As reimbursement rates plummet and pressures to stay competitive increase, many private radiology practices are choosing to align themselves with hospitals. In today’s world, hospitals can strike better deals with insurance companies than radiology practices can.
 
“It’s a really tough position to be in right now,” says Nat Wasserstein, managing director at Lindenwood Associates LLC in Nyack, New York. “It’s near impossible to compete with the hospitals. It’s not just the reimbursement rates that the hospitals get. They often have the competitive advantage of being a not-for-profit. Not having to pay taxes and having donor-driven capital campaigns for new equipment gives them a huge advantage over radiology practices that use after-tax dollars and debt.”
 
But a radiology practice that is heavily leveraged does have other options at its disposal, including a restructuring that may include a Chapter 11 filing. Wasserstein spoke with HealthCare Business News about what practices can do to keep their businesses afloat and when it may be time to get out.
 
Restructure or Reorganize
A radiology practice can restructure its balance sheet, but if the underlying business is flawed, it’s just a Band-Aid option. Another option is to reorganize its business entirely by cutting away the services that are either losing money or not yielding enough profit, and strengthening those that throw off enough cash flow to carry the entire business and reinvest for growth.
 
The first thing a practice should do is properly assess whether it’s generating positive cash flow or not. The second thing is to develop and implement a new plan, says Wasserstein. A plan may include consolidating locations, which can cut labor and operating costs. A practice’s economic goal should be to target a profit margin, collect receivables as fast as possible and pay payables as late as possible, all while increasing volumes and decreasing operating expenses. But, ultimately it’s all about execution, because you can’t do much with a plan unless you have the leadership to implement it.
 
Volume is not always the answer
A plan to increase volume can be difficult and a practice must know its business well because there are fixed and variable costs. If an increase in volume requires an increase in fixed expenses, it could lead to problems. Volume increases don’t necessarily mean the practice will make more of a profit.
 
More volume could mean more staff, more space and more equipment,” says Wasserstein. If inventory and receivables increase, more working capital will be needed too. “The more operating assets you have, the less cash you have.” If a practice doesn’t get the benefits it thought it was going to get from greater volume, the only thing left to do is cut costs. But Wasserstein says that could mean “cutting into the bone,” which can be disastrous because the practice may not be as resilient facing business risk every day. The smallest problems can lead to a financial crisis.
 
“If one, sizable receivable does not get paid on time, or there’s a problem with labor, or bad weather creates unusually low volume, then you join the ranks of the financially distressed,” he says.
 
Aligning with a hospital
Wasserstein says that the smart practices will decide to align with a hospital. “Right now an imaging practice’s financial goal should be to survive as a business. I think you have to look at it as, ‘Am I going to make it one day to the next?’” he adds. When a hospital is evaluating a practice, it is looking at volume. “They already have the infrastructure. All they need is new volume to go through that,” says Wasserstein.
 
He says it’s a good idea to prepare by having an outside, impartial company identify and eliminate under-producing aspects of the business and strengthen core areas. “It may become inevitable for a private imaging center to join a hospital,” says Wasserstein. “Physicians’ salaries and reimbursement rates continue to fall, and new equipment and technology continue to over-leverage balance sheets. The sooner they realize they need to become part of a hospital or a sizable medical center, the better.”