Evaluating a New Partner: Financial and Other Considerations
Whether an entity is being partnered or acquired, up-front money is always the first consideration. While no one denies the importance of dollars, Todd J. Sorensen, a partner at VMG Health (Nashville, Tennessee), warns his clients that even the most lucrative deals can go sour if cultures clash and operational issues make life miserable. In the recent case of a hospital system trying to acquire three multimodality imaging centers, employment scenarios and lifestyle considerations took center stage. Once initial financial and cultural issues had been settled, both parties moved on to the long-term outlook. Specifically, would the flow of money remain strong? According to Sorensen, long-term finances often hinge on autonomy. Radiology groups that own imaging centers, for example, have a lot of control, and they are used to it. “If they sell a piece of their business to the hospital, then they might lose a lot of that control,” Sorensen explains. “When a hospital takes over an imaging center, radiology groups lose some control, and a loss of control in operations often affects the fee schedule. If a hospital raises rates, resulting in higher out-of-pocket costs for patients, it may mean a reduction in volume to that center. If you sold your center and monetized that asset, but are still dependent on the professional fees, you have lost your control over that component of your professional fees.” Dollar signs have been known to blot out the boldest of red flags, but Sorensen believes that the best of deals can satisfy the wallet, while also maintaining quality of life for all involved. “If someone is not addressing all of your concerns, and all of the focus is on the up-front money (without dealing with operations), then I would be leery about going forward,” he says. “In many cases, you may never get the technological component of your business back, and you are going to be dependent on these elements for your livelihood. The answers may not be what you want, but the parties involved should, at least, be willing to address everything.” If a potential partner is coy about the age and sophistication of its equipment, for example, the proverbial red flag is flying high. Since radiology is such a capital-intensive business, machines and sophisticated PACS can drastically affect the valuation of companies. Sorensen has seen traditional buying formulas upended by equipment considerations. “Typically, we see transactions happening at three to five times EBITDA, but that is a broad range,” he explains. “If you have a center with equipment that is about 10 years old, and it needs to replace a bunch of its equipment, then you are looking at the bottom end of that range. If you have a center that has just purchased a bunch of new stuff, it may be at the top end (or even way above it).” Know What You Want Partnerships, mergers, and acquisitions take a lot of time and paperwork, and every organization should have a firm idea of what it wants to accomplish. Whether it’s an employment agreement, a joint venture, a professional-services agreement, or having the hospital as partner or employer, ask yourself this: Will the deal allow you to do something that you can’t do on your own? In many cases, the decision to seek a partner comes down to sustainability for the group. Elsa Ozuna-Richards, president of REA Healthcare Strategies (Reno, Nevada), says, “If they can grow, they can have a greater presence. Much of it has to do with finances and contracting, which can add up to extra staffing. Partnerships give groups better negotiating power, whether it be for equipment, contracting with hospitals, or enhancing a reimbursement contract.” Ozuna-Richards points out that gaining clinical expertise and leadership is a powerful motivator for new partnerships, especially when more experienced radiologists choose to retire. “Are you buying expertise in a new subspecialty or bringing in a generalist to increase volume?” she asks. “If it is being done to grow, is it in a current market or a new market? What is the competition offering, and what do you need to offer as a group? If the competition is beating you out on orthopedic or neurology work, find a neuroradiologist or someone with a fellowship in orthopedics.” For radiology groups that aren’t growing as fast as they want, Ozuna-Richards identifies referral sources and finds out which subspecialties they crave. “Many times, the subspecialties tend to be higher-revenue areas, although they also tend to be higher-cost areas,” she says. “If a group is not successful in recruiting in a subspecialty area, maybe its long-term plan would be to merge with a group that is offering that subspecialty. If the group is in a position to acquire others, it may be an excellent growth opportunity.” Ozuna-Richards agrees that financial growth is important, but she also believes that intangibles such as chemistry must be taken into account. “The cultural match (along with chemistry) is a big component,” she says. “Many decision are based solely on chemistry, but you must factor in everything—financial characteristics, market growth, and the operational perspective.” Before any organization attempts to partner with a hospital or acquire another group, Ozuna-Richards says, the first step to should be to look inward, to be absolutely sure that the talent is not already within the organization. “You may need a new mammographer,” she says, “but have you already done an internal needs assessment to see if someone already has those skills—or the potential for those skills?” Preparing for the Future The prospect of accountable-care organizations (ACOs) strikes fear into some and invigorates others, but many radiology groups are hard pressed to predict how ACOs will affect day-to-day operations. “A lot of radiologists are just plain scared about what would happen to them if the hospital developed an ACO,” Sorensen says. “If ACOs and bundled payments come to fruition, you are going to see some additional mergers in response.” If the political winds bring ACOs out of favor, Sorensen believes, the trend could go in the other direction, with groups sizing down in response. “Instead of hospitals acquiring, they may go back to more of a joint-venture or freestanding-imaging strategy,” he says. “In either case, we see the potential for a lot of transactions, and the need to choose partners wisely will only continue.” Greg Thompson is a contributing writer for ImagingBiz.com.