An orthopedic group that starts taking calls from buyers usually hears a number early. The number is rarely the useful part. What matters more is what the buyer thinks it is buying: the surgeons' future earnings, a platform of ancillary services, an ambulatory surgery center, or some combination that the buyer can grow. Each of those has a different value, carries a different set of rules, and responds differently to the pressures now working on the specialty. This article walks through what orthopedic practice buyers are paying for, where the value sits, and what a group should understand about its own economics before it answers the phone.
The buyer sets the structure, and the structure sets the price
Orthopedic groups may consider several kinds of counterparties, including health systems, private equity-backed platforms, other physician groups and employee stock ownership plan structures. The choice is not only about who writes the check. Each structure may deliver value through a different mix of purchase price, post-closing compensation and retained or rollover ownership.
When a health system acquires a practice, the physicians may receive value through both purchase consideration and post-closing employment compensation. The mix depends on the transaction. That compensation has to be evaluated under the federal self-referral and anti-kickback rules. The Stark bona fide employment exception requires, among other conditions, that the compensation be for identifiable services and consistent with fair market value for those services. The anti-kickback statute's employee provision is a separate rule with its own conditions, and it does not use a fair market value test.[12] A group whose partners already earn at the top of the market has little room for a raise, so the upfront payment may carry more of the economics. A group whose partners earn below market may find that post-closing compensation carries more. In either case, the appraisal of the practice and the fair market value analysis of the compensation have to be built together, because a dollar counted in one cannot also be counted in the other.
Private equity transactions run the other way. Sellers usually receive more cash at closing and roll a meaningful portion of their proceeds into equity of the acquiring platform, which they hope to sell again at a higher value in a later recapitalization. The platform's purchase price is usually expressed as a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). Getting to that EBITDA requires separating what the partners are paid for their work from what they take out as owners. Distributing profit to the partners does not by itself reduce EBITDA; a distribution is a use of earnings, not an expense. Where the practice has historically expensed substantially all of its remaining earnings as physician compensation, a sustainable reduction in that compensation is what creates the earnings stream the buyer capitalizes. Where earnings are already visible, the analysis starts with them and adjusts compensation to the level the practice will actually carry after closing. The arithmetic is simple. The consequences are not: the sellers are converting a recurring income stream into a one-time payment plus an equity stake in the platform, and the compensation reset has to be sustainable for the years the buyer is counting on.
An employee stock ownership plan can give senior partners a path to liquidity without selling to an outside investor. The mechanics differ: the practice sells to a trust for the benefit of its employees, financing may include bank debt and seller notes, and the analysis still has to separate selling physicians' pay for their work from returns on ownership. Sellers may retain shares or negotiate warrants, depending on the deal.[15] Federal tax law requires valuations of employer securities that are not readily tradable on an established securities market, with respect to activities carried on by an employee stock ownership plan, to be performed by an independent appraiser.[13] In a physician practice that means an independent appraisal of whatever entity the plan actually buys, which in some states is a management company rather than the professional entity, and the compensation reset still has to hold up.
Groups that do not want any of these paths have been combining with one another, forming larger independent practices through mergers and affiliations that do not involve outside capital. Health systems, for their part, have used joint ventures and affiliation structures with large groups as a lower-cost alternative to acquiring them outright, trading full ownership for governance rights and shared service lines. Both approaches require a valuation of what each party contributes, and both tend to raise fair market value questions around the services exchanged.
The earnings that survive the deal
Across all of these structures, the most important valuation question is the same: what level of physician compensation will the practice carry after closing, and how much earnings remain once that compensation is paid?
The answer drives everything else. A buyer underwriting a multiple of EBITDA is underwriting the compensation assumption behind that EBITDA. If the post-closing compensation is set too low to retain the surgeons, the earnings are not durable. If it is set so high that nothing is left, there is nothing to buy. If it is set at a level that is inconsistent with fair market value for a referring physician in a health system deal, the structure has a regulatory problem regardless of what the practice is worth.
A buyer may pay more when it sees a supportable path to growing durable earnings after closing. In an orthopedic transaction, ancillary services can be part of that path when the practice owns or controls the relevant economics and the services can be operated within the applicable rules. Sellers who retain a permitted interest in those earnings may rebuild part of the income they gave up in a compensation reset. Buyers see the same growth from the other side: if EBITDA rises after closing, the effective multiple paid on the original earnings falls. The actual value depends on ownership, volume, margins, capital needs and the post-closing structure rather than on the specialty label alone.
Why the ancillaries matter
The ancillary services that surround an orthopedic surgeon are familiar: physical therapy, imaging, braces and other orthotic devices, orthopedic urgent care, and above all the ambulatory surgery center. Each adds revenue the practice would otherwise refer away, and each has its own economics and its own rules.
Physical therapy may follow naturally from the surgeon's referral patterns when patient volume, staffing and space support an in-house program. Coordinating therapy with the surgical practice may be more convenient for patients and easier to schedule, which can matter in bundled and episode-based payment arrangements. Imaging, especially magnetic resonance imaging, is capital intensive, but in-house imaging can capture a technical fee and shorten the diagnostic path for the patient. Braces, orthotics and other equipment can be dispensed in the office, and a group may outsource management of that program to a third party under an arrangement that should be evaluated under the applicable fair market value and other requirements.
These services sit inside federal rules that are easy to overlook when a practice is thinking about value. For Stark purposes, designated health services generally means services payable in whole or in part by Medicare, except as otherwise provided. The categories include physical therapy, imaging, durable medical equipment, and prosthetics and orthotics.[1] A physician generally may not refer those services to an entity with which the physician has a financial relationship unless an exception applies. The in-office ancillary services exception is one option a group may examine, and for services within its scope it sets conditions on who performs or supervises the service, where it is furnished and who bills for it.[2] The exception covers only a short list of durable medical equipment (canes, crutches, walkers, folding manual wheelchairs and blood glucose monitors, each under its own conditions) and infusion pumps that qualify as durable medical equipment. It excludes other durable medical equipment and also excludes parenteral and enteral nutrients, equipment and supplies, including infusion pumps used for that purpose.[2] Braces and other orthotics are listed as a separate category of designated health services rather than as durable medical equipment, so the durable-medical-equipment exclusion does not by itself resolve their treatment. Each item still has to be classified and tested against the exception's conditions. The building and billing tests alone do not establish that an orthopedic equipment program qualifies. A buyer will test whether the ancillaries actually meet those conditions, and a practice that has grown its ancillaries informally may find that part of the value it expects to sell is harder to document than it assumed.
The surgery center can be a major piece
An ambulatory surgery center (ASC) can be a material ancillary when the group or its physicians own an interest, the center has supportable case volume and margins, and the transaction includes those economics. The ASC captures a facility fee for eligible procedures that otherwise may be performed in another setting.
Total joint replacement is one reason ASCs matter more today than they did a decade ago. Medicare added total knee arthroplasty to the list of procedures it will pay for in an ASC beginning in 2020,[3] and added total hip arthroplasty, along with hundreds of other procedures, beginning in 2021.[4] Separately, the American Joint Replacement Registry's 2024 annual report analyzed more than 3.7 million hip and knee procedures using 2012–2023 data. The report counted 62,110 procedures submitted by ASCs for 2023, up 70 percent from the prior annual report.[5] A June 2025 analysis by UnitedHealth Group, based on its own claims, found that outpatient settings accounted for 94 percent of its Medicare knee replacements and 92 percent of its commercial knee replacements in 2023, up from 46 percent and 38 percent in 2019, with hip replacements following a similar path.[6] The same analysis projected roughly $70 billion in savings across Medicare and commercial payers from 2025 through 2034.[6] These sources document payment-policy changes and growth in outpatient or ASC volumes, but they do not establish that the coverage changes alone caused the measured shift. The UnitedHealth analysis also includes outpatient settings beyond ASCs and reflects the payer's own claims and assumptions.
For a buyer, an orthopedic ASC that performs total joint replacements can offer a path to growth. The historical shift toward outpatient care is relevant, and the buyer still has to test local demand, case eligibility and the center's capacity. For a seller, the ASC raises three valuation questions that are easy to get wrong.
First, the ASC is usually a separate entity with its own ownership, which may not match the practice's ownership. Its value belongs to its owners, not to the practice, and a transaction that combines the two needs to value them separately and then reconcile who receives what.
Second, the federal anti-kickback statute has an ASC investment safe harbor with conditions on both the investment and the physician investors. Safe-harbor compliance is voluntary; an arrangement outside a safe harbor is not automatically unlawful, but it is evaluated on its facts and circumstances rather than protected. For the surgeon-owned ASC category, at least one third of each surgeon investor's medical practice income from all sources for the previous fiscal year or previous 12-month period must come from the surgeon's performance of procedures on the Medicare ASC covered-procedure list, among other conditions.[7] A buyer will want to see that the center's ownership and distributions have been structured with those conditions in mind. Whether a particular structure satisfies the safe harbor is a question for counsel; the valuation question is whether the ownership interests and any management or lease arrangements around the center are priced at fair market value.
Third, the ASC's earnings reflect the surgeons' case volume, and the surgeons are the sellers. A buyer paying for the ASC is paying for cases the sellers control, which is exactly why the post-closing compensation and the surgeons' continued ownership stake have to be designed so that the volume is durable without being purchased.
What buyers are now pricing as risk
Three developments have changed how buyers think about risk in orthopedic transactions, and a selling group should expect each of them to come up in diligence.
The first is state transaction review. A growing number of states now require notice to a state agency, and in some cases substantive review, before certain healthcare transactions close. Oregon's Health Care Market Oversight program requires parties to file a notice of a material change transaction for deals that meet the criteria in its administrative rules.[8] In Massachusetts, Chapter 343 expanded the state's material change notice process to include certain transactions involving equity investors. The Health Policy Commission's implementing rule allows it to require information about a significant equity investor's capital structure and financial condition.[9] For a transaction subject to review, the time and disclosures involved can affect what a buyer is willing to pay. For a group considering a sale, the practical step is to know early whether the transaction will trigger a filing in its state and what the filing will require it to disclose.
The second is coverage. The reconciliation law enacted in July 2025, Public Law 119-21, includes Medicaid provisions that the Congressional Budget Office estimates will increase the number of people without health insurance by 7.5 million in 2034.[10] The effects vary by state, and they will arrive over several years rather than at once. For an orthopedic group, the exposure depends on its payer mix: a practice with a large Medicaid share in a state projected to lose coverage faces a shift of some of that volume toward self-pay and bad debt, while a practice with a commercial and Medicare mix is less exposed. A buyer will model that exposure, and a seller should model it first.
The third is the cost of money. When borrowing costs rise, the same purchase price can leave less cash after debt service. A buyer that relies on leverage may have to offer less, use more equity or accept a lower return.
Two tax details that change the economics
Two provisions deserve attention because they change what a seller nets or what a buyer can deduct, and because they are easy to leave out of an early conversation.
Personal goodwill is the first. In some transactions, the parties may allocate a portion of the purchase price to goodwill claimed to belong to individual physicians rather than to the practice entity, based on the relationships and reputation the physicians personally control. The Tax Court has recognized that an individual's relationships may give rise to goodwill the corporation never acquired. In another case, a dentist's employment and noncompetition agreements supported treating the goodwill as the corporation's.[14] The allocation can affect who is taxed on the proceeds, particularly when the practice is a C corporation. The allocation has to be supported by an analysis of what the practice entity owns and what the individuals bring, and it is one of the places where a valuation professional and a tax adviser need to work from the same facts.
The second is bonus depreciation. The 2025 reconciliation law permanently restored a 100 percent first-year depreciation deduction for qualified property acquired after January 19, 2025, and removed the earlier placed-in-service deadline for that property, according to Treasury and Internal Revenue Service guidance issued in January 2026.[11] Qualified property for this purpose generally means depreciable property with a recovery period of 20 years or less, along with qualified improvement property, meaning certain improvements to the interior of a nonresidential building; the building itself, with its 39-year recovery period, does not qualify.[11] For an orthopedic practice, that affects the timing of the tax benefit from a new MRI, the equipment and qualifying interior improvements in a surgery center build-out, and other capital investment, and it can affect how a buyer and seller view the practice's capital plan. It is a smaller factor than the coverage and compensation questions above, but it changes the after-tax cost of the investments that drive ancillary growth.
What a group should know before the first conversation
A selling group is better served by understanding its own economics than by collecting indications of value. Before engaging a buyer, a group should be able to answer a short set of questions.
What are the practice's earnings at a market level of physician compensation, and what is that market level for each surgeon given the surgeon's actual productivity and services? This is the EBITDA a buyer will underwrite, and it is also the compensation a health system can defend.
Which ancillary services does the practice own, how are they owned, and do they meet the conditions of the exception the practice relies on? Value that cannot be documented is value a buyer will discount.
What does the ASC earn, who owns it, and how would its ownership and the surgeons' distributions look to a buyer reviewing the safe harbor conditions?
What would a state transaction filing require the practice to disclose, and how long would it take?
How exposed is the practice's payer mix to Medicaid coverage losses in its state over the next several years?
A group that can answer these questions can compare a health system offer, a private equity offer and an internal path on the same basis, which is the only way to compare them at all. The buyer's number starts the conversation. The practice's own analysis decides whether the number is a good one.
Sources & Notes
- 42 C.F.R. § 411.351, definition of designated health services, https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-B/part-411/subpart-J/section-411.351 (checked November 3, 2026; eCFR displayed as up to date through October 30, 2026). Except as otherwise noted, designated health services means only services payable in whole or in part by Medicare; the listed categories include physical therapy, radiology and certain other imaging services, durable medical equipment and supplies, and prosthetics, orthotics and prosthetic devices and supplies.← 1
- 42 C.F.R. § 411.355(b), in-office ancillary services exception, opening text and paragraphs (b)(1) through (b)(4), https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-B/part-411/subpart-J/section-411.355 (checked November 3, 2026; eCFR displayed as up to date through October 30, 2026). The opening text includes certain durable medical equipment and infusion pumps that are durable medical equipment, excludes other durable medical equipment, and separately excludes parenteral and enteral nutrients, equipment and supplies, including infusion pumps used for that purpose. Paragraph (b)(4) states the covered durable-medical-equipment list and conditions.← 1← 2
- Centers for Medicare & Medicaid Services, "CY 2020 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Final Rule (CMS-1717-FC)," fact sheet, November 1, 2019, https://www.cms.gov/newsroom/fact-sheets/cy-2020-medicare-hospital-outpatient-prospective-payment-system-ambulatory-surgical-center-payment.← 1
- Centers for Medicare & Medicaid Services, "Trump Administration Finalizes Policies to Give Medicare Beneficiaries More Choices around Surgery," press release on the CY 2021 OPPS/ASC final rule (CMS-1736-F), December 2, 2020, https://www.cms.gov/newsroom/press-releases/trump-administration-finalizes-policies-give-medicare-beneficiaries-more-choices-around-surgery.← 1
- American Academy of Orthopaedic Surgeons, "American Joint Replacement Registry Surpasses 4 Million Captured Hip and Knee Arthroplasty Procedures," November 2024, https://www.aaos.org/aaos-home/newsroom/press-releases/american-joint-replacement-registry-surpasses-4-million-captured-hip-and-knee-arthroplasty-procedures/. See also the AJRR 2024 Annual Report, chapter 1 and Figure 1.10, https://connect.registryapps.net/hubfs/AJRR/AJRR%202024%20Annual%20Report.pdf.← 1
- UnitedHealth Group, "The Successful Shift of Joint Replacement Surgeries from Hospital Inpatient to Outpatient Settings is Saving the Health Care System $6 Billion This Year and Will Save $70 Billion over the Next Decade," June 2025, https://www.unitedhealthgroup.com/content/dam/UHG/PDF/2025/2025-06-uhg-shifting-joint-replacement-surgeries.pdf (analysis of 2019 to 2023 UnitedHealthcare Medicare and commercial claims; savings projection uses the payer's own volume and unit cost growth assumptions).← 1← 2
- 42 C.F.R. § 1001.952(r), ambulatory surgical centers safe harbor, paragraphs (r)(1)(ii) and (r)(5), https://www.law.cornell.edu/cfr/text/42/1001.952 (read October 30, 2026); HHS Office of Inspector General, General Questions Regarding Certain Fraud and Abuse Authorities, question 1, https://oig.hhs.gov/faqs/general-questions-regarding-certain-fraud-and-abuse-authorities/ (read October 30, 2026).← 1
- Oregon Health Authority, Health Care Market Oversight, "Submit a Transaction Notice," referencing Oregon Administrative Rules 409-070-0000 through 409-070-0085, https://www.oregon.gov/oha/hpa/hp/pages/hcmo-how-to-submit.aspx (checked October 30, 2026).← 1
- Massachusetts Legislature, "Legislature Passes Major Health Care Oversight Legislation, Regulates Private Equity," press release on H.5159, December 30, 2024, https://malegislature.gov/PressRoom/Detail?pressReleaseId=164; enacted as Chapter 343 of the Acts of 2024, https://malegislature.gov/Laws/SessionLaws/Acts/2024/Chapter343. See also 958 CMR 7.04(3), https://www.mass.gov/doc/958-cmr-7-notices-of-material-change-and-cost-and-market-impact-reviews/download.← 1
- Congressional Budget Office, "Public Law 119-21, to Provide for Reconciliation Pursuant to Title II of H. Con. Res. 14: Title VII, Finance, Subtitle B, Health, Chapter 1, Medicaid," October 28, 2025, https://www.cbo.gov/publication/61837.← 1
- Internal Revenue Service, "Treasury, IRS issue guidance on the additional first year depreciation deduction amended as part of the One, Big, Beautiful Bill," IR-2026-06, January 14, 2026, announcing Notice 2026-11, https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill; Notice 2026-11, https://www.irs.gov/pub/irs-drop/n-26-11.pdf (property under a written binding contract entered into before January 20, 2025 is not treated as acquired after January 19, 2025); 26 C.F.R. § 1.168(k)-2(b)(2)(i), property eligible for the additional first year depreciation deduction, https://www.law.cornell.edu/cfr/text/26/1.168(k)-2; 26 U.S.C. § 168(c), applicable recovery periods (nonresidential real property, 39 years), https://www.law.cornell.edu/uscode/text/26/168.← 1← 2
- 42 C.F.R. § 411.357(c), bona fide employment relationships, https://www.law.cornell.edu/cfr/text/42/411.357; 42 C.F.R. § 1001.952(i), employees, https://www.law.cornell.edu/cfr/text/42/1001.952 (both read October 30, 2026).← 1
- 26 U.S.C. § 401(a)(28)(C), use of independent appraiser for employer securities not readily tradable on an established securities market, as described in Internal Revenue Service Notice 2011-19, https://www.irs.gov/pub/irs-drop/n-11-19.pdf.← 1
- Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 207–08 (1998); Norwalk v. Commissioner, T.C. Memo. 1998-279; Howard v. United States, 448 F. App'x 752 (9th Cir. 2011).← 1
- National Center for Employee Ownership, "How an Employee Stock Ownership Plan (ESOP) Works," financing discussion, https://www.nceo.org/what-is-employee-ownership/esop-employee-stock-ownership-plan.← 1