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Private Equity and Physician-owned Practices and ASCs

July 14, 2023

Jim Freund

In collaboration with Beckers ASC Review

Private Equity and Physician-owned Practices and ASCs

Lessons learned from South Bend Orthopaedics and Sports Medicine, a partner practice of OrthoAlliance

For decades, physician-owned practices and ASCs have been partnering with companies that can help them scale, grow and operate more efficiently. Over the past several years private equity firms have vigorously pursued these strategic partnerships, focusing on forging alliances and building platforms that can power surgical facilities’ business models and growth objectives.

Becker’s ASC Review recently spoke with A.J. Mencias, MD, president of South Bend (Ind.) Orthopaedics and Sports Medicine, and Jim Freund, managing partner of ASCs Inc., about what’s driving the growing interest in private equity partnership with independent practices and ASCs and how physician-owned facilities can make the most of this opportunity.

South Bend Orthopaedics has been one of the leading Orthopaedic practices in the Midwest for over 75 years. ASCs Inc. is an advisory firm that has represented over 300 physician groups that have gone through the process of evaluating strategic partnership options and formed alliances with organizations that have enabled them to best realize their goals.

Question: What spine procedures do you expect will become more prominent in the ASC setting over the next three years?

Jim Freund: While PE-backed firms have long been in healthcare, they have seen the paradigm shift to outpatient care models and are focused on investing in specialties they see growing exponentially over the coming decade. This has been driven by many factors, including payers taking a more active role in directing patients to high quality, lower cost of care settings, a growing population base, and advances in technology that allow more procedures to be performed safely in ASCs, along with both physicians and patients demand for more convenient and efficient sites of service. Considering these trends, interest from the investment community will continue.

Dr. Alberto Mencias: I believe most medium- to large-sized private orthopedic groups should consider some form of consolidation to scale their operations and increase efficiency or roll up into a PE-supported management services organization (MSO). The competitive landscape — including payer issues, hospital competition, multispecialty clinic acquisitions and steerage and decreasing reimbursement — is more than most standard-sized private groups can keep up with and is making them consider different pathways for growth, diversification and risk mitigation.

Q: What has your experience been so far with this partnership? What benefits has it yielded? What challenges have come up?

AM: The partnership has had a successful beginning, with early wins for our organization. The experience so far has been great, with the OrthoAlliance leadership team being very transparent and patient with the onboarding and integration process.

We have already seen increases in operational efficiency and improvements in cash flow management, data analytics utilization, third-party negotiations and strategic partnerships. This applies to the clinical practice, the surgery center and ancillaries.

Q: What advice would you give to practice and ASC leaders considering such a partnership? What are the essential elements of success?

AM: Groups considering a PE partnership must first and foremost consider what the needs of their group truly are. Then, call and speak to as many physicians and colleagues
as possible who have experience in the MSO side of their specialty practice. Research, learn and read as much as possible, so you can be knowledgeable about PE involvement in medicine before entering into the process. Consider a strong advisor or an investment bank to help you with the process. Make sure your legal and accounting teams have experience in these types of deals.

The elements of a successful partnership with a PE-backed MSO are mutual trust between the group and MSO leadership, open lines of communication, transparency, strong physician involvement and choosing an MSO whose long-term strategy and business style you agree with.

JF: The advice we most often provide when first meeting with physicians is that this is a once in a lifetime transaction and, without the experience that comes from doing this many times, it is simply not reasonable to expect that you would end up with an optimal outcome. The second is that every prospective partner is different, you need to thoroughly evaluate every buyer, after all a bad partnership is worse than no partnership at all. Along those same lines, remember, when you run an evaluation process, you are under no obligation to move forward with a transaction unless you find the right partner.

We have found that the most successful partnerships result from physician groups clearly identifying their goals and evaluating all their potential options, which is exactly what Dr. Mencias and his group did. Whether it is providing senior partners with a means to transition the business, providing a pathway forward for more junior partners, growing the business, recruiting and retaining new physicians

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