To achieve success in consolidating two radiology practices, it’s important that they are a “good fit.” But what determines a good fit? While practices may be similar in size and may even have some structural similarities, no two practices are exactly alike. However similar the challenges are that radiology groups face in the current healthcare environment, each group is unique, and made up of individuals who have formed their practice’s culture. By definition, culture is a congruence between the norms and values of the practice and the individuals who make up that practice. Finding another practice with a compatible culture is an extremely important variable in the success of most mergers.
So how do you determine a good fit? Performing a thorough inventory and review of each group’s benefit structures is a great place to start. Understanding the benefit structure built by each group, from retirement planning to malpractice insurance, health insurance and continuing education is essential to recognize the underlying motivations of the group’s shareholders, as well as where there may be affinities between the groups. David Myrice, director of practice management with Zotec Partners, offers his perspective on current consolidation activities in the radiology industry, and important considerations when assessing a potential new partner.
“We are seeing a lot of consolidation in radiology right now,” says Myrice, “and when there are two groups contemplating a merger or some form of combined relationship, there are some important issues to consider. One area of particular significance is the benefit structure of each group. Benefits are a reflection of a group’s culture. Often, we’ve seen groups that walk away from a consolidation opportunity because their cultures are not compatible.”
Begin with the End
Every radiology practice has some form of retirement plan, and a majority of groups maximize those plans. Defined contribution plans can be implemented using traditional 401k plans, profit sharing plans, or both. A profit-sharing plan is a defined contribution plan in which the amount allocated to each individual account is usually based on the salary level of the participant. Depending on how the plan is structured, the shareholders control the frequency and amount of the contributions based on circumstances, and in some cases, whether or not the company makes a contribution at all. The IRS limits the total contribution amount, and these figures change annually. Companies take the IRS limits into account and adjust contributions, whether purely made by the company, or matched to employee contributions.
“When your group is considering a merger or partnership, it’s important to understand what you have in terms of retirement plans, what the other group has, and how they may be impacted if the two groups join together,” Myrice counsels. “Oftentimes, the structure of a group’s retirement plan is determined by the size of the group, and whether or not it is completely shareholder based, or comprises shareholders and non-shareholders.”
Groups with large staffs that include both shareholders and non-shareholders often use both the traditional 401k retirement tool, as well as a profit sharing plan as it offers more contribution flexibility when salaries vary widely across the employee base.
The cost of medical malpractice insurance for radiologists, as for many other specialties, can be very high, and higher yet for those who perform more invasive procedures, such as interventional radiologists. There are several different types of policies available for malpractice coverage, so groups looking to consolidate need to take inventory of this as well.
“In most cases, malpractice insurance is paid for by the group, which has selected the carrier and negotiated the policy details. Professional liability insurance comes in two basic forms: occurrence or claims-made,” explains Myrice. “In today's insurance market, the overwhelming majority of policies available are claims-made, but a few insurance companies do offer occurrence policies.”
Claims-made insurance provides coverage only for incidents that occurred and were reported while the employee is insured with that carrier. For a claim to be covered, the claim must be filed while the insurance is still in effect. If a claims-made policy is dropped, most likely because an employee leaves one practice to join another, the policy does not cover any suits filed later unless the person pays “tail coverage,” the term used for an extended reporting endorsement. Tail coverage is expensive—often over two times the amount of an annual premium—but it's essential to be insured for any claims that could arise later.
“In my experience, I’ve seen groups set up their malpractice coverage in many different ways; in some groups, the employee pays the tail coverage themselves, and in other cases, it’s paid by the group, often after a vesting period. Because liability coverage is so important, this is a variable that demands considerable review when two groups are considering a merger,” says Myrice.
Establishing a healthy work-life balance is just as difficult, if not more so, for healthcare providers as it is for any other working group. When a group of physicians builds a practice, the benefit structure they choose in this area will directly reflect their work-life balance objectives. Areas to review include life and health insurance policies, dental and vision coverage, as well as paid time off (PTO), continuing education and long-term disability coverage.
“There’s a lot of variables to look at here when evaluating a potential partner. When I consult with radiology groups, we look at all of them, but I especially caution groups to look carefully at long-term disability coverage. In the majority of groups I’ve worked with, the premium has been paid by the individual physicians, as a payroll deduction with no tax benefit, but I have seen some groups that did pay for it. The main difference is that if the group pays the premiums, the benefit is then taxable to the employee if he ever uses it. If the employee pays the premium, the benefit is tax-free. I don’t recommend one way over the other, I always counsel groups to just understand what they have,” Myrice adds.
Myrice also says that coverage for life, health and dental varies widely by practice. The important factor to consider is how the coverage is paid. In some physician-only practices, the cost is equalized between the shareholders; if one shareholder has family coverage, the cost is equalized with the shareholders who are only using individual coverage. Equalization is often also used for continuing education allocations.
PTO or vacation time is yet another variable to consider. How a group structures PTO can be very telling. Can shareholders buy and sell back vacation time?
“Vacation time, salary, retirement and benefits—these are all very personal topics that carry high priorities when a group is initially structuring its practice,” Myrice concludes. “So when two groups are looking to join forces, there’s so much more than balance sheets that need to be reviewed to assess the success of a potential merger.”