A Merger Born of Data Analysis
Lynn ElliotThe merger/acquisition market is heating up in radiology. Over the past few months, several mergers of large practices have created even larger ones, and other groups are likely to be considering similar moves. While entering into a merger agreement has its benefits, though, not all potential partners are entirely suited for each other. Moreover, even if proceeding with a merger of two or more radiology practices appears to be a wise course of action, many factors must be taken into consideration if the new entity is to be a success. Harnessing analytics to assess the viability of a merger—as well as to identify any necessary operational adjustments, going forward—is therefore prudent. Radiology Associates of Tarrant County, Southwest Imaging and Interventional Specialists, and Grapevine Radiology Associates followed such a course of action prior to merging their respective practices in March 2011. Headquartered in Fort Worth, Texas, the group now operates under the name Radiology Associates of North Texas. Employing 110 board-certified radiologists and 260 additional medical and administrative staff, it is the largest radiology practice in the state of Texas and is currently one of the largest in the United States, based on a 2010 survey1 of US radiology practices published in Radiology Business Journal. Lynn Elliott, CEO of the new group, says, “Mergers are not for the faint of heart, and radiology practices are bound to encounter hurdles, even with the best of possible matches. The more analytics you look at ahead of the game, the smoother the ride.” Early in the discussions about the proposed merger, executives of all three practices (along with a financial analyst) formulated revenue assumptions for the new venture. These assumptions, however, did not take into account the different contracted rates that each player had set with various managed-care payors. “We looked at each group’s volume versus the contracted rates that would be in place following the merger, which gave us a good feel for top-of-the-line revenues and, indeed, validated our assumptions,” Elliott observes. Toward the same end, the team executed a comparison of each practice’s collection volume and contracted rates by CPT® code and payor. Discrepancies were uncovered in several instances; for example, two of the practices had one contracted rate for a CT scan of the brain, but the other practice had a slightly lower rate. All of the variances were considered when projecting postmerger revenues, ascertaining the validity of the revenue assumptions. RVUs per Physician In another vein, the groups performed a detailed physician-productivity analysis based on RVUs. Data analyzed included average revenues generated by each radiologist in each practice, RVU range per practice, and revenue per RVU. Elliott says that the purpose of this exercise was to determine whether physician productivity was sufficiently varied to indicate the existence of diverse corporate cultures. The executives were aware that cultural differences would need to be addressed, if indicated, before the merger could go forward. “Analytics can really say a lot about corporate culture,” Elliott remarks. “For example, lower RVUs might indicate that physician lifestyle is a priority for one group; higher RVUs might indicate that physician lifestyle is not at the top of the list in importance. In our case, productivity was very similar across the board, but had it not been level, we would have had to come to an agreement on changes.” If that had been impossible, the merger could not have taken place. Elliott and his colleagues also relied on analytics to iron out physician-compensation and workload issues. At the outset of their discussions, decision makers had concluded that shareholder salaries would be identical across the board, as would physician workloads. Detailed comparisons, however, revealed practice-to-practice differences in vacation and holiday allotments, call assignments, number of hours worked per day, number of days worked per year, and extra compensation for internal moonlighting. “There was a lot of what-if analysis to figure out how to tweak all these variances to meet the goal of consistency once we became a single entity,” Elliott explains. Moreover, pro-forma analyses were conducted to determine what impact the merger would have on future economies of scale (such as savings on overhead). These analyses were essential because each group was to retain its existing accounts receivable following the transition. The team wanted to have a strong handle on how much money it would need to borrow to satisfy its working-capital requirements and how much time would need to elapse until physician bonuses could once again be distributed. “Unless you know how much economies of scale will contribute, you cannot determine these factors,” Elliott says. He adds that accessing the data and rendering them actionable through detailed analysis was a time-consuming (though highly worthwhile) endeavor. “While it would have been easier,” he concludes, “making decisions in a vacuum, rather than in line with analytics, would have made terrible business sense.” Julie Ritzer Ross is editor of RadAnalytics.com