In The Times They Are
A-Changin’, Bob Dylan sang
about keeping up with the
changing times by
sinking or swimming.
Capital Retention
in Radiology
Practices
JOSEPH P. WHITE, CPA, MBA
RBMA BULLETIN | september-october 2015 | www.rbma.org
TIME TO CHANGE THE APPROACH?
T
he radiology industry has seen a lot of changes
much momentum at this time. Once again, I do believe this
in the past 20 years. Some of these changes
is because radiologists have improved service and quality.
were brought on by the advent of national
The marketplace will continue to evolve. The victory
teleradiology practices, and by private equity
of a battle should not be confused with winning the war.
entering the marketplace. The competition
There is new competition and the above acquirers have
brought to the industry by these entrants made the inde-
big war chests: Mednax and Amsurg have market capi-
pendent radiologist-owned groups respond by focusing
talization of over $7 billion and $3.4 billion respectively.
on increasing service and quality. The threat of losing
They need to get a return on their investments, and the
hospital contracts has made the independent groups
only way they can do that is to grow the business. For
better competitors to the new competition.
them, growth will come by either acquiring new hospital
There have been some mergers and acquisitions
recently including the following sales:
•Virtual Radiology to Mednax ($500 million)
contracts or by acquiring radiology groups who hold the
contracts, or both.
Not-for-profit health systems are also poised for growth
•Radisphere to Amsurg/Sheridan (undisclosed price)
in the radiology marketplace. Cleveland Clinic, Mayo
•Optimal Radiology to Aris (undisclosed price)
Clinic, and others will offer radiology services as a part
One could interpret the above transactions as a victory
to the independent radiology groups. The transactions
suggest that the private equity-backed organizations are
having difficulty achieving their required profitability and/
of the growing networks.
Both the for-profit and not-for-profit health systems
desire to become national radiology providers. They will
have something to offer hospitals including:
or implementing their strategies. The practice of hospitals
•Sub-specialization reads 24/7
directly employing radiologists does not appear to have
•Technology
•Gain sharing
to keep the equation in balance. There are limits on the
•Risk sharing on total cost of care contracts
amount that a business can borrow, and thus a business
•Big data
needs to increase equity. This can come in two forms:
•The reality (or perception) of higher quality
capital contributed by investors or profits retained by the
•The reality (or perception) of a higher level of service
corporation. This is what I mean by owner financing.
•Lower costs
These factors and others lead me to believe that larger
independent radiology groups are necessary in order to
compete. I would envision that there will be large regional
radiology groups, and eventually national groups. One of
the characteristics/requirements of these groups is that
they will have capital. Capital is absolutely required for
growing a business.
The Need for Capital
A group practice administrator once told me, “It is easy
The Benefits of Equity
Why should a radiologist group retain capital? So that
it is there when the group needs it. It is much harder to
borrow money when you need it than when you do not, and
it is very hard to raise equity when you need it the most.
It is prudent to have reserves in the corporation
as a “Rainy Day” fund. What happens if ICD-10 delays
payments for months? Do you really want to borrow
money to pay shareholder compensation? And what if a
shareholder were to leave in the interim period?
to retain profits in a medical group for 364 days a year; it is
A business that has equity sees the world differently
that last day that is difficult.” It is common for radiology
than a business that doesn’t. It can afford to think more
groups to bonus out all of the profits each year. There are
strategically. It can dream of opportunities, both ones
several reasons that this is done:
that find them and ones they can search out. Should
•The practice is organized as a C-Corporation and does
not want to pay taxes on the retained profits.
•The shareholders want their money. They earned it
and they deserve it.
•The value of the corporation does not change (or
changes very little) if they leave profits in the corpo-
the group consider purchasing other specialties? Should
they purchase emergency physician practices or anesthesiology practices as Mednax has done? Could a group
of radiologists have purchased Radisphere instead of
Amsurg? Would it be possible for independent radiologists
to create what is, in effect, their own private equity fund?
Some specific examples of when capital is needed by
medical groups:
ration.
•The banks would always lend the group 100 percent
of any capital needed.
•There was not a pressing need to leave the profits in.
What would we do with the “reserves”?
body has to get an equal distribution.
The Definition of Capital
Investopedia states:
“’Capital’ can mean many things. Its specific definition
depends on the context in which it is used. In general, it
refers to financial resources available for use. Companies
and societies with more capital are better off than those
with less capital.”
For the purpose of this article, capital—also called
equity—refers to the owner-financed portion of the
accounting equation shown below.
Assets = Liabilities + Equity
contracts from a system and needs to add 15 radiologists all at once. The sudden increase in payroll costs
puts a severe strain on cash flow for nine months as
the accounts receivable builds up and normalizes. It
cannot afford to consider other opportunities during
this time frame.
•A medical group wants to buy itself out of a management service agreement with a private equity fund. In
order for the group to have consensus, they feel that
they need to assure the shareholders:
They will not take a cut in pay over the


They will not have to guarantee any bank debt

They will not have to work more

They will not have to put in of their own
previous year
money.
The group doesn’t have any equity and the bank
As this fundamental equation shows, as the asset side
will not lend them the funds because the physicians
of the equation grows either the liabilities or the equity
are not putting any money into the deal as some
(or a combination of the two) needs to increase in order
of the younger physicians does not have the funds.
RBMA BULLETIN | september-october 2015 | www.rbma.org
•One of the shareholders needs the money so every-
•A radiology group is awarded three new hospital
CAPITAL RETENTION IN RADIOLOGY PRACTICES – TIME TO CHANGE THE APPROACH?
The physicians has been making 40 percent more in
2012 than 2014…2012 was the time to plan ahead and
build up some reserves.
•A radiology group has the opportunity to purchase
a nearby competitor’s imaging center for $3 million.
The center shows a loss of $300,000 per year but the
deal includes the real estate for the imaging center.
The group will purchase the center and then immediately close it down, so the volume/patients will be
transferred to the existing center. This will add $2
million in profits to the existing imaging center. The
bank was only willing to lend them $2 million, so the
group needs to raise $1 million internally. Of course
a few of the radiologists does not have the ability to
raise the funds personally. This creates a fair amount
of concern and commotion in the group.
A Possible Option for Large Groups
or Networks
Private equity groups, including Radiology Partners,
service metrics
•Fear of losing hospital contract to the national forprofits or not-for-profits
If an independent group came in with a bit of capital, it
would allow the transaction to get done quickly and efficiently. They could use some capital to buy out some of the
partners near retiring shareholders, or pay them to retire
early. The purchaser would get a return on its investment
in the same way other acquirers would—by absorbing the
work—and by having better contracting and through cost
savings on overhead expenses. Mergers between radiology
groups are time intensive and expensive, from both a legal
and accounting perspective, and a little bit of capital would
go a long way! Would it make sense for organizations like
Strategic Radiology or Preferred Radiology to acquire groups
that are looking for help?
The Hurdles to Equity Build Up
There are several hurdles to overcome when considering
Aris, and Imaging Advantage, have been searching for
building equity in a radiology practice but two of them are
and acquiring radiology groups as a way to get hospital
income taxes and buy-in and buy-out arrangements.
contracts. Many times they will offer a lump sum cash
payment to the group in return for some of the group’s
future cash flow. In order for the group to have this cash
flow, the radiologists agree to take a lesser amount of
future compensation. This may work for the 65-yearold radiologist who wants to practice for only two more
years, but the 45-year-old does not see the benefits. It
is the 45-year-old physician’s viewpoint that has made
acquisitions difficult for private equity in metropolitan
marketplaces.
RBMA BULLETIN | september-october 2015 | www.rbma.org
•Group being unable to substantiate quality and
Another strategy is to acquire groups that have shareholders who are going to retire in the near term. The
acquirer does not replace the retiring shareholders, and
the work is shifted to other radiologists either through
teleradiology or by requiring more productivity from the
remaining radiologists.
Could independent radiology groups get into this game?
Would some of the groups contemplating selling consider
selling to a larger radiology group rather than private
equity? I would think they would prefer it. The “selling”
group could feel the need to be acquired for a variety of
reasons:
•Hospital requiring sub-specialization 24/7
•Senior physicians approaching retirement and
difficulty in recruiting quality physicians
•Inability of the group to govern itself
•Inability of the group to find quality management
INCOME TAXES
Arthur Godfrey said, “I am proud to be paying taxes in
the United States. The only thing is—I could be just as
proud for half the money.”
Eventually equity has to be paid for with after-tax dollars.
It is painful, but true, so the goal is do it in the most efficient
way possible. The options for how to do this depend upon the
structure of the entity: C-Corp; S-Corp; or LLC/LLP.
C-CORPS
C-Corps are the most tax-inefficient way of doing business. The profits retained are subject to income taxes, and
the shareholders are additionally taxed upon sale of their
stock or when receiving any dividends. Some groups do
decide to bite the bullet and pay the tax. It is simple and
if a fixed amount of profit (in total or per shareholder) is
left in every year, even a small amount will add up over
the years.
Another option is to pay out a bonus each year and
require the shareholders to lend a certain (say $10,000)
amount back to the corporation. The corporation should
do a formal note paying interest at 10 percent. When the
radiologist retires, the note is then repaid over five years.
This is a great way to build equity from shareholders and
rewards those who leave the money in the company.
S-CORPS AND LLCS/LLPS
CliftonLarsonAllen, LLP, is a professional partnership that I am a partner in. Each year we distribute 100
CAPITAL RETENTION IN RADIOLOGY PRACTICES – TIME TO CHANGE THE APPROACH?
percent of the profits and then each partner is required to
contribute back a calculated share of the projected addi-
Conclusion
The sponsored ad of Morgan Stanley on the front page
tional capital needs. The calculation is based upon income
of the Wall Street Journal on July 15 says “Capital Creates
and years of service, and the partnership pays a 10 percent
Change—we work with visionary companies to bring big
return on the contributed capital. It is done with after tax
ideas to life—harnessing capital, not just to create wealth,
dollars so it is painful, but worth it. We are not beholden
but also to create positive change.”
to a bank, and we have capital to fund growth.
Radiology groups that are S-Corps and LLCs/LLPs can
operate in a similar manner with similar success.
Buy-in/Buy-out Arrangements
There must be an incentive for radiologists agreeing to let
profits stay in the practice. This should come in the form
of a return on the investment, plus the chance for some
stock appreciation. Most radiology groups do not put much
of a value on the practice itself in the buy-in or buy-out
arrangement. While I understand why it is done that way,
Most managers of radiology groups would agree that
capital retention is something that should be done, but
feel that getting group consensus to do it would be next
to impossible. However, if groups do not start to do it,
right now, they may end up with the same fate as most
independent primary care groups: sold to a system, or as
Dylan puts it, “sink like a stone.” Radiology groups that
have equity will have the two critical elements needed for
success: an engaged radiologist workforce with emotional
(and real) ownership and the capital to grow.
the concern is that it may not reflect fair market value thus
creating a dilemma if the group ever contemplates selling, as
no one wants to sell for less than fair market value. Using
a method that tries to reflect fair market value creates an
incentive to increase the value. The shareholder will see the
benefit of leaving profits in the corporation and invested
when it results in a higher buy-out amount.
As independent groups become regional and national in
scope, I believe they have a greater value. Doesn’t a group
with per-radiologist income that is 150 percent higher
RBMA BULLETIN | september-october 2015 | www.rbma.org
than another group seem like it has more inherent value?
JOSEPH P. WHITE, CPA, MBA,
healthcare principal at CliftonLarsonAllen, specializes
in serving physician groups and healthcare systems.
He has over 30 years of experience in consulting, tax,
and assurance services in the healthcare field. He is
also on faculty at the University of St. Thomas teaching in The Center for Health and Medical Affairs, the
Physician Leadership College, and The Executive MBA
Program. Joe can be reached at (612) 376-4525 or
joseph.white@CLAconnect.com.