Behind Venture Capitalists’ Interest in Radiology
Behind Venture Capitalists’ Interest in Radiology
When you think of venture capitalism, your mind likely goes directly to business endeavors, not health care. But the ties between venture capital investment and health care activities are real – and growing, especially in radiology.
According to global communications and consulting firm Mercom Capital Group, LLC, venture capital investments in health care topped $2.2 billion in 2013. That’s double the $1.2 billion venture capitalists sunk into health care in 2012.
It’s unclear how much venture capital (VC) investment is funneled into diagnostic imaging, but according to Arl Van Moore, Jr., MD, former president of Charlotte Radiology in North Carolina, these types of outside funding activities are likely to continue. The main reason: profit. VC investors look at radiology practices and teleradiology companies as opportunities to make money.
What’s Behind VC Investment
Ultimately, said Syed Zaidi, MD, president of Radiology Associates of Canton and chief executive officer of radiology strategy development company RadHelp, venture capital investment can be a shot in the arm to practices or teleradiology companies that are struggling to provide efficient and effective patient care or meet client needs.
“You do have some private equity VC finance groups that are growing, and you have to judge each on its own,” he said. “This is partly happening because radiology groups can’t necessarily respond to customer needs. Not every group is equal.”
The biggest motivating factor, he said, is often innovation. Many small practices, which usually have nine or fewer radiologists on staff, are interested in pursuing the latest technologies but lack the funds to do so. Accepting outside investment can open this door, Zaidi said.
Overwhelmingly, VC groups gravitate toward providing support for information technology systems. For example, in 2009, Foundation Radiology Group received $10 million from VC firm Chrysalis to not only support new radiologist hires, but to augment the practices technological capabilities.
“In these situations, there’s always room for innovation,” Zaidi said. “If someone wants to invest money in innovation and bring together groups in corporate mode, it will benefit radiology and patients.”
Where Does the Money Go?
Other VC investments have also significantly impacted a practice’s or teleradiology company’s strength. In 2012, Radiology Partners received a $60-million investment from New Enterprise Associates, a global VC firm that focuses on technology and health care. According to practice leaders, the funds allowed the group to purchase state-of-the-art technology and support a staff of more than 200 radiologists who provide 24/7/365 coverage in a myriad of subspecialties.
A 2011 VC investment from Great Point Ventures into Aris Teleradiology, LLC, helped the company expand its sales and marketing efforts, as well as strengthen its infrastructure and grow its workforce. As a result, Aris offered a wider range of 24/7 and subspecialty coverage and acquired several new hospital contracts.
In 2015, three health care-related VC groups invested in USARAD – this time with a greater focus on personnel.
“Many parts of the world are experiencing a significant shortage of expert physicians, especially radiologists,” said Ralf Schnell, chief executive officer of one of the VC groups, Venture Capital Unit of Siemens. “By delivering U.S. board-certified specialists to these regions through the use of technology, USARAD is positioned to affordably bring high quality health care around the world.”
Omphalos Venture Partners and Excelerate Health Ventures also invested in USARAD.
Replacing the Old Model?
Injecting large sums of cash immediately into the arm of an anemic practice or teleradiology company can be an immediate boost. It can also be a more effective strategy for exerting control – especially for vendors interested in moving in on a practice’s territory, said Lawrence Muroff, MD, chief executive officer and president of consulting firm Imaging Consultants, Inc., and radiology professor at the University of Florida and University of South Florida Colleges of Medicine.
The next best option, he said, is replacement.
“Purchasing a radiology practice is expensive and relatively time-consuming. There are a few companies that do this,” he said. “And, frankly if I were a radiology practice, I’d rather be purchased than displaced. But, it’s far easier for hospital administrators to just get rid of a group.”
It’s not uncommon for hospital administrators to receive cold calls from vendors that claim to provide better patient care and higher quality metrics, he said. They promise around-the-clock, subspecialty coverage, and, frequently, offer lower costs because they use voice recognition systems that eliminate the need for transcriptionists or editors and higher reimbursements due to more studies read.
Vendors and VC investors do face challenges and risks when they invest money into a practice or teleradiology group. In many cases, a hospital contract might not belong solely to the practice they’re funding, Muroff said. That can make return on investment uncertain because a hospital could cancel a contract at any point.
The hospitals also carry risk, though. It is possible that an outside influence could impact performance. The quality of patient care might be different or the newly-funded practice could alienate a member of the medical staff for any number of reasons, he said.
“If the new group doesn’t perform to expectations, hospital administration could be in a bind because they’ve expended a lot of good will to make the transition,” Muroff said. “And, now, they might be forced to repeat the process if they choose to find something new as a replacement.”
It’s important for individual radiologists and practices to remember that nothing protects them from losing a hospital contract. Winning contracts is largely based on competition, he said, so practices must take the right steps to keep their clients happy. Be sure to provide good patient care, be responsive to administrators and referring physicians, and provide quantifiable metrics. And, take all opportunities to meet with administrators.
Radiologists and groups must also be mindful to cultivate and maintain a wide variety of relationships. Medical relationships with hospitals and individual physicians are vital, but it’s critical to maintain positive social and political interactions within the surrounding community, as well. Becoming entrenched in a community makes replacement harder and can also strengthen a practice’s or group’s financial foundation so there is less need for outside investment.
“A strong local presence is what differentiates an incumbent group,” Muroff said.
Although a fair number of VC investments into radiology practices and teleradiology companies have already occurred – and many more will likely materialize – enough questions about the efficiency and efficacy of this business model remain to make the future of VC-backed radiology fuzzy.
“It’s impossible to predict whether this trend will continue,” Muroff said. “Venture capital funds for investment could dry up. Companies and practices might not want to go public. No one knows whether this will become an increasing trend or a minor diversion.”