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For this episode, Roger Strode, Partner and Health Care Attorney discusses orthopedics in the new millennium and the evolution of the business of orthopedic and spine medicine. Roger is joined by Dr. Todd Albert, Surgeon in Chief, Chief Medical Officer, and Korein Wilson, Professor of Orthopedic Surgery at the Hospital for Special Surgery (HSS).
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Please note that the interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!
Todd, maybe you can start out by giving the audience your perspective on how orthopedic and spine medicine, and the business of orthopedics and spine medicine has grown during the course of your career.
Dr. Todd Albert:
It's been an incredible evolution to watch. I graduated from my fellowship in 1993. The majority of people in those days were in a small group or solo practice, or maybe they worked in an academic department. But, no one owned anything. No doctors owned anything. I joined a group of six people, and over time, what I saw the first step was amalgamation of groups to become bigger. There was a perception by physicians that their income was dropping. It was the HMO [managed care] era, and individuals didn't get fee-for-service anymore. There was a perception by physicians that their income was dropping.
It was partially reality/partially perception, but it was a defensive move [for physician groups] to try and get bigger, first for negotiating purposes with insurance companies, etc. Then, as groups grew, at least our personal experience was, we wanted to leverage the ability of our growth to own things that were appropriately used to treat patients. What I mean by that is we ordered orthotics, braces and things like that all the time. It was just to have control of the braces we ordered, the quality of what we ordered, the physical therapy that we ordered, really for control.
The secondary effect, especially in musculoskeletal medicine (orthopedics) was that it became an ancillary stream of revenue. By owning the things that you would prescribe in the necessary kind of process of care, you started to see accumulation of your business assets.
The natural [progression] was to go from orthotics, to PT, to then surgery centers, and ultimately at least we in Philadelphia, went to hospitals. Much of it was around control of quality, but it became also an ancillary revenue stream so it served two purposes. Now, this Hospital for Special Surgery was a different purpose. It started 153 years ago as a single specialty hospital when James Knight, who was the Founder, was trying to treat poor kids with Polio in New York City out of his house. He wasn't even a surgeon.
Then the second Surgeon in Chief, Virgil Gibney, was a surgeon. It was almost heresy that he performed surgery on people. From there, it's grown to what you described. It's the largest musculoskeletal academic medical center that's solely focused on musculoskeletal health. There's a huge advantage, as I had just alluded to, in a smaller group setting because a huge advantage to being singularly focused with no distraction of transplant medicine, cardiac medicine, GI medicine, where we can deliver care to patients that is really hard to compare to in a general hospital.
I think that's a huge advantage when we talk about delivering the best care, but it's also a huge economic advantage to be able to singularly focus on musculoskeletal care. Our not for profit hospital is very, very successful as a business model because we focus and have every single thing dialed into what delivers the best care for the patient.
Correct me if I am wrong, but a number of years ago a Harvard professor, a woman by the name of Regina Herzlinger, wrote a book. I believe was called Focused Factories and I think the premise of her book was when it comes to health care that the focus factory is really the way to go. It sounds like, and without skipping too far ahead because I do want to dive into the business of the Hospital for Special Surgery a little later, it seems to me that the Hospital for Special Surgery, it's little bit like Sloan Kettering, it's a little bit like the MD Anderson, but yet in spine and orthopedic and musculoskeletal medicine, that that focus is really what's made you guys as successful as you are.
Dr. Todd Albert:
You're 100% correct. I came from a general hospital setting where we tried to create a focus factory by owning a hospital, which we can talk about. But I think it is 100% correct. Just to take Regina Herzlinger's thesis a step further, what she said is that hospitals and doctors should become much more like McDonald's or FedEx, where you do the same thing over, and over, and over again to perfection. I think that's to your point, the way to deliver the most efficient cost effective care.
One of the things that I would like to spend a little time talking about is the growth of the large orthopedic group and the interests of both hospitals and now, specifically private equity, in the acquisition of orthopedic medicine. What I want to talk about a little bit and explore with you is, as a disclaimer, I realize you're in private practice and you are at the Hospital for Special Surgery have sort of a very unique model, and please correct me if I'm wrong, where many of you are just in a single physician practices.
You have your own single practice, which today can be almost impossible to do in most markets to have just Todd Albert PC, or Todd Albert PA. The hospital does employ some physicians, but you guys are all in some very small practices, which you just don't see anymore. You're not really part of private equity, and you've not been approached necessarily by private equity.
I know that private equity has begun to turn its sights on orthopedics, and to me it seems natural from their perspective because of, as you said before, it's always struck me that orthopedics, if you consider leverage points and you consider all of the ancillaries, whether it's PT, and it's imaging, and it's DME and orthotics, its ambulatory surgery, in some cases it's physician-owned hospitals. You have tremendous lines of business that spin off individual income streams, and they like to say that people get wealthy when they make money while they're asleep.
Orthopedics seems to be one of the few practices left where a physician doesn't have to have his hands on a patient at any particular time necessarily to generate revenue for his business. Can you talk a little bit about the trend of the consolidation of big practices around the country, as well as where you see private equity going from your perspective? Because I am sure you've had plenty of conversations with physicians around the country as well as internally. And maybe some of the various pros and cons you see from a physician perspective.
Dr. Todd Albert:
I think that was actually a great lead up because the truth is, you described the Hospital for Special Surgery fairly accurately. We have grown, from when I came, by a lot of physicians. But almost except for probably four physicians, they are singular physicians, with what looks like under a practice manager, and the practice management is HSS. So you can't tell people are singular, because everybody has the HSS tag. That's a whole different model which works very nicely, and there's consolidation there. Let's put that aside for a minute.
Where I started at the Rothman Institute, we grew from, as I alluded to before, six physicians or seven physicians up to over 100. We were in the first group ... the first musculoskeletal group to join, if you remember, and this is an old term, "the physician practice management companies." They were rolling up. The first trend was rolling up physician groups with the idea of you'd give a third of your income off the top. It was a little bit of a pyramid. You'd give the 30 percent income for the rest of your life, and they would offer income growth, and more efficiencies, and ancillaries, and all those things.
That trend was very, very rampant in the mid- to late-90s. The industry collapsed a bit. What's happening now is slightly reminiscent of that in terms of groups getting bigger and bigger, as you said. In my opinion, the original driver was to get leverage, but not as much leverage for ancillaries, leverage to negotiate, to negotiate against hospital systems and to negotiate against insurers. In Philadelphia, it's somewhat of a unique market, some other unique markets in the United States where there were large insurers. There was Keystone, which was the Blue Cross product which was huge, and so we wanted to become big to have negotiating power, but we also became big so that we could own those ancillaries.
In my opinion, to answer your question to what I think about the private equity, we always were thinking about could we get as a multiple. But, I'm not sure if it's the best play, because many of these large groups, and people became large and then owned all the ancillaries and built it up so they would be attractive.
As far as I understand, for private equity you want to buy something, increase the value and then sell it and the average lifespan is a three to four year lifespan before the next transaction. Well if it's a really successful group, they're not maximized on their ancillaries but they're doing pretty well on the ancillaries and you have to say, "What is that infusion of private equity going to do build them up to get to the next level?"
There is the ancillaries, but if I was a private equity group I'd want to buy doctors who haven't exploited all those ancillaries yet and then build up the ancillaries and then sell them to someone else.
Todd, I think that is one of the questions that private equity is probably facing here. I have a little bit of experience in this, and you've got for example the large super groups like the Rothman, or the Ortho-Indie, the Ortho-Carolinas, these very, very large groups. You're right, they are maxed out probably already on the ancillaries that they've got everything they can possibly have, and even then some. They've expanded, they've made them better. Then the only way to grow in a situation like this is something that some of these groups have already done. They go around and they will then bolt on smaller practices onto them. From a private equity standpoint, I think that's the other way to grow because one of the ways they do it is they will take a platform practice and will pay a fairly sizable multiple.
It's no secret, we've seen the multiples in the 11/12 times trailing 12 months earning range, if not more. Then when they bolt onto smaller practices and they go out and acquire those smaller practices, those tend to be acquired at a substantially lower multiple, usually maybe half. So the idea is that then when you sell the whole thing, or you do the next trade whether it be three years out or seven years out, whatever it might be, you've got built in arbitrage between what you paid for those smaller practices and what you ultimately trade at hopefully higher than the multiple that you originally bought it at.
I'd like your thoughts here, it strikes me also that orthopedics is going to be a little bit of a tougher nut to crack, and it's been a tough nut obviously for hospitals to crack because you can imagine large hospital systems would love nothing more than to employ the orthopedic surgeons that fill up their surgical suites.
It's because of these ancillaries, and it's because of the entrepreneurial nature of orthopedic surgeons, they don't really seem to need the help growing in many cases. They don't need that outside capital, so what is it that would attract them? It would probably have to be something like just the equity downstroke, the ability to monetize part of their practice and then hopefully the equity that they take in return, in addition to the cash, will grow I suppose.
I guess I'd like to know and get your thoughts on is, do you see any of these super groups, do you ever foresee a national platform for orthopedic surgery where you could have a very large network of orthopedic surgeons all over the country that are all under the same maybe MSO [management services organization] model, or under the same [brand] ... flying the flag, whether it be an HSS flag or whether it be whatever flag. Do you foresee that happening?
Dr. Todd Albert:
I would love to see it, because it's been one of my little dreams or thought processes, as you were talking about private equity. What the really good play is if you could create that. I always make the joke that what I would like to see is a musculoskeletal insurance company, and people laugh at me. But if you think about the costs, if you look at large employers, the second largest cost, the second or first largest cost under their pay line is musculoskeletal injuries.
If you could get a national consolidation or a huge, huge supergroup to supergroup consolidation, and control the intake and the lives of all those patients, imagine you could go to really large employers and say, "What did you spend last year on your musculoskeletal health?" They have those numbers: Comcast, Google, everybody, American Express, has those numbers. "What'd you spend?"
What if our venture could decrease your cost by 25%, would you be willing to share that savings with us? And now, you have a new type of product that you're delivering. I think if there's going to be a play in that way, that would be the play for some smart organization to perform. We've talked about it in a different way at HSS, and it's a little embryonic in it's thought process. But it's a thought process of trying to create almost a musculoskeletal ecosystem.
In other words, trying to help people with their musculoskeletal problems both before if you think about the life cycle of musculoskeletal injury. There's prevention, just like there's cardiovascular prevention, but there's prevention in terms of getting your muscles strong, all the things that you do from childhood to old age to help your balance, help your muscle strength, prevention of fractures, falls, injuries all that, through those who have sprains and all those other things helping them either with an app, through access to care, to those few that need surgery taken care of then, to the rehabilitation.
If you think about that life cycle of care, we have some interests and a lot of knowledge in how to do that at our institution. We've had some discussions and actually almost a SWAT team put together of how to create that, both the door to get in or to have access to people, to provide both education and easy to get at prevention tools, to access to care on a global basis. We're not there yet, it's just an early hot off the press “patent pending” kind of thing.
Interesting. Very interesting. In that regard, and now jumping to HSS because again, I have found it to be such a fascinating place, having had the pleasure and the honor of getting to work with you and the physicians and the leadership at HSS on some of your ventures. Maybe you can talk a little bit about HSS' mission and some of the really interesting things that you're doing with respect to branching out and taking that HSS brand and that HSS intellectual property to different places in the world. You're doing some really fascinating stuff, and I think if you talk about the business of orthopedic and spine medicine given the fact that you guys are really on the bleeding edge of all of this, no pun intended, or pun intended, maybe you can talk a little bit about the work you guys are doing in Korea, and also in different parts of the United States. I think people would really find that fascinating.
Dr. Todd Albert:
Sure, I like to call it the "Bloodless Edge", not the bleeding edge, the bloodless edge. We have a couple of different ways. We have some of the best knowledge having been created, and experiential knowledge, with a long history of like I said, a singular focus, and some really, really talented terrific surgeons and non-operative specialists.
One of our principle missions is education. We start with some educational outreach across the world, with partners. We've stared such connections in a number of places, but two examples you've mentioned: one was Korea where we have relationships, where we help certain hospitals and systems to improve their care both through education, we do analyses and help them with their operating rooms and how they function and share our protocols.
We've [also] done so in Colombia. We have an agreement we just executed in Cartagena, Colombia with a new hospital there that is connected to a wonderful hospital in Bogota. We're helping them both to improve their processes and get off the ground in terms of improving their care. We've also executed an agreement with Aspen Valley Hospital in Aspen, Colorado, where we have a similar agreement to help them with their processes all related to musculoskeletal health.
One of the things we've done so that there's a partnership between our excellent physicians and the enterprise, the HSS enterprise, that you helped us with Roger, with something we called HS Squared, where there are physician investors ... you know you noted that we were somewhat individuals and physicians, a small number employed, 30% employed, but the rest individual practices under a physician practice management model that HSS is the physician practice manager but that people invested individually, and about 85% of our physicians invested.
It's essentially, for lack of a better description, a talent management agency. This group, HS Squared, is in charge of when we do these outside ventures, quality, the people that we involve, the physicians we involve, an oversight of the protocols and the improvement in care that's given. Also, when we create innovation, we help with the innovation as well.
That's a different kind of ancillary that's compliant in a partnership between the physicians and hospital. At least you have to tell me as my lawyer that we're compliant. This is now going to out to the world.
It is really a unique model that we all did build between the physicians and counsel on both sides, as well as the leadership at HSS, to harness of that physician talent. It's unique in that you do have all of these independent physicians, but you've come under one umbrella, you all own one company, and can share in the revenues that HSS generates from the hospitals in Korea, and in Cartagena, and in Aspen, et cetera, and the other places that you'll branch out into by providing that talent at a fair market value rate.
It allows all the physicians to participate in the distributions through that rather than just simply the doctors who are maybe sent down to Colombia, or head out to Seoul to do it. All the physicians get to participate. It's a pretty fascinating model.
Dr. Albert, I'd like to expand a little bit on this idea of HSS's growth strategy and where you see it going.
Where does telemedicine and digital health fit into that particular growth plan?
Dr. Todd Albert:
Telehealth is big all over. Everybody is dabbling in it. In the concept I alluded to in terms of a kind of an enterprise or an ecosystem, we view telehealth as the digital front door. So we're thinking of ways to create this front door, or an app ... I'll give you example of one I take care of, back pain.
We are early in the stages of creating – [an app for when]... you have back pain. You go to the HSS app, you get exercises, you might get a preliminary diagnosis, you make sure there's not red flags that you should see a doctor very soon, and you can go follow up and/or get a doctor in your area if you need that. I think it's going to be huge across the country and the world for people obtaining medicine. Our strategy will absolutely include a telehealth strategy.
We've seen an explosion of clients interested in telemedicine and digital medicine, and it'll be very, very interesting because if you kind of look at the growth curve of telehealth/digital medicine right now, a lot of these companies tend to be VC-backed, but we're starting to see more and more of them actually start to cash flow and as they do that, I think you're going to see a lot of private equity investment in telemedicine. When that happens, you're going to see ... That's really, I think, a function of a heavy adoption by leading institutions like yours, like Mayo, and some of the others.
Then I think it's going to be a function of patients ultimately getting comfortable with it, because I think I have seen some data out there that at least right now patients tend to be a little slow to adopt it, and while patients love digital apps, and we all love our phones and our computers, I think learning how to actually use it and use it to better your own health is something that probably organizations like yours that are going to help understand how to do that, and really how to use it.
Dr. Todd Albert:
Yes, use it. Trust it. One of the other things we're doing besides a digital front door, is trying to use wearable technology so people can both track their progress and their outcome, and we can use it for research to measure if we're doing the correct thing for patients, or when patients may need an intervention.
Just real quick to wrap it up, what are you, Todd, in the next say three to five years, where do you see HSS? And where do you see the business of orthopedic medicine?
Dr. Todd Albert:
I look at that a little bit as two questions. I think the HSS, I see perhaps in the next three to five years, realizing that dream I just spoke about of becoming ... my raw term, my Waterbury, Connecticut term for it is "Musculoskeletal Insurance Company," but we're of course not going to become that, but being able to effectuate musculoskeletal care for a huge population through technology, partnerships and perhaps a global network, or at least a national network and maybe a global network. That's three to five, probably to 10 years.
I think orthopedic medicine in general, you are going to see a way, as you noted, private equity has set their sights on, but I think you're going to see more consumption of large orthopedic groups by private equity, but I also think it remains to be seen. I'm not a pessimistic person, but I think it remains to be seen whether when they look at that, when the private equity groups look at it and say, "Did we make a great purchase?" Much like the Phi Cares and all those did 20 years ago, and look back and go, "Well we did it, but it wasn't super successful."
I wonder as the private equity groups look at orthopedics, if in the end, 10 and 20 year sense, they're going to say, "That experiment worked," if they don't do what I was describing, I think would be the play.
I think too, to kind of wrap it up, the great thing about private equity and the men and women that work in private equity, is they're very smart people... And they're very quick learners, and they're very creative.
I think you may see some different investment models that might work in private equity. I don't disagree with you. Obviously the lower hanging fruit are the smaller groups that haven't exploited all of the ancillaries and don't necessarily have the capital to grow the way a Rothman or an Ortho-Carolina might be able to grow, or an Illinois Bone and Joint might be able to grow. You may some more creative investment models in private equity.
I think we're coming to the end of our time. Again, I want to thank Dr. Albert. This was really terrific, Todd. Very interesting stuff. I think one of the reasons that I had stayed in health care my entire career, and will finish out my career in health care, is it never stops changing, it's fascinating, the business of health care is fascinating.
I do recall one anecdote that back when ... I recall sitting at the Palm in Chicago when President Obama was elected, the night he was elected. We knew that the Affordable Care Act was on the docket, and that with the democrats capturing the House and the Senate, and the White House, that we were going to have the Affordable Care Act.
I recall thinking to myself, and talking to my wife, my girlfriend at the time, my wife, picking up the phone and saying, "My career as a health care lawyer is now officially over. I'm going to have to find something else to do because this Act is going to ruin medicine and ruin my career." It's a good thing that I don't prognosticate anything, because I couldn't have been more wrong.
It has created, as Rahm Emmanuel said I think at the time, "There's nothing like taking advantage of a good crisis." It has created such ... I don't want say chaos, but it's created so much disturbance and it never really seems to stop changing, and it's really fascinating stuff.
Dr. Todd Albert:
Can I tell you one quick anecdote that goes along with that, that I remember? I don't remember where I was sitting, but I remember rushing like crazy to get our private orthopedic hospital we just bought certified before that thing came down, because it was going to become illegal. I prognosticated that correctly. But we did get it done, as you know.
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Foley would like to thank Dr. Todd Albert for his time on our show. Again, please take a moment to listen to this podcast in its entirety. We hope that you will subscribe to the Health Care Law Today Podcast on your regular podcast channels.