January 29, 2023

Volume XIII, Number 29


January 27, 2023

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January 26, 2023

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Continuing Consolidation in Orthopedic Medicine

Physician consolidation continued on a robust pace this past year, despite, or maybe because of, the Pandemic. Physician-owned orthopedic practices appear to be no exception to this trend. Interestingly, orthopedic physicians, including spine physicians, are among the most independent of all physicians and have long resisted the urge to sell or combine their practices. This desire to remain independent has been supported by the leverage these practices have by reason of their ownership and operation of ambulatory surgery centers or, in some cases, physician owned hospitals, imaging, physical therapy, orthotics, and durable medical equipment. However, and in spite of this desire for independence, as well as the means to do so, business combinations among orthopods show no signs of slowing.

Current Deal Structure Trends

During the past several years much of the transaction volume centered on practice recapitalizations by private equity (PE) sponsors. Depending upon the demographics of the group, these transactions can have significant appeal. Groups with senior members who are interested in an exit from the practice at double-digit price multiples (of EBITDA) coupled with access to capital and management expertise often find a PE sponsor transaction attractive. The downside of PE transactions can be reductions in current compensation and loss of control of the practice.

In addition to PE deals, we are seeing the development of “super” practices arising out of the merger of two or more independent groups. These consolidations likely are an attempt to ward off health systems and PE sponsors seeking to acquire the involved groups. Obviously, these deals help the combining groups avoid giving up both business and clinical control of their practices. Moreover, they can provide the combined groups with larger borrowing bases and, if done with the right, geographic contiguity to increase their relevance with payers and health systems. They also may be an intermediate step to develop a larger platform before going to market to look for a capital partner.

Relevant Legal Issues

With the pace of the above-described transactions showing no signs of slowing, it is appropriate to review certain of the most critical legal issues that any buyer or group considering a transaction must take into account. Failure to account for these issues may not only subject the practice to regulatory liability, but the fines, penalties, and damages resulting from those liabilities have the potential to cause significant loss to the buying entity or merging groups.

Orthopedic practices are among the most leveraged—in terms of ancillary services—in the medical industry. The ownership of, or investment in, ancillary services can bring with it legal risk if the ownership, investment in, referrals to or billing for, the services or goods attendant to those ancillaries are not structured properly. In addition to ownership of ancillaries, these practices have significant relationships with other providers, most especially hospitals. Those relationships carry with them additional issues that require vetting by counsel to buyers to avoid unnecessary risk. Finally, billing and coding mistakes can have an adverse effect on earnings, value, and create compliance concerns. 

Ambulatory Surgery Center Investments

It is quite common for orthopedic surgeons, or their group practices, to own interests in one or more ambulatory surgery centers (ASC). While ASC investments do not implicate the self-referral provisions of the Stark Law (found at 42 U.S.C. Section 1395nn) an investment by an orthopedic surgeon, or a practice owned by orthopedic surgeons, implicates the Federal Anti-Kickback Statute (AKS) (found at 42 U.S.C. Section1320a-7b). 

Common recapitalization or merger structures often involve the purchase by the buyer or the merging parties of all or a portion of ASC investments. Thus, compliance with the AKS is vital to the health of the overall relationship. In this regard, it becomes important that any party to a transaction consider (among other things):

  • Whether distributions paid to each investor are proportional to his, her or its percentage ownership interest in the ASC.

  • Whether the ASC is an “extension” of the practice of the particular physician, or physician owners of any entity investors.

  • Is the ASC owned individually by physicians or by an orthopedic practice and, if so, are there any owners of the practice who do not use the ASC, and why not?

  • Under what circumstances must any investor sell or surrender his or her ownership interest in the ASC?

In addition any investor in, or merger partner with, an orthopedic practice that involves an ASC will want to look at matters such as “out of network” billing. For example, a buyer should ascertain whether or not the ASC bills out of network, and, if so, are the ASC’s billing and collection practices compliant with relevant state and now, Federal, law regarding commercial insurance billing? This is especially important given new legislation and regulatory guidance regarding surprise billing.

Finally, while not a compliance issue, we often see deals get delayed, or potentially derailed, because certain ASC investors refuse to consent to the transaction or try to extract concessions in exchange for that consent. For example, it is not uncommon for an ASC to have one or more non-physician investors, such as a hospital or health system and/or a proprietary manager/investor. These investors may have the right to consent to some or all of the transaction. It is wise to treat these consent issues as initial “gating” items in order to avoid unpleasant surprises late in the deal.

Ancillary Services Regulatory Issues

Many orthopedic practices own and bill for one or more of the following ancillary services: imaging (e.g., MRI), physical therapy, durable medical equipment (DME) and orthotics. The ownership of these services by an orthopedic practice may implicate the Stark Law, a federal anti-referral statute that prohibits certain referrals by a physician of the above described ancillary services (referred to as DHS, an acronym for “designated health services”) to any entity with which the physician has a financial relationship, whether through ownership of the entity or a compensation arrangement, with the entity. The entity is also prohibited from billing Medicare or, possibly, Medicaid for such referrals. This broad prohibition, however, has a number of exceptions that allow for such referrals so long as the conditions for the exception are fully and precisely met. Violations of the Stark Law can render referrals to the practice illegal and can negate the practice’s billings to Medicare and possibly Medicaid (because they are not payable if billed in violation of the Stark Law), requiring repayment to the Centers for Medicare & Medicaid Services (CMS) along with possible penalties and fines. In addition, the practice can find itself alleged to be in violation of the Federal False Claims Act or Civil Monetary Penalties Law, which carry their own fairly harsh penalties.

The good news is that the Stark Law recognizes that physician group practices, including orthopedic practices, own and their owners refer to, DHS. The bad news is that it is incumbent upon the practice to ensure that it meets at least one exception to allow for the referrals and to allow the group to bill for the services referred. The most common exception used is the “in office ancillary services (IOAS) exception,” a complex set of rules that (i) looks to where the services are provided, (ii) looks to how the services are accounted for and billed and (iii) whether or not the practice is a so-called “group practice,” the definition of which contains a separate set of requirements that need to be met with specificity. Assuming all conditions for the IOAS exception are met, the exception protects referrals of ancillaries (excepting most DME) within a group practice, regardless of whether the referral comes from an owner or an employed/contracted physician. It is noteworthy that requirements of the IOAS, including compliance with the definition of “group practice” are well beyond the scope of this discussion, but should be reviewed, in depth, with counsel knowledgeable with them. As noted above, non-compliance with the Stark Law’s requirements can be costly.

COVID-19 Related Issues

Two years into the COVID-19 pandemic and we are still grappling with its impact—including its impact on deals—especially as new variants emerge and case counts wax and wane.

Early in the evolution we saw elective procedures, including orthopedic and spine procedures, halted and we continue to see some states and health systems halt procedures as variants cause upward spikes in cases. These lapses in volumes can complicate pricing in transactions as 2020 and 2021 volumes may not be reliable indicators of long-term performance by either under, or over, stating revenues and have led some investors to put certain amounts of purchase price, or other types of compensation, at risk. Traditionally, compliance counsel has looked askance at payments that are at risk, such as those involving earn outs or other contingent compensation, for fear of violating the Stark Law or the AKS. However, we have seen arrangements that adjust for volume differentials while remaining compliant with applicable law. These arrangements must be carefully structured, however, and should be reviewed by compliance counsel.

The pandemic also saw a sizable influx of cash payments by the government to providers of health care including Payroll Protection Program (PPP) payments and Medicare Provider Relief Funds, most of which emanated from the CARES Act of 2020. In the event a group or an ASC received any of these payments, investors or merger partners should take care to determine whether or not certain payments, such as PPP payments, were appropriately sought and, further, have been forgiven. As for Medicare advances it is important to ensure that group or ASC appropriately reported and accounted for these payments.

Hospital Relationships

In addition to referrals within the group, orthopedic physicians have significant referral relationships with hospitals, such as space or equipment rental arrangements, medical directorships, on-call arrangements, co-management arrangements, and joint ventures. These relationships can implicate both the AKS and the Stark Law and must be reviewed to ensure that they comply with relevant AKS safe harbors and Stark Law exceptions in order to avoid putting the group at legal and financial risk.

Billing and Coding Compliance

Mistakes in coding and the billing of procedures or services affect the quality of an orthopedic practice’s earnings (if one assumes, for example, that these practices could trade somewhere about, or above, 10x trailing twelve months earnings, a dollar of miscoded earnings will cost $10+ in value) and create compliance concerns. Common errors can include billing for physician assistants, i.e., billing their services as “incident to” the physician service without the proper supervision or when otherwise inappropriate, improperly describing and coding visits, procedures and related items and services, and incorrect levels of supervision over in-office ancillary services such as imaging or physical therapy. An audit by an outside party is often merited to assure that risks in this area are minimized. 


Orthopedic practice recapitalizations and combinations between groups are evolving at a steady pace. Given the multiples at which these practices will trade, vetting critical legal issues is crucial to ensure buyers of legal and regulatory compliance and maintaining value for the prices to be paid. 

© 2023 Foley & Lardner LLPNational Law Review, Volume XII, Number 12

About this Author

Roger D. Strode, Foley Lardner, health care business transactions lawyer, mergers and acquisitions attorney

Roger Strode is a partner and health care business lawyer with Foley & Lardner LLP where his practice focuses on health care business transactions, including mergers, acquisitions, corporate restructurings and joint ventures, general corporate matters and health care regulation. His experience includes the representation of institutional health care providers (hospitals, health systems and integrated delivery systems), large physician groups, specialty providers (ASC development organizations), health care private equity firms and industry consultants. Mr. Strode is...