The world of radiology is evolving in a rapid and multifaceted manner, both from a clinical standpoint as new technologies and protocols emerge, and also from a business perspective.
Shifting payment models, hospital consolidation, new technological and data analytic expectations, and heightened competition have altered the longstanding status quo for many independent groups around the country, and in response, the opportunity for physician shareholders to align with a partner through mergers, acquisitions, or private investment has become more compelling. These dynamics have also emerged during a time when practice valuations for physician groups across all specialties are at all-time highs, a combination that has created an optimal environment for a seller’s market.
Overview of the Recent Radiology Merger & Acquisition Environment
Consolidation and investment activity within radiology has been a bit slower to materialize in relation to other hospital-based physician specialties, such as emergency medicine and anesthesia, both of which are specialties that have received numerous private equity investments and began consolidating heavily during the mid-to-late 2000s. During this period, it was not uncommon for 10-20 acquisitions to occur annually within each respective specialty.
Over the past 18 months, however, there has been a rapid shift and transaction activity has surged in the radiology marketplace, driven primarily by publicly-traded multi-specialty groups, private equity-backed platforms, and private equity funds seeking new initial investments in the specialty. In July 2016, Columbus Radiology surprised many by joining Radiology Partners, a multi-state group that is backed by private equity group New Enterprise Associates and led by a C-Suite comprised of many former DaVita personnel. Shortly thereafter, a new private equity platform was established when Riverside Radiology & Interventional Associates announced a partnership with private equity firm Excellere Partners, a highly reputable health care investment firm that helped grow PhyMed into one of the largest anesthesia providers in the Midwest.
As we entered 2017, publicly-traded Envision Healthcare expanded their foothold in Florida with the acquisition of Sunshine Radiology1 and subsequently added nearly 500 radiologists through the acquisition of Imaging Advantage, a technology-driven group whose stakeholders included Goldman Sachs and other distinguished investors. Perhaps the most notable development of 2017, however, has been the entrance of publicly-traded MEDNAX into the on-site radiology market. The company, which has been prominent in anesthesia and neonatal care, and active in teleradiology through their subsidiary vRad, established a separate radiology division in January and has since been joined by four large groups: Radiology Alliance (Nashville), Radiology Associates of South Florida (Miami), Jefferson Radiology (Hartford), and Synergy Radiology Associates (Houston). These primary industry consolidators (Radiology Partners, Envision Healthcare, MEDNAX, and Riverside Radiology & Interventional Associates) have driven a highly active merger and acquisition market in 2017 and will continue to grow their network of radiologists, establish and strengthen relationships with health systems, and leverage access to capital to invest in technology, clinical best practices, and thought leadership.
While this newly robust transaction environment may cause some trepidation for independent groups and physician shareholders, it also may create opportunities based on a group's current position and strategic goals. There are a number of key considerations groups can evaluate in order to determine if mergers and acquisitions fit into their long-term strategy for growth, quality, and stability.
Strategic Considerations for Independent Radiology Groups
• How prepared is the group to withstand MACRA/MIPS? Could the group perhaps benefit from aligning with a partner with a more extensive support team for billing, coding, tracking data, etc.?
• What is the group’s contract risk? Is the group an exclusive provider with a sole professional services agreement, or are revenues diversified across several contracts? This is particularly important given the rapid consolidation occurring amongst health systems, as hospital mergers increase the possibility of RFPs.
• What is the competitive environment in the group’s marketplace? Does a national multi-specialty group (Envision Healthcare; MEDNAX) hold an anesthesia, ED, or hospitalist contract within the group’s health system? Do any of the major radiology consolidators hold radiology contracts in nearby systems?
• What is the group’s growth potential? Could the group perhaps benefit from additional capital, supplemental management, business development and recruiting support, or additional data analytics to demonstrate quality?
Financial Considerations for Physician Shareholders of Independent Radiology Groups
• Are shareholders willing to bear the full risk of reimbursement changes, lost contracts, reduced subsidies, necessary management and technology investments, and heightened competitive forces? Not only will these adverse events reduce annual compensation, they can also significantly reduce the valuation of a radiology group.
• What is the possibility of a market downturn given that valuation multiples are currently at all-time highs for physician groups?
• How much is the value of the group currently growing (or declining) each year? Would it be compelling to participate in the upside of a national group that offers partnership and targets minimum equity returns of 3× over a five to seven-year period? Similar to a publicly-traded stock, early participants in these private equity-backed organizations stand to benefit the most from growth because the cost-basis of their equity is lower.
• What is the magnitude of shareholders’ potential financial “break-even” generated from receiving significant transaction proceeds that are taxed at lower capital gains rates?
While joining a national group or finding a private equity partner will not be the optimal strategy for every independent radiology group, it may be prudent to evaluate these options against the risks and opportunity costs inherent in remaining independent. Given the magnitude of buyer and investor interest in the specialty and the amount of capital currently available to invest, the recent increase in market activity is expected to continue for the foreseeable future.
1Provident Healthcare Partners served as the exclusive sell-side advisor to Sunshine Radiology