Consequently, there is a projected surge in orthopaedic surgery practice buyouts and acquisitions by private equity firms looking for investments with a high rate of growth.
What are the trends?
A recent trend analysis published in JAMA indicated that since 2013, buyouts of physician practices are slowly but steadily increasing. Despite the dearth of accurate data, the analysis showed a sobering trend, as the number of practices acquired by a private equity group increased from 59 in 2013 to 136 in 2016, constituting a jump from 843 physicians to 1,882 entering buyout agreements. Effectively, this indicates a doubling rate every three years, with no indication of stopping. By the numbers, in 2017, the dollar value of acquisitions totaled roughly $43 billion. Simultaneously, a 2018 report by the American Medical Association indicated that, for the first time in history, there were fewer physician owners than employees in medical practices.
In orthopaedic surgery, there remains a paucity of data and knowledge on the trends; however, it is clear that orthopaedic surgery private equity acquisitions are a new horizon for investors. As noted in a recent ethical commentary piece published in The Journal of Bone & Joint Surgery, orthopaedic surgery practices provide investors the assurance of future growth. Ambulatory services provide high-value care at relatively lower costs compared to services requiring hospital admissions for care. Finally, although the number is relatively low, in 2019, 11 orthopaedic practices were acquired by private equity groups. However, it is important to note that the trend in the initial JAMA piece showed that no orthopaedic practices were acquired in 2013 and 2014, then two in 2015 and three in 2016. It is reasonable to hypothesize that the trend will not only continue but increase year by year.
What does this mean?
Research into the impact of private equity acquisitions on the delivery of health care overall is limited. Everyone involved should think about several ethical considerations before entering a long-term business agreement. Depending on the structure of the acquisition, physicians may lose some autonomy to the private equity firm. Although each acquisition has different power-sharing structures and safeguards, ethical questions may arise when physicians are no longer the only stakeholders making decisions. How will decisions affecting patient care be made by nonphysician business executives? How will physician groups protect against incentives to provide unnecessary exams or procedures?
Besides the ethical considerations, there is also risk of investment failure and the inevitable reformation of physician practices. Unfortunately, not all investments result in positive outcomes. Often, private equity groups hold onto practices for only three to five years, during which groups may opt to consolidate, combine, fractionate, or outright dissolve existing practices to cut costs and increase revenue.
These potential risks of acquisition must be balanced by the potential benefits they may provide to physician groups. Acquired groups may benefit from valuable insights regarding business practices, restructuring, consolidation of practices, and investments into the practice, which may allow physicians to provide improved care to their communities. Often, these larger groups can provide reasonable cost-cutting initiatives and methods that a single practice would not be able to achieve or have the financial ceiling to carry out. Conceivably, investment groups may align well with the ethical principles shared by the physician groups they are purchasing and deliver better and more affordable care for patients while respecting surgeon autonomy and research indications.
What can I do?
For physicians and physician leaders in private practice, private equity acquisition may serve as a way to improve your ability to provide high-quality care to your community. However, private equity investment in an orthopaedic practice may have an unintended negative impact on how care is delivered within the practice. Each practice is urged to consider how well the goals of the investing group align with prioritization of patients and physician autonomy.
Sagar Chawla, MD, MPH, is a fourth-year resident at the University of Washington and member of the AAOS Resident Assembly Health Policy Committee who attended Mayo Clinic School of Medicine and obtained a master’s degree in public health from the Johns Hopkins Bloomberg School of Public Health. He is interested in studying cost and quality of orthopaedic interventions in order to guide health policy.
Daniel Pereira, BS, is a fourth-year medical student at Vanderbilt University and a student member of the AAOS Resident Assembly Health Policy Committee.
Molly Day, MD, is a sports medicine fellow at Hospital for Special Surgery and chair of the AAOS Resident Assembly Health Policy Committee.
- Zhu JM, Hua LM, Polsky D: Private equity acquisitions of physician medical groups across specialties, 2013-2016. JAMA 2020;323:663-5.
- Murphy K, Jain N: Global Healthcare Private Equity and Corporate M&A Report 2018. Available at: https://www.bain.com/insights/global-healthcare-private-equity-and-corporate-ma-report-2018/. Accessed October 15, 2020.
- Kane CK: Policy Research Perspectives. Updated Data on Physician Practice Arrangements: For the First Time, Fewer Physicians Are Owners Than Employees. Available at: https://www.ama-assn.org/sites/ama-assn.org/files/corp/media-browser/public/health-policy/PRP-2016-physician-benchmark-survey.pdf. Accessed October 15, 2020.
- Moses MJ, Weiser LG, Bosco JA III: The corporate practice of medicine: ethical implications of orthopaedic surgery practice ownership by non-physicians. J Bone Joint Surg Am 2020;102:e53.