Go/No-go for Radiology: Knowing When to Sell
Todd Sorensen, AVAElliott Jeter, CFA, CPA/ABAcross the country, radiology groups, faced with a less-than-favorable reimbursement outlook and increasing expenditures, are considering selling their practices to or entering into joint ventures with hospitals. As with any major financial decision, a detailed discussion of the pros and cons is required, and there are several factors of which groups should be aware when considering selling their businesses. For these reasons, performing a go/no-go assessment, aided by a third-party advisor and a valuation professional, is critical. To begin, groups should break down their concerns into qualitative and quantitative issues, with quantitative issues defined as factors that can be measured and qualitative issues defined as those that are less tangible. Quantitative Factors In order to sell, a group must work with a valuation professional to determine what the technical component of its practice is worth. It has been our observation that physicians, particularly radiologists, tend to focus on their professional revenue, but it is important to determine, if the hospital purchases the imaging center that they own, whether the radiologists will retain any revenue from the technical component. If so, will it be enough to subsidize the recruitment of additional physicians, the addition of subspecialty service, or any of the other investments that might have been underwritten by that revenue in the past? Radiologists might underestimate the contribution that technical revenue has made to their practices. Even large radiology groups sometimes fail to view their business as the combination of two components, and to understand that their compensation is reliant on both. The process of valuation helps groups look at their businesses as they never have before, breaking down volume, reimbursement, and operating expenses to determine the viability of surviving with a smaller (or nonexistent) portion of the technical-component revenue. From there, further quantitative issues arise. If your group’s agreement with the hospital is for you to capture a percentage of the overall imaging-center revenue, for instance, you need to consider whether the cost of an exam will rise or fall following the acquisition. If the hospital is offering a fixed fee per scan, but the higher copayments and deductibles associated with hospital imaging stand to affect your volume negatively, you will be faced with lower revenue. An assessment of the potential outcomes of each of these scenarios will help radiology groups understand whether selling is truly to their advantage—or whether it would be more profitable, in the long term, to remain independent. Qualitative Factors Profitability, though, is only one consideration. Qualitative factors are of equal (or, perhaps, even greater) importance when performing a go/no-go assessment. Unlike quantitative factors, they are difficult to assess and weigh, making the presence of a third-party advisor critical to ensuring cooperation and consensus among members of the radiology group. An example of a qualitative factor to consider might be the issue of control. In selling to a hospital, you lose control over certain processes, over strategic decision making, over equipment selection, and over other matters. Are you comfortable surrendering this kind of authority? The quality of your new partner, itself another qualitative issue to assess, comes into play here as well. Will this hospital or health system allow your group to have a voice in higher-level decision making? Will it permit you the kind of autonomy to which you’ve become accustomed? Further, is this partner one with which you want your brand associated? Is the hospital or health system prestigious in your market, and if not, what does that mean to your business? It is likely that in partnering with a hospital, you will transition away from being a low-cost provider of imaging services, as the reimbursement differential between outpatient and freestanding imaging is part of what is currently motivating hospitals to buy. There is a justifiable pride that comes from offering high value at a lower cost, particularly in an increasingly consumer-driven health-care marketplace; this dynamic can (and should) be taken into consideration before making a decision. Expert Advice Leveraging the assistance of experts, from valuation professionals to outside advisors, is critical for groups in fully understanding the dynamics of the go/no-go assessment. The advisor might make a specific recommendation for the group or merely help the group understand how heavily to weigh the different factors under consideration. Whatever the case, the advisor will facilitate the discussion and help stakeholders achieve consensus. Radiology has suffered losses in its technical revenue, and that trend will only continue—but groups should not succumb to unnecessary pessimism that might lead them to make rash decisions. Long-term profitability and market position must be considered because, in many cases, it might ultimately be more advantageous to remain independent and ride out the storm. With the right partner, however, and in the right market, groups might find that selling is the best choice for them. Our advice to groups is to remember that not all independent radiology practices will be run out of business by the challenging economy and the current reimbursement scenario. There is always room, in every market, for a low-cost provider—and if the last low-cost provider in a given market sells itself to a hospital, an opportunity will be created, yet again, for an independent group. Any decision to sell must take into consideration the dynamics of the local marketplace. A group would be well advised not to base its judgment solely on a short-term reimbursement differential, but on an honest assessment of the factors described here. Todd Sorensen, AVA, is a partner with VMG Health, a national company (with offices in Dallas, Texas, and Nashville, Tennessee) that specializes in health-care valuations and transaction advisory services. Elliott Jeter, CFA, CPA/AB, is a partner with the company.