Philadelphia-based Rothman Orthopaedic Institute is on a rapid growth trajectory with its eyes set on becoming a national brand in the next decade.
To facilitate this growth, leaders at Rothman recently developed a business model to ensure incoming physicians will boost the value of the independent practice and not dilute the revenue spread across the organization.
Alex Vaccaro, MD, PhD, president of Rothman Orthopaedics, spoke to Becker's Spine Review about the business model, how to reach a consensus among physicians in large groups and the biggest healthcare trends he is monitoring.
Question: We're seeing a lot of large independent orthopedic groups expanding in recent years. How big is too big for large orthopedic groups?
Dr. Alex Vaccaro: If you look at any professional organization, such as an architecture group, law or medicine, there's a sweet spot where the group begins to involute and fall apart due to inequities in the compensation structure. That's usually because groups begin to separate into tiers of performers, like the top 20 percent, the middle 60 percent and the bottom 20 percent. As the group gets bigger — depending on how you structure overhead and cash flow — those at the top will feel they're supporting those at the bottom, and that's why professional groups reach a critical size and often break up when there is a financial stressor in the market such as COVID.
We're constantly re-examining our business model and strive to be accretive, not dilutive. For example, if you have a professional group of about 20 physicians of the same specialty working hard, then everyone will make approximately the same amount of money. But when you have 200 physicians in a group, you're going to have some really busy physicians and some not so busy physicians, and reimbursement for different specialties will cause further discrepancies in income.
What is important is that everyone contributes to the well-being of the group so no one specialty feels like they are shouldering a greater burden of the cost of business. You try to come up with an overhead structure that is fair, with people feeling that they're getting their money's worth, they're covering their overhead and taking home what they think is appropriate. If one division feels they're providing more services and not getting fairly compensated, then it'll never work.
When you bring new physicians into a group, you want to make sure they're not diluting revenue spread over the entire group. Make sure they're accretive, so they're increasing the value of the organization. There are many different ways of doing this, but this strategy will allow further growth of the group over time in a fair and transparent manner.
Q: How have physicians in your group responded to this new model?
AV: The way you get things done in a big group is to carefully decide on strategic committees that guide the business and make sure you get leaders that develop consensus without hidden agendas. It's not a top-down decision-making process. You set up committees that have stakeholders from every division (sports, spine, hand, etc.) and different income brackets so the entire enterprise is represented. Consensus only comes through multiple meetings where you work things through. Not everybody agrees on the first meeting. Not everybody agrees on the second meeting. But soon transparent discussions at the third, fourth or fifth meeting will bring consensus while maintaining respect among all stakeholders.
Q: In the quest to maintain independence, do you see more orthopedic groups affiliating with private equity firms and management services organizations?
AV: Private equity provides an infusion of capital, which may help some orthopedic groups invest in ASCs, infrastructure and develop value-based care programs. Most private equity organizations want a majority stake in an orthopedic group, but the question is, what's next? Someone has to make money, so when you have an outside investor with a large investment in these groups, there has to be some sort of return. The return prior to private equity was invested back into the business, so care must be taken to make sure these arrangements invest in growth and quality patient care and not for the profit of the investor.
The private equity movement is going to be big for the next five years maybe, but what happens afterwards? Who becomes the final buyer? Nobody really knows right now, but I think physicians have to determine the direction of healthcare and not let big business determine the direction of American medicine. The group has to decide if they want to confront future economic challenges independently or if they want to do this with a large healthcare system that focuses on patient care or with a private equity group that is focused on care efficiency. Private equity partnerships will only survive if they reinvest in the patient.
Q: How does this new influx of private equity organizations differ from those of the late 1990s?
AV: I was involved with a private equity deal in the 1990s. I didn't see the value of it back then. It was structured then as a 30-year stock arbitrage deal leveraging physician debt, market forces and outside investment capital. Now, most deals rely on a physician scrape model over a five- to seven-year horizon with multiple bites of the apple where a group is sold piecemeal over time. Instead of giving physicians stock, they're giving them cash. If you have an organized orthopedic group that is focused on value-based care and is not fragmented, then what is the value proposition of outside capital unless you need it for further growth?
Private equity firms are focused on their business model of organizing care to be more efficient and investing in the infrastructure needed for value-based programs such as outpatient ambulatory care. This allows care to be provided at the least expensive point of contact. Before venturing into a private equity deal, make sure you are doing it for the right reason, so at the end the patient benefits, not the physician or outside investor.
Q: What other healthcare trends are you keeping a close eye on?
AV: The American Academy of Orthopaedic Surgery has invested a tremendous amount of time in understanding the value of virtual reality and augmented reality and how those technologies would benefit patient care. We are seeing the evolution of robotic and navigation systems in the operating room as well as how to improve minimally invasive techniques. The academy has spent a lot of time and money understanding VR/AR and these technologies may have a huge impact on spine care, allowing surgeons to focus on smaller incisions, less tissue disruption, with less potential for injury to surrounding nerves and vessels. I think that's going to be the next big thing.