Hospital interest in acquiring independent radiology practices has cooled markedly of late, but mergers between independent imaging groups continue to gain favor, a McKesson expert says. Newly merged entities are seeking to expand geographic reach, improve coordination with allied health systems and reduce costs.

Ron Jackson, specialty vice president for radiology with McKesson Business Performance Services (McKesson), said today's practice-to-practice deals increasingly are being structured as strategic mergers that allow the combined organizations to retain a relatively high degree of autonomy. The approach can save time and money when compared to traditional asset transfers, he said, and also help preserve an exit strategy if the alignment doesn't work out.

Regardless of the type of merger pursued, Jackson says groups need to have a sound strategic rationale for seeking a union and should also be sure that the organizations are culturally compatible before pulling the trigger.

"If the idea is to get big just for the sake of being big, then that's not the right reason to do a merger," Jackson said. "There has to be tangible, long-term benefits and it has to be a good fit. Otherwise, it is probably not going to work."

Hospitals Rethink Radiology Strategies

According to Jackson, the surge of hospital and health system radiology acquisitions that followed implementation of the Patient Protection and Affordable Care Act has diminished considerably in recent months. This is in large part due to a realization that radiologist productivity tends to fall off, sometimes dramatically, once the physicians become employed, he said.

"We've seen a lot of hospitals that really didn't understand what they were getting into," he said. "They were paying significant premiums for independent practices, but when productivity declined, they had to hire additional staff to do what the independent groups had previously done alone. So it was costing them money."

Practice-to-practice mergers, on the other hand, continue to thrive, he said. With the right partners, the benefits can be significant: Improved geographic coverage to better serve a hospital or health system, reduced malpractice, materials and information technology costs, shared management expense, enhanced negotiating leverage, greater capacity with subspecialty coverage and the ability to provide reads around the clock; all can flow from a well-designed merger.

"Being able to offer 24/7 reads is a huge value for the hospital," Jackson said. "If you can develop the bandwidth to do it, it decreases the likelihood that the hospital will go out and look at viable competitors to provide after-hours coverage."

Merger Lite

Jackson said more organizations are embracing the strategic merger concept while eschewing traditional asset transfer deals. The goal is to reduce the cost and complexity of a transaction while preserving the benefits of independence.

Sometimes referred to as a "merger lite," the strategic merger allows practices to collectively contract and bill under a new, single tax ID number. At the same time, collections are tracked back to the specific group that provided the service and reported under that organization's original tax ID. This approach enables the merged organization to function as a single entity in many respects, particularly in the areas of negotiations and cost-sharing. Yet it also preserves the all-important "eat what you kill" model traditionally utilized in radiology.

Because strategically merged groups can present a united front to hospitals, health systems and payers, procedural and operational touch points are reduced, contracting is streamlined and quality reporting and care continuity can be made more consistent. Equally important, the potential for conflicts surrounding lifestyle and workload differences between newly combined practices is reduced when groups remain solely responsible for their own productivity and income.

"A full merger gives you the most control, but it's also the most time-consuming and expensive to complete and it can be pretty difficult to unwind if any of the parties want out," Jackson said. "One of the beauties of a strategic merger is that groups can leave if they want because they've not given up their own taxpayer ID."

Due Diligence

Making sure a proposed merger supports a larger strategic vision is an essential first step in deciding whether to move forward, Jackson added. An expanded footprint to better serve hospital and health system facilities is among the most frequent reasons that groups combine, he said. Groups should consequently spend time understanding their hospital relationship and work to identify the ways in which a deal could benefit the hospital. They should also try to make sure that no hidden issues surround a would-be partner's hospital contract.

"Is it perpetual in nature, or does it come up for grabs all the time?" he said. "The last thing you want is to inherit someone else's problems."

Assuming the post-merger potential for benefits like cost reduction and expanded sub-specialist capacity exists, the next step is to assess whether the organizations are culturally like-minded. Jackson said that one of the biggest problems he's seen with mergers is when deals bring together physicians with sharply differing views on lifestyle and workload expectations. Many radiologists work relentlessly and pride themselves on high productivity, while others are more focused on a work-life balance that allows for shorter days and more time off.

"There is no right or wrong answer," he said. "It's just a question of trying to be clear about what everyone s expectations are going in." Jackson reiterated that strategic mergers can help mitigate lifestyle-work challenges, since physicians continue to be responsible for their own income and productivity.

Beyond working to ensure a good cultural fit, attention should be paid to how the organization will be managed and by whom. Too often, practices assume that the processes and personnel that worked for a small practice will be just as effective for a larger organization. In fact, the challenges can be very different and the management workload may be exponentially greater. It is important, therefore, to think hard about the medical practice management expertise the new entity will need and clearly identify the most capable leadership before executing the merger.

One of the biggest challenges with a traditional merger is putting an appropriate value on the acquired practice, Jackson said. Formulas that take into account asset value, cash flow, A/R and other variables can produce an equitable number, but it is still important to enlist the services of a neutral, outside consultant.

"Bringing in outside expertise is critical, not just to help value the deal but also to provide guidance in areas like tax strategy and potential anti-trust issues," Jackson said.

The Payoff

Done correctly, Jackson said, radiology mergers can have a dramatic and positive impact on operations. He noted that in one major metropolitan area, eight previously independent radiology groups have banded together to better serve a single regional health system. The deal, which is structured as a strategic merger, is generating multiple improvements for the groups.

"They're saving on malpractice insurance, have increased collections based on improved managed care agreements that are among the best in the industry, and they're moving ahead rapidly with clinical integration, evidence-based medicine and aggregate quality reporting," he said. "It's going gangbusters for them."

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McKesson Business Performance Services offers services and consulting to help hospitals, health systems, and physician practices improve business performance, boost margins and transition successfully to value-based care.