Is Small Sustainable? If your group is not focused on growth, you may want to reconsider

This is the eighth year CliftonLarsonAllen, Minneapolis, Minn., has helped compile the list of the largest private radiology groups. The changes in group size are small and hard to notice when you compare on a year-to-year basis. The average group size of the largest 50 practices for 2015 is about 68 radiologists as compared to 66 radiologists in 2014. However, the average size in 2008 was 45 radiologists—a 50% increase in seven years!

Several groups had sizable increases in the number of FTE radiologists over the last two years. The largest increases in numbers from 2013 to 2015 include University Radiology in New Jersey (+23), Columbus Radiology in Ohio (+46) and Southwest Diagnostic Imaging, Ltd., in Ariz. (+43).

We also are seeing some groups get smaller and “de-consolidate,” including groups in Michigan and Illinois that were very high on the list in prior years. They had been divisional mergers that never evolved into complete mergers. Some groups appear to be right-sizing: Working harder with fewer radiologists, leading to increases in radiologist compensation.

The industry saw some big changes in the corporate/private equity world last year: vRad, Eden Prairie, Minn., sold to Mednax, Sunrise, Fla., for $500 million; AmSurg, Nashville, Tenn., acquired Radisphere, Beachwood, Ohio; and Aris, Hudson, Ohio, acquired Optimal Radiology, Nashville, Tenn. These groups are not on the list of largest radiology groups as they are not radiologist owned, but if they were, vRad would top the list and the other would not be far behind. These mergers and acquisitions are evidence of the difficulty these groups have had in obtaining hospitals contracts. Independent groups saw the threat and increased the service they provided.

The momentum for consolidation will continue and probably accelerate.  Corporate-owned groups will continue to invest and pursue independent groups through partnerships or outright acquisition. Independent groups will grow both organically and through mergers as they serve the consolidating hospital industry.

If your group is not focused on growth, I would encourage you to consider that approach. Growth is required for an organization to increase or even just maintain income levels. Growth allows groups to spread the ever-increasing fixed costs over more units of production. If an organization is not growing, it will eventually fail. The competition is growth-orientated, and they will need your business to continue to grow.

The right stuff

Both the corporate and independent groups that are growth-oriented will have something to offer hospitals including: the reality (or perception) of higher quality; the reality (or perception) of a higher level of service; subspecialized reads, 24/7; technology (investing and spreading the costs); contracting leverage; risk sharing on total cost of care contracts; big data and the ability to monetize it; lower costs from synergies and purchasing power; professional management; and strong radiologist leadership.

These factors and others lead me to believe that size and independence is necessary in order to compete. I envision that there will be large regional—and eventually national—radiology groups. One of the characteristics/requirements of these groups is that they will have capital, necessary to  grow the business.

Most independent radiology groups do not retain capital/profits both for tax reasons and because there is no incentive or reward for those nearing retirement. Groups need to get past this barrier if they are going to continue to grow and compete successfully.  As partner in a CPA firm, we provide a 10% return on capital invested and charge partners 12% if they are short on the required capital. The capital has helped us grow from 150 CPAs in 1989 to 3,500 today.

Another key ingredient of growth and sustainability of a larger group is leadership. Leaders create and communicate vision and strategy in a manner that inspires. They keep everyone moving in the same direction. As groups grow, they need to recognize the need for leadership and invest in it. Radiology leadership needs to have the time to lead the practice, and as groups get larger it cannot be done between reading scans. The value of time spent leading and managing a practice should provide a greater return than if the radiologist was reading film.

Some questions to ask: Do we need to grow as a radiology group? If so, how do we position ourselves for growth? How do you educate your radiology partners on the need to grow and the benefits of getting bigger? When corporate medicine calls on my hospital, what is the pitch that they are selling to the hospital CEO? What do we need to do to respond before it occurs? Is our hospital/system more likely to be an acquirer or to be acquired? When will they say, “We need to have one radiology group serving our system?”

The advantage that personal ownership creates for radiologists makes me optimistic about the future of independent radiology groups.  When combined with great leadership and capital, it will allow groups to continue to evolve successfully.

Joseph White, CPA, principle, health care, CliftonLarsonAllen, Minneapolis, Minn.