Merger Mania: Radiology Seeks a Foothold in a Consolidating World

It’s not a figment of your imagination: Radiology practices are getting larger via mergers/acquisitions. Hospitals are broadening their reach, using the same tactics, in their efforts to maintain regional influence. One example of this phenomenon, in the private-practice realm, is Charlotte Radiology in North Carolina, which has grown from having 61 FTE radiologists in 2008 to having 85 in 20121 (an increase of more than 40% in four years). Arl Van Moore Jr, MD, FACR, led the group through much of that growth as president; that role was assumed in 2012 by Robert Mittl Jr, MD, freeing Moore to focus on his role as chair and CEO of Strategic Radiology LLC, a consortium of 17 independent radiology practices. Government policy is shaping the current merger environment, Moore believes. “A lot of the government programs are not small-business oriented; they are big-business oriented,” he says. “Mandates found in the PPACA are requiring increased collaboration—not only vertically, within a single specialty, but horizontally, across multiple specialties.” The consolidation trend reshaping the provider realm also is reflected in the radiology-vendor community, according to Jeff A. Younger, past president of the Florida RBMA and CEO of a new entity, Preferred Radiology Alliance, that is trying to align private radiology practices in Florida. Peer pressure—and even fear—are fueling merger/acquisition activity because corporate entities (including some of the large teleradiology and billing companies) want assets on their books, he says. “Corporations are acquiring to hold on to market share,” Younger says. “They’re concerned that if individual practices end up working with someone else, or are acquired by someone else, they could end up losing their teleradiology business or billing business. They also see an opportunity to solidify their financial bases by picking up hospital contracts.” The rationale, he says, goes back to the nature of hospital contracts, which tend to have a long-term window. Teleradiology and billing contracts, however, can be much more fluid, with periodic turnover not being uncommon. The Reimbursement Factor Contracts always circle back to reimbursement, an element of imaging hit hard in the past seven years. Steve Duvoisin is CEO of Integra Imaging (Spokane, Washington), a Strategic Radiology member practice. Integra Imaging was founded this year through the merger of Inland Imaging (Spokane) and Seattle Radiologists to form a 97-radiologist megapractice. Duvoisin says that health systems have also felt the pinch, with regional players attempting to grow and large players getting even larger. “The health systems are getting bigger,” he says, “because they need to drive down costs to address lower reimbursement.” Consolidation has been going on for years among both health systems and payors, but Duvoisin reports that this trend has accelerated, particularly within the past year. “Health systems, specifically, are consolidating because they see the payors getting bigger and bigger, on a national basis,” he says. “I’ve heard that somewhere in the neighborhood of $20 billion in annual net revenue will be needed for a health system to compete, in the future.” Another reason for accelerated merger activity is what Duvoisin describes as the need for a critical mass of patients, as health systems and accountable-care organizations (ACOs) move toward risk assumption. “Managing the health of 20,000 people probably won’t cut it,” he says. “You need to be managing the health of hundreds of thousands, if not millions. The CEO of Ascension Health said that his company’s goal was to manage the cradle-to-grave health of 30 million people. Fragmented markets, on the other hand, are inefficient. You have a lot of small shops out there, and it’s difficult to drive efficiency. All of those factors have accelerated consolidation among health systems.” Costs for insurance, employees’ health care, and equipment have increased for health entities, big and small—just as they have for many businesses. “The formation of ACOs is causing groups to see if they need to be larger to cover a larger geographic region,” Younger says. “There’s been an increased emphasis on subspecialty interpretations. Every group cannot have every subspecialty represented 24 hours a day, unless it becomes tremendously larger.” Horizontal and Vertical Much of the recent consolidation has been horizontal (through the acquisition of similar businesses), but there have been notable exceptions, such as UnitedHealth Group’s purchase of Monarch HealthCare (Irvine, California), an association of more than 2,300 physicians. The Wall Street Journal described the 2011 transaction as “the latest example of how lines are blurring between insurance companies and health-care providers.”² Californian deals involving control of medical groups must be structured to comply with rules that block many entities from directly employing practicing physicians. A company such as UnitedHealth may, however, buy nonclinical assets and sign a long-term management agreement with an IPA such as Monarch HealthCare. Moore calls the Monarch HealthCare acquisition a curiosity, but he hesitates to call it the beginning of a trend. “You’ve got an insurance company starting to get into the business of practicing medicine,” Moore says. “I’d love to hear what its top five goals are for the next three years.” David Cyganowski, managing director of Kaufman, Hall & Associates, points out that in addition to the Monarch HealthCare deal, several more horizontal moves have taken place. “In Pennsylvania, Highmark acquired West Penn Allegheny Health System (Pittsburgh), as well as Saint Vincent Health System (Erie) and Jefferson Regional Medical Center (Clairton),” he says. “There, you have an example of an insurance company acquiring hospitals. We’ve also seen insurance companies acquiring physician groups. We are seeing vertical integration and new market entrants jumping into the traditional hospital business. Traditional lines and roles of what were once distinct and separate vertical entities are now blurring.” In radiology, a prime example of this trend is that imaging-center chain RadNet announced, in September 2010, that it would acquire a PACS provider; later that year, it announced its intention to acquire a teleradiology company. In 2011, another imaging-center operator, Alliance Imaging, acquired a teleradiology company. Getting Bigger Strategic Radiology does not represent a true merger of its 17 member practices. Instead, it is “a strategic alliance of large, like-minded radiology groups across the country that have gotten together and are looking at quality, data sharing, developing best practices, and ways of clinically integrating night work and day work,” Moore says. True to its name, Strategic Radiology has pursued its mission strategically, bringing into its fold noncompeting practices in geographically dispersed locations. In June 2013, Strategic Radiology announced that Radiology Associates of South Florida (Miami)—a prominent, subspecialized group of 67 radiologists and the 10th-largest private radiology group in the country¹—had joined the consortium. Just a month later, Strategic Radiology announced a new deal with University Radiology (East Brunswick, New Jersey) that brought Strategic Radiology an international teleradiology presence. University Radiology, composed of more than 115 board-certified radiologists with advanced subspecialty training, is the largest provider of subspecialty radiology and teleradiology services in New Jersey. “I think you’re going to see further consolidation. Everybody is getting bigger. If you don’t get bigger while everybody else around you is getting bigger, by scale, you are automatically getting smaller, and your impact is going to be diminished. If you want to stay relevant, you must grow to maintain your relative balance to those you are working with,” Moore says. Moore believes that the consolidation trend among hospitals is fueled by many of the same drivers seen among radiology groups. “There are a few ways to increase your size,” Moore explains. “Hire a bunch of people and find a lot more business or combine with radiology practices to maintain relevance. Until the merger mania across the country slows down—predominantly with hospitals and the entrepreneurial companies trying to get into the business—I do not foresee a reduction in the impetus for mergers to continue.” Change and Opportunity Venture capitalists have not failed to notice merger mania, and Moore believes that this private-sector interest is likely to continue, as long as investors see the potential for making money. “They are trying to get involved to make a profit,” he says. “Traditionally, most of health care was delivered by not-for-profit organizations, with the institutions reinvesting the dollars in the communities. Now, small hospitals are no longer able to compete. Cost sharing and cost reduction have been very important—simply to survive.” Cyganowski believes that the effects of this survival mode can readily be seen in significant consolidation among hospitals. “The number and size of mergers, partnerships, and affiliations have increased dramatically, over the past couple of years,” he says. “It’s happening because health care is in the midst of changing its business model.” The phenomenon can be seen nationwide, largely due to health-care systems’ use of their brand names to extend market reach and management-service agreements, he says. “We have health-care systems selling a minority interest in their institutions: virtual mergers that don’t combine assets, but combine the operations of hospitals via joint operating agreements,” Cyganowski explains. “We’re seeing not-for-profit and for-profit entities form joint ventures. We’re seeing regional superpowers emerge. Catholic health care is consolidating. Insurance companies are acquiring hospitals. Health-care systems are acquiring physician groups, and we’re seeing new people getting into the health-care market who weren’t there before,” he adds. While Younger agrees that the consolidation of health care is pervasive, he adds that there are hotbeds of activity. “Some states are being more heavily targeted because of population density and Medicare population,” he says. “Florida is targeted by a lot of the national companies, and I think Texas has been targeted as well.” The Morning After Not all marriages are made in heaven, and Cyganowski says that some entities occasionally declare victory on the day of closing—when in fact, that is when the real work begins. Postmerger integration can spawn of host of challenges; they include back-office support problems, IT challenges (see related article, page 30), supply-chain difficulties, and physician alignment. Judging by the pace of consolidation, Cyganowski says, the pros are clearly outweighing the cons. In addition to operational advantages, adding new talent to the mix can’t be underestimated. “Intellectual capital to support the transformation to new business models is an important factor,” he says. “Additional benefits are enhanced physician platforms, integration, and recruitment—which lead to a larger market presence, a more competitive position, better care coordination, better quality of care (at a lower cost), improved branding, and mitigation of risk.” Younger and Duvoisin note that all the recent consolidation probably improves subspecialty coverage, reduces costs, and improves efficiency—but does it improve the actual delivery of radiology services? “From the patient’s perspective, it’s probably somewhat unknown,” Younger says. “Many radiologists are well trained, but we can’t say that they all are. Some of the larger national companies are trying to fill positions, and I don’t think patients recognize the difference.” He continues, “In terms of impact, I don’t think we’ve seen that yet. We’ll know better in two or three years—because certainly, the larger corporations are going to make money doing this, which will mean fewer radiologists and fewer hours of staffing. If you have people working longer shifts and reading more studies, there’s going to be a natural fallout: You’re going to have more misses and more discrepancies, but right now, you can’t say that there’s been major change.” Duvoisin hesitates to say whether all this growth is a good. “Health systems such as Cleveland Clinic in Ohio are physician driven, as opposed to hospital centered,” he says. “That’s an evolution that needs to occur.” Maintaining Autonomy In the Preferred Radiology Alliance, Younger envisions a business model that allows physicians (and particularly radiology groups) to work together without the necessity of being owned by a corporate entity. It’s not that Younger and his colleagues have an inherent distrust of corporations, but more that they want to preserve autonomy and independence. Discussions began in January 2013, and six months later, the Preferred Radiology Alliance entity was formed under the direction of Radiology Associates of Daytona Beach in Florida, a 23-person radiology group. “We’ve already started talking to groups around the state about joining, and there seems to be a really high degree of interest,” Younger reports. “I’ve met with eight groups in the past three weeks.” Younger says that radiologists are attracted to the organization because it resembles a managed-services organization that allows practices to get accustomed to working with one another, sharing services, reading for one another, and working together on billing and practice management. “There are a lot of groups that know they want to merge and become larger, but they don’t want to give up their imaging center, teleradiology company, or something else,” he says. “Our setup allows them to do that. They can keep that separate and take all revenue from it.” Cultural objectives for the alliance include applying best practices to govern subspecialty interpretations and teleradiology, in addition to reducing costs for hospitals through utilization management. “We want to demonstrate to the hospitals that there is real value in affiliating with us and having a contract with us,” Younger says. “The idea is that over the next two to three years, this alliance will continue to integrate to where we form one operating group—without having to merge the assets, because that’s typically where the barrier lies.” According to Younger, each practice will have one seat on the board, which will help determine which services are offered. IT will be a priority. “If you are a four- or five-person group, you’re just not going to have the resources to do that,” Younger says. “That’s part of what has made some of the national teleradiology companies attractive to smaller practices: They have that technology—now. That is not inexpensive, by the time you buy the equipment and have the IT staff available 24 hours a day.” Preferred Radiology Alliance’s business model enables it to acquire the software, but access IT staff from the component organizations. “We’re starting with the Daytona Beach group, with their IT people (who are well qualified), and we’ll use them to move images among other groups as those groups join,” Younger explains. “I think IT is going to be one of the largest investments, as entities continue to grow.” Ultimately, the relentless pace of consolidation activity is an undeniable sign that the industry is changing and fortifying itself for new market realities. Many executives, including Duvoisin, are keen to embrace the change and make the best of it. “Radiology still has a lot of potential and opportunity,” Duvoisin says, “and at some point, consolidation has to hit an endpoint. The FTC will see to that. The strategic reasons to consolidate are not going away anytime soon, however, and doing things the way we did in the old days is not going to work.”

Greg Thompson is a contributing writer for Radiology Business Journal.