Today, our speakers are Gary Hirschman, who is the chair for Epstein Becker Green on health care transactions, and Dana Jacoby, who is the chief executive officer for Vector Medical Group. Now, I'll turn it over to Gary and Dana to get us started. Welcome, Gary and Dana. Nice to meet you all. Thank you for Jessica and AAOE for having us today for this webinar. Yes. Thank you for having us. Again, I echo Gary's sentiments, Jessica. We're very grateful to AAOE for having us for this very important topic kicking off 2025. I'm Dana Jacoby. I'm the founder and CEO of Vector Medical Group, and Vector is a firm that's been in existence the better part of a decade. It helps doctors and CEOs architect their futures. So a lot of times with what we're talking about, we are prior to a decision on what a group wants to do with their futures. So anyway, we are grateful to have us, and hopefully we are good with the IT side of the business and we can move forward. Yeah, and it's Gary Hirschman here. I'm just going to reshare my screen. I'm a partner, a health care transactions attorney at the law firm of Epstein Becker & Green, and I'm sorry for not having this working right away. And I've been, for over 30 years, been representing health care providers, mostly physician groups across the country on major transactions, and speak at national conferences, including Becker's and AAOS, other AAOE conferences, ACUS, and OrthoSummit. So you heard about Dana, and I just want to start, our goal here is to educate you on the challenges that are facing orthopedic groups, and the fact that orthopedic groups in response to that are looking at strategic options. But our goal is to educate you as executives regarding these issues so that you could be smart about them and help your physicians understand them. So everybody knows that Medicare payments are declining, they have for the last five years, and at the same time, due to inflation, costs are increasing, which means doctors are making less money. So there's a lot of, as a result of that, and various other factors, orthopedic groups are looking at strategic options. Some of them are staying the course and continuing to be independent. But this kind of shows a summary of, you know, they're looking at mega groups, hospitals and health systems, strategic companies like USP and Surgery Partners, joint ventures, and also private equity down here on the left. And there's just been a lot of private equity recently, as you may know, and we'll get to it in a minute. There's a lot of private equity platforms in orthopedics. But over the years, this year, we just got the total. So it wasn't on the slide. But early this morning, I got the total. There was a drop in the number of transactions last year. Last year was a slow year. It was around 242 transactions. So about 100 less than 2022. But what we see is that kind of like 2020, which was the COVID year and an election year, due to inflationary issues and costs going up, and the election year, there was a bit of a decline last year. But in light of the election being over, and interest rates coming down, and inflation starting to get under control, we're starting to see a lot of interest this year and getting a lot of incoming calls. In regard to outpatient care, everyone knows everything's moving to the outpatient setting for cost efficiency to try to keep the rising costs of health care in general across the country down. So we see on a macro level, companies like Optum, CVS, Aetna, Cigna, Walmart, Walgreens, all doing a lot of consolidation within health care. And then you have private equity consolidators and also large health systems. So the consolidation has been expanding as you get these bigger and larger and larger every year companies in the health care space. So let's talk about orthopedics. So orthopedics in private equity, there are 18 platforms now, including some new ones, with Zenith just getting in the game at the end of last year with Ortho New York. Surgery Partners has been active acquiring orthopedic groups. And if you just go down United Musculoskeletal, some of these that have been around for three years or more, you'll just see there's more logos of groups that have joined them. Some of them are slower to grow. Some of them are quicker to grow. And if we go to the next slide, it just shows the balance with Hopko being the first consolidator back in 2017, so over seven years ago, Orthopedic Care Partners, and then all the others up here. And so that's the update on that. There's just a lot of groups, over 100 groups, that have made these private equity affiliations. So I'm going to turn it over to Dana to help you understand why this is happening, and a lot of it has to do with the challenges facing orthopedic groups. Yeah, thank you, Gary. And I tell you, just even, I keep joking, 2025 is coming in hot. It's incredible. Even this year already with some of the biggest groups in the country in this space, we've had conversations about what do we do with reimbursement going down? We have to build more ASCs. The market consolidation, to Gary's point, private equity has been here now for quite a few years, since 2017. We haven't seen as much of it until the last year is Optum is now in the space formally. They have invested pretty strategically in one of the largest groups in the country. SCA, Surgery Partners, is coming into the space. They just invested in one of the largest groups in the country. So all of a sudden, your market consolidation, not just on the private equity front or the hospital front, but now you have new players that are more strategics, not strategically, but strategics in this space, and we're watching some of this joint venture stuff going on between 800-pound gorilla and 800-pound gorilla. So you might have a hospital and a private equity or a hospital and surgery partners. Very interesting times. I mentioned reimbursement, but this just breaks my heart. Every single time we have these conversations, we are, again, facing pretty substantial reimbursement degradation for orthopedics, MSK, and ancillaries around that space. CMS has actively been talking with AUKUS and other large institutions in the orthopedic space and basically said, guys, it's real. This value-based care bundle payment initiative stuff is coming, and it's coming in hot for you quickly. Orthopedics, when you include some of the RA and OMA, it ends up being roughly a third of medical spend. And there's a lot of focus, a lot of spotlight on our groups for that endeavor. So we're really important that our groups are focusing on this. This is one of the main reasons driving some of the uptake in some of these groups selling or being invested in by somebody else. I mentioned the power players, but primary care is also now funded by some larger institutions. I know I live in Denver, Colorado. In Denver, New West is owned by Optum. They're our largest primary care group, and one of the things that they are doing is being able to funnel referral sources to the specialists. But they're a huge voting block, obviously, in the state, and we're watching that around the country with primary care being owned by multiple different sources. I mentioned value-based care, and we can go on to the next slide, but value-based care, I keep dusting off old PowerPoints from 20 years ago. It's getting very materially real this year, and a lot of our groups are doing a good job with direct contracts with employer groups. So not just looking at value-based care or things where they're focused on bundle payment initiatives. We have a group in Wyoming that's done a phenomenal job with our largest employer groups doing direct contracting opportunities with employer groups. We have another group right now in the Midwest that's doing a direct contract with the largest transportation company in the Midwest. So that's one way groups are trying to get around some of the reimbursement and degradation. It just unfortunately takes a while to get these contracts negotiated. So it's not a foolproof opportunity, but it definitely is something that groups are targeting in 2025 and beyond. The last three, they kind of all go together, but after the pandemic, which I know feels like it was 20 years ago, but things are coming into the MSK and greater orthomarket cybersecurity. I mean, I just paid mine for my own company. It's incredibly expensive now to run a business from an IT expansion standpoint. If you are going to do direct employer contracting or value-based care, you have to have the ability to report your outcomes. A lot of our groups struggle with how to do that effectively without good IT infrastructure. There is a major shift, especially in your specialty on shifts to ASCs. If you don't have an ambulatory surgery center, or if you co-own it with someone else, that's definitely something that's going to hamper your independence and your ability to negotiate some of these contracts long-term. And then last but not least, but we're watching, I mentioned this earlier, 800-pound gorilla meets 800-pound gorilla. We're starting to see joint ventures and new healthcare models. So being able to anticipate change at a high level, if the leader in a large orthopedic group is just critical to the future success of your ability to manage the business. Some of the things that we're seeing with the private equity investors or some of the other strategic in the space is just the ability to move into the evolving landscape with oomph, with a lot of focus. So really something for our leaders to be knowledgeable about as the market continues to evolve. So when we look at, and we have conversations like this quite frequently. Like I said, 2025, I've already had with some of our top groups in the country, as has Gary, some of these conversations. Why do you even want to explore these strategic partnerships? Or I hear a lot of, oh, my group's not ready. We're going to stay independent. Absolutely fine, but it never hurts to start exploring early because you just never know. You never know when the winds of change are going to shift. And you also never know what you're going to be facing from a payer contracting standpoint moving into 2025, 2026 and beyond. So I mentioned most of these, but really being able to manage the uncertainties, it shouldn't be, we're going to stay independent or we're going to join a hospital or we're going to do a private equity deal. It should be on a realistic level, looking at the strategic opportunities around you in your region and nationally regularly to look at all of the things we just talked about, the top eight things that some of them are highlighted on this slide. Secondly, you know, and this is probably the biggest one I'm seeing right now is just the ability to have the benefits of a larger corporate infrastructure. Even if you are going to stay independent in your mind forever and ever, amen, everybody is going to need strategic alliances and partnerships in order to survive. So you can't just say, I'm going to put my head in the sand and be an orthopedic group without any strategic alliances. You have to have strategic alliances with your payers, with your referral sources, with your larger, you know, payer groups nationally. So really being able to have access to capital to play at that level is becoming one of the biggest pulls. Think about it. If reimbursement is going down three to 4% every year, and now you have to personally guarantee things like ASCs, IT expansion, et cetera, it's just the equation starts getting really broken very quickly. And so we're watching a lot of our doctors say, I'd love to stay independent, but I really could use extra help from a corporate infrastructure and investment standpoint in order to keep my group at the front line. I just want to add to this that, from the perspective of you all being executives of orthopedic groups, you need to see this as additional help for you, not replacing you. In these potential, in these partnership transactions, there's huge value put on the fact that there's a great CEO or COO or CFO at a medical group, or all three of them, if it's a really large group. And that kind of helps the value. They don't want to get rid of you. They know that the executives of successful groups, that they're part of the reason the group's successful. So this is just to add additional resources for you as the executives running the group to be able to do your job better. 100% Gary. I think a lot of our executives on this call feel that pain of they want to hire, they want to invest in additional things. They see the value of the vision of the future and it's being able to convince the physicians to invest in that future, just can be a lot more helpful with a capital partner at your back. And then last but not least, we put this last for a reason, but a lot of physicians and administrators don't realize there is value to the medical practice. I don't know if, when you go into your financial advisor, you probably don't say, oh, by the way, I also run this medical practice. These medical practices are very, very lucrative and they are gonna be for the future. It allows you to take some chips off the table at the height of the valuation of the market. With this many platforms, we don't see the market just going up from here. The valuation is at the height of the market opportunity. So you really have an opportunity to maximize the monetization. And then the last bullet on here, it's hard to talk about, but it's real. Some of our status stories are doctors and administrators that really just didn't do anything. And then all of a sudden, sadly, they face some sort of life event. Every one of us is gonna have some sort of succession plan, right? It's just part of human nature and part of life. If you can prepare for that in advance, it just really helps to create the security and sanctity of the practice, and frankly, the legacy of the practice. Some of our more mature physicians are having a hard time finding younger partners that want to take over and be partners at the same level. And so this is a great way to get ahead of that moving forward. So I'll turn it, oh, I'm sorry, go ahead. No, I was just gonna say the doctors in the group, the shareholders, the partners, are gonna be appreciative of you as the administrative leader, CEO of their group, bringing these things to their attention, looking out for them and trying to position them for the future better. So that was gonna be my point on all three of these slides and your role as executives in helping to educate the doctors on these things. Correct, no, I agree, Gary. I almost feel, well, I shouldn't say almost, I feel as if this is your fiduciary responsibility to at least bring it up. We have a group right now that I said, if you don't bring this up and in the rear view mirror, they say, why didn't you bring this up? What a shame, right? It's a good way to get ahead of the regret that you might have for just not addressing that this is in the market. So it's really important to have these conversations early and often. Yeah, and we've been asked by executives, in fact, we're next week, Dana and I are heading out to make a presentation one evening to all of the partners of the group and the CEO is the one that organized it to help them understand the different strategic options. It's obviously more of a two hour presentation versus this 30 minute presentation. So, but we do help educate and answer questions on that. So we want this to be very practical, right? So we are gonna end this the next 10 minutes and then open it up for questions to practical recommendations for orthopedic groups when considering and exploring strategic partnership transactions. And so the top two most important things, we kind of crunched them on one slide because they're equally number one, which is that doctors and their executives, you guys, everyone needs to make an informed decision. Sometimes there's an initial negative reaction to private equity or other types of partners. But what's most important is for everybody, the executives and the doctors to be informed before making a decision. We've looked at all of our options and what's best for us to do right now. And again, it says it right there, a strategic partnership is not right for every group, but you shouldn't come to that conclusion without really diving, and the doctors shouldn't, without everybody together diving in and understanding and getting fully informed about the different options that are out there. And the equal number one, but it's number two is culture trumps everything. So regardless of what someone is offering you, like let's say everyone agrees there should be some type of partnership, we should join a private equity platform or a hospital or some other big national company. The key, because it's gonna help you in the future and position you and the doctors and the whole group for the future, you have to look at the people that you're dealing with on the other side. Do the doctors and you trust them as good people? What's the culture? Are you convinced that the culture is there? That's what this means. And so meeting with the people that are gonna be involved and spending a lot of time with them on the other side of the potential, on the potential partner side is crucial. And you need to get convinced and the doctors that this team are very experienced and they can really help us and they have experience and they can execute on their plan to help improve our practice. And they've done it before. And we're gonna talk a little bit about diligence in a minute. And is everybody on board with their philosophy, business plan, what they have to bring to the table? Again, culture is everything. In fact, we've worked with groups where they picked the third highest bidder, they knew they needed help. So they got over that hump, but it wasn't the biggest purchase price or financial terms that won the day. It's very common that that doesn't win the day. It's culture and a cultural fit with the group and comfort. One of the issues that is important is income repair. So the doctors do get some normalization reduction in compensation when doing a private equity deal, which is what creates the value. But everyone talks about all these private equity companies of income repair, meaning, hey, after two or three years, you'll be back even with that normalization. You'll be back because we're gonna help you get higher payer rates and help you with expanding or commencing new ancillary services or value-based care programs, economies of scale, group purchasing, all of these things. You need to satisfy yourself that, wow, they really can do this. And they've done it with other groups. And that's very important that it doesn't stay static, that they come back up and this helps in the long run. They also need to have a solid plan for recruiting new physicians. So every group we work with asks this, what about bringing in new docs? Well, the platform, the partner needs to tell you how they're gonna do that and hopefully show you their track record for doing it with other groups that joined them in the last year or two. Another thing to check on, because there's some bad stories out there, very few in our experience, 90 plus percent of these private equity deals have been very successful. But the ones that haven't, some of the ones that haven't are because they were over leveraged. So you need to do through your financial advisor, do they have too much debt? Is it a comfortable amount of debt? Because if they're over leveraged, it may impact their ability to bring all those benefits to the group and invest in the group. Doc to doc diligence, this is really important. If you're joining a private equity platform, the doctors themselves should reach out to doctors that joined this platform in prior years to ask, hey, what is the culture? Have they experienced income repair? Things like that. Do they tell you to work harder? Which they don't. Yeah, have they cut expenses? Which again, our experience is they don't. And so it's very important not to just reach out to the senior doctor in the group, but to mid-level and junior doctors. How has this been? Ask them off the record. Don't call the people they tell you to call. Call the other people at the platform. And if the platform also previously has other platforms like in GI or dermatology, reach out to those doctors because the private equity platform culture, it's meaningful to talk to other specialties that they've also invested in. So again, this is good kind of due diligence. Another thing that's very important is getting your house in order and in advance of exploring options. There are some really easy things that the group can do. And even if you don't do a transaction, these are important things for executives to know. So it does help the value of the practice in doing a deal. But even if you don't do a deal, it's important. And so, but if you do a deal, confirming that there's consensus amongst the doctors that we should do this. It's not like only half wanna do it and half don't. And that consensus also needs to be how are we gonna split the proceeds of a transaction? You should also check with tax advisors early on if there may be advantages to restructuring certain things or changing your corporate agreements before you do a deal, like way before, like before you even start looking into things. And then the basic regulatory compliance issues, these are easy fixes. I mean, if you are not doing these things, now it's gonna hurt you in a deal. And even if you don't do these things now, you should be doing these things like monthly exclusion checks on all, not only doctors, but all employees of a medical practice. Very easy to do this. Having corporate compliance program in place that's followed where people are encouraged to report non-compliance and not be retaliated against and to be self-auditing your billing and coding. HIPAA compliance, everyone thinks they're HIPAA compliant, but are your laptops compliant? Do they, are they password protected? All those kinds of things. Coding and documentation. Some groups, even though they think they're conservatively coding, are actually aggressively coding. That should be looked at. Mid-level practitioners, how they're billed, how they're supervised. Employment policies, just as an example, are you paying overtime per the overtime laws? Are you paying incentive compensation in a compliant way and following?

orthopedic groups

strategic partnerships

private equity

value-based care

healthcare consolidation

Medicare payments

IT infrastructure