Radiology Partners executives dish on details of blockbuster $885M deal with Mednax

Industry giant Radiology Partners turned heads Thursday with the announcement that it plans to buy fellow behemoth Mednax’s imaging business line for $885 million. But questions remained about how they’d integrate cultures, where they’d call home and whether anything can derail the closing.

Radiology Business recently sat down with three members of the El Segundo, California, company’s C-suite to explore some of the intricacies of the massive merger. What follows is an edited transcript of that conversation.

Florida-based Mednax—which is changing its name back to Pediatrix later this year—said it hopes to close the deal during the fourth quarter of 2020. After the deal is sealed, RP will employ some 2,400 radiologists in all 50 states, reading roughly 35 million exams annually.

Radiology Business: Why did this deal make sense for Radiology Partners?

Chairman and CEO Rich Whitney: This is a continuation of our view that scale really matters in radiology. The specialty has a tremendous opportunity to be a leader and part of the solution that our healthcare system needs so desperately, which is to move from fee-for-service to fee-for-value medicine and create more sustainability in the long term. Radiology is in the center of a lot of downstream care activity and has the opportunity to direct a lot of resource utilization. We think that’s a big opportunity, but it takes scale to actually realize that potential. So, we’ve been trying to build scale for that reason, and of course this transaction helps us in that regard.

In addition to that, this is a great collection of people and practices. In most cases, these were very high-priority practices for us to partner with when they joined Mednax, and we were disappointed at the time. This was a nice second chance for us to welcome some great talent and great practices into our network.

A third thing is that this really brings together two of the leaders who have been investing in quality and implementing artificial intelligence technology into radiology care processes, at scale. A lot of people have been playing around in this space, but there are very few who have had any experience in implementing those kinds of tools at scale. We’re still in the early days, but nevertheless, we think this will create an opportunity to accelerate our progress on that front, which bodes well for the profession, and in our desire to add more value to the healthcare system. This will be a big part of the solution, over the long term.

Radiology Business: Aside from scale, how does this deal make you stronger and a more attractive potential partner to both practices and hospitals?

Chief Operating Officer Anthony Gabriel, MD: There are a few things that are very synergistic, from a capability standpoint, by us doing this. The first one is the vRad technology platform. They’ve invested in building a very capable solution to address PACS and workflow that serves their teleradiologists but is also deployed onsite. They’re doing a lot of artificial intelligence work on top of the platform. So, that’s one great opportunity that’s very synergistic.

The second is the ability to serve a new segment of the market. We’ll now be able to deliver overnights for practices that aren’t big enough to do them, which is a big part of what vRad does, and is something that RP does not currently do today. We’re excited about being able to enter that segment. It’s a national market; vRad has clients everywhere and they’ve proven this is a national business. So, that’s also very exciting for us.

And then the third is there are a lot of very significant clinical capabilities at these practices. These are high-performing onsite groups. Radiology Associates of South Florida is perceived as being one of the leading interventional radiology providers not just in the U.S., but in the entire world. Bringing on that kind of clinical capability, along with what RP already has in our groups, is very exciting.

Associate Chief Medical Officer of Clinical AI Nina Kottler, MD: As Rich said, there are a lot of people talking about AI and I think many are recognizing the value that it can add, when implemented the right way. But there’s not a lot of experience actually using it. That experience tends to be in smaller groups or academic medical centers, with few deploying it at scale. Radiology Partners has been doing that for the past three years, and vRad and Mednax also have been doing it for the last three to five years. Just bringing that experience together is really going to help us accelerate the understanding.

There are also a lot of questions that need to be answered in terms of how you roll out AI in an effective way. How do we make sure that, as datasets change, we’re still providing the same-quality product? That’s a really big question in the AI industry. Together with our two groups, we have a huge validation dataset. We have the ability to monitor what’s happening across a very large practice with the use of AI, across the entire U.S. population. We can really help advance that and develop an understanding of what we should do.

The other component is just the data in general. We do 24 million exams a year and Mednax does another 11 million. VRad also has a database of 50 million exams, which has a huge amount of diversity in terms of practice formats, protocols, equipment and patient populations. That provides a dataset that can be used not only to create AI, but also to validate and test it. That’s a huge bonus for the industry, in general.

RB: Any sense of how competitive the process was for this acquisition?

Whitney: Yes, from what I’m told it was a very competitive process. There was a lot of interest from both strategic and financial buyers, which is probably not surprising given that they had announced about three months ago that they were selling these assets. It’s very unusual to do that ahead of time, but it obviously stirred up a lot of interest. Also, as I mentioned before, this is a really good collection of people and assets and definitely a sought-after platform.

RB: Is there anything that could potentially derail the closing of this transaction?

Whitney: Really, the only significant closing condition is regulatory approval. We have committed financing and we’re confident that the transaction will get approved. It’s just a matter of working our way through the process. We recognize and we certainly hope that the FTC recognizes that there are a lot of aspects of radiology that make it a national business. Images can be moved around quite easily, digitally, so supply and demand can be moved around seamlessly, as an example. That’s one reason why this transaction should not be viewed as problematic, from an FTC standpoint. But there are other reasons, too.

Radiologists don’t control referrals. We serve hospitals and other client sites on very short-term contracts, so we have to earn our business every single day. And so, having a certain market share or however you want to define it is really not as important as just providing great service, great quality and great value. For those reasons and many others, we think the FTC should not be too concerned about this transaction.

RB: Is there any overlap here? Do you anticipate layoffs or closures as you bring these companies together?

Whitney: No. We don’t anticipate closures or layoffs. This is very much additive to our capabilities and our existing operation.

RB: What about back-office or administrative aspects of the enterprise? Any redundancies in that regard?

Whitney: Really nothing of significance because billing is a big part of the people-intensive aspect of the back office, and Mednax has outsourced that. A lot of the other back-office work is kind of shared services with Mednax, so many of those people are just going to stay with them because Mednax obviously still has a lot of other businesses. So, it should be very limited.

Kottler: I’ve been part of mergers where one group sort of overtakes the other. But one of the things that I’ve been really proud of in being part of Radiology Partners is that we’ve always had a best-of-both mentality. We’re not talking about taking one group over, firing people and overwhelming what they’ve built. It’s really about taking the best of both.

Whitney: We said before these are really great practices and I believe they will undoubtedly benefit by being a part of Radiology Partners, but I’m equally confident that they’re going to make us better, as well, by becoming a part of our team. That’s the kind of merger you can get really excited about.

RB: Where will you call home? Will you remain anchored in California or elsewhere?

Whitney: Well these days, it’s in the cloud. We haven’t been to our headquarters in six months, but yes, our offices will remain where they are.

Gabriel: And I’ll just add that we have many business offices in multiple states, so, it’s a pretty distributed support system across RP.

RB: Could you also just talk for a moment about culture, integration and how you ensure that these two organizations mesh with one another?

Gabriel: Yes, culture is something that is super important to us here at RP, and we spend a lot of time focused on that. It’s really about establishing the core principles we believe in, our values, and what we’re trying to accomplish. Our mission is to transform radiology and we talk about that a lot. And one of the things that is part of that is our operating principle of one practice, locally led. Meaning that all of our local groups make decisions on their own and that is very much in line with how the onsite practices at Mednax have operated. So, we think they’re going to blend in pretty nicely.

As far as the culture goes, we do plan on sharing a lot with practices about our culture. We’ll spend a lot of time with them sharing what RP is all about, and also spend a lot of time learning what they’re all about, and hopefully incorporating some of the best of those practices into RP, which is something that we do with every practice that joins. A lot of the things that we’ve done and a lot of the capabilities that are now national at RP came from one local group that partnered with us, and we just took that, scaled it up and made it available everywhere.

RB: How did you land on the sale price of $885 million?

Whitney: It’s really a product of arm’s-length negotiations and of course we’ve done partnerships with lots and lots of similar practices around the country. We’ve got quite a good sense for the things that are most important—the nature of the market, health system partnerships, growth potential, the quality of physician leadership, etc. For us, it’s bigger than normal, for sure, but it’s also what we do and so it’s a pretty straightforward process to understand their business, it’s strengths and weaknesses, its prospects, and what kind of value would make sense for us. Of course, they have their own view and you see if those lines can cross, and in this case they did cross.

RB: Could you also talk about how you are financing this deal and address some of the concerns Standard & Poor’s raised about your debt load?

Whitney: One of the things that’s been a hallmark of our practice since the beginning is that we’ve had access to a significant amount of capital and a strong balance sheet. We viewed that S&P downgrade as not indicative of the financial strength of our business, for a lot of reasons. And maybe this is a perfect validation of that because obviously if we were in financial distress, we wouldn’t be able to go out and spend $885 million to take advantage of this opportunity.

With that as a backdrop, we have committed financing from our existing investors to put more equity into our business. Those investors are Star Investment Holdings and New Enterprise Associates, and then we also have debt commitments from Barclays and Goldman Sachs. We’re very comfortable both pre- and post-transaction that we’ve got a really strong foundation, financially, to be able to support and continue to grow the business.

Gabriel: One thing to add on the financing side is that almost two-thirds of our physicians are owners, as well, and they’ll have an opportunity to continue to invest. They’re a significant part of the ownership structure of RP and as the practice grows, they get to benefit financially.

RB: So, the concerns raised by S&P were kind of a one-off, rare instance and not an ongoing, systemic concern with Radiology Partners?

Whitney: Yes, I think that’s the right way to look at that. I don’t criticize them for their ratings and their reporting. We were in the middle of a 100-year pandemic and our volume did take a tremendous shock and reduction. But we’re largely back to normal at this stage. In the ratings business, you’re fast to downgrade and slow to upgrade, so hopefully they’ll adjust it at some point here.

RB: Do you feel as if you’re out of the woods with COVID-19 and getting back to where you’d like the business to be?

Whitney: We’re more or less back to normal, kind of plus-minus, at this point in time. Of course, we’re maintaining a level of caution around the possibility of future spikes, but one of the advantages that we have going for us right now is that we have a very geographically diverse portfolio in 28 states now. What we have experienced in the last three months—and what we expect to experience, even in the face of spikes going forward—is that we have the benefit of diversification. When Florida, Texas and Arizona—all important markets for us—were flaring up, there were lots of other markets in the RP portfolio that were improving. And so, we really had that benefit of diversification. Unfortunately, on the front end of this, it didn’t matter how diversified you were because the whole country shut down all at once. But on the back end, we’re managing it much more differently now, and the diversification is a really, really big asset for us. I think it will remain challenging, but not like what it was and very manageable for us, with our scale.

RB: Are you done growing or will you continue to look for opportunities?

Whitney: We still have a modest share overall, so we’ll still be very much looking to grow our business both in existing and new markets. Clearly, we have a big integration project in front of us and that, of course, will impact at some level the pace at which we take advantage of other opportunities. But if you think about the intermediate term, we’ll continue to try to grow the business and expand our footprint.

RB: Is there anything else you’d like to add?

Kottler: We’re all very excited about this from the ability to really affect patient care because ultimately that’s our main goal. If we can drive quality and value in our organization, and we are now 7% of the radiology out there, then great. Let’s keep going.