Analysis: Private equity interest in orthopedics increases

• There have been 17 private equity deals across the globe related to orthopedics so far in 2019, according to data from an industry research firm as reported in a Modern Healthcare article.
• The number of private equity deals centered around orthopedic practices so far this year already matches all of 2018, according to Modern Healthcare.
• Orthopedics is a potentially lucrative area for private equity as the number of joint replacements is expected to increase as the population of older American grows rapidly.

Modern Healthcare is reporting that, “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. 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.

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.”

Takeaway

Why is private equity interested in orthopedics? Demographics, as called out in the Modern Healthcare article, is one side of the equation. The other piece of it is payment policy.

The outpatient prospective payment system final rule allows knee replacements that are performed in ambulatory surgery centers (ASCs) to be paid for by Medicare (currently Medicare will only pay for them if they occur in either the hospital inpatient or outpatient setting).

Additionally, the rule removes hip replacements from the inpatient-only list (so they’re now covered when performed on an outpatient basis), which is the first step to coverage in an ASC.

In a previous blog “Analysis: Moving joint replacement procedures to the outpatient setting,” I discussed the potential margin impact (both in terms of volume impact and Medicare profitability per case) of this shift.