The orthopedic physician group space continues to be one of the most active in terms of private equity (PE) strategic alliances and investment activity.

The orthopedic physician group space continues to be one of the most active in terms of private equity (PE) strategic alliances and investment activity. Although PE investment interest in orthopedics will likely continue in 2023, there are several factors that will cause investors to be more scrutinous. Rising payroll costs, changing reimbursements, higher interest rates, and other macroeconomic factors are causing PE buyers to be more cautious with their target acquisitions.

Approximately $1.2 trillion of investment capital is currently being deployed within the U.S. PE investment activity. This investment is within both the physician practice management (PPM) sector and the orthopedic practice sector specifically and remained strong through the majority of 2021-2022.

Some of the primary drivers or motivating factors for PE’s appetite for orthopedics include:

  1. A large demand for orthopedic treatments and a short supply of orthopedic surgeons in the US.
  2. The long-term sustainable growth of orthopedic services.  
  3. A highly fragmented specialty.
  4. Rising reimbursements.
  5. Financial and competitive challenges facing independent practicing physicians.
  6. The recognition of the advantages of being part of a larger organization and ultimately achieving better clinical outcomes.
  7. A desire to “jump on the bandwagon”, or “fear of missing out” (FOMO) as physicians see more of their physician peers doing deals with PE.
  8. Physicians have the opportunity to unlock or realize the value of their orthopedic practices (and take advantage of the tax code), and hedge against future uncertainties and potential devaluation of their clinical practices.

The primary factors PE investors consider when evaluating a potential acquisition are:

  1. Group size (number of physicians and mid-level practitioners).
  2. Number of locations and geographic breadth.
  3. Reputation in the local market.
  4. Experience with value-based care.
  5. Management team.
  6. The type and extent of ancillary clinical services the practice has and/or could have in place.

Today, the orthopedic sector is optimally positioned for continued PE investments because of the highly fragmented nature of the orthopedic practice market.  In addition, it provides a significant first-mover advantage for orthopedic practices that have the size, scale, and infrastructure to capitalize on these opportunities.

According to an article by Gary Herschman, JD, Anjana D. Patel, and Hector Torres, JD, in the Journal of Orthopaedics Experience & Innovation,  as of the end of 2020, there were a total of eight (8) PE firms that invested in orthopedic groups[1]. Currently, there are more than fourteen (14) PE-backed orthopedic platforms seeking to consolidate musculoskeletal physician practices.

Valuations are Rising

This strong demand is creating robust competition amongst PE firms, hospitals, and strategic healthcare companies for orthopedic practices, which is pushing valuations higher.  As such, more orthopedic groups are now considering a sale or alliance with a PE orthopedic platform.  Furthermore, we anticipate growth in the number of PE groups entering the orthopedic space, followed by growth via the bolt-ons of smaller groups. The demand for orthopedic treatments and procedures continues to grow for inpatient and outpatient surgeries, generating an estimated $110 billion in revenue annually. Meaning, there is still more market share to gain.