 Mark Wagar, chairman of the board and CEO (left), and Mark Martin, president and COO, Radiologix, in the headquarter offices in Houston. |
Not even 5 years ago, Radiologix was poised to ride high on the crest of the physician practice management (PPM) trend, with a single specialty organization composed of geographically clustered radiology practices. PPMs promised a practice model based on an ideal division of care, and for a while they were wildly successful with Wall Street financiers. In Radiologix’s case, when the company went public as American Physician Partners Inc in 1997, its stock was valued at $12 per share and the future appeared bright.
Three years later, however, shortsightedness and overvaluation of stock took its toll and PPMs everywhere began collapsing. Radiologix’s stock hit a 52-week low of $2.75 in the early part of 2001, but sagging stock prices failed to topple the company. After closing 2001 at $10.15, Radiologix stock is trading at $9.55, its revenues will stand around $270 million at year-end 2001, and the company operates 120 service sites in 18 states.
Why did Radiologix survive? According to executives, the company sought to align only with the most reputable radiology practices that had strong referral patterns to all of their physicians. “Other PPMs’ revenues and earnings were highly dependent on a handful of physicians,” notes Sami Abbasi, executive vice president, CFO, and cofounder of Radiologix. “Our strength is the radiology group and the medical franchise it built over several decades, as opposed to any one radiologist.” The company also diversified its assets among the professional (physician groups) and technical (technology ownership) aspects of its business, whereas the typical PPM model was more reliant on professional income.
“Most PPMs generated the bulk of their earnings by providing management services to their affiliated physicians in return for a percentage of their professional revenues,” Abbasi continues. They talked about investing in technical assets and growing physician incomes as a result of these new ancillary services. Few were successful.
“The concept of funding acquisitions using stock as a currency can allow a company to grow very quickly. And as long as the stock price continues to increase, the company will appear to be creating value. Once the market corrects and the stock price declines, if the company did not invest wisely, its financial performance will begin to suffer. That’s what happened to most PPMs. They were not built to be operating companies, they were financial plays taking advantage of a strong health care equity market.”
According to Mark Martin, president and COO, even when Radiologix was classified as a PPM, about 60% of the company’s revenue was coming from the technical side as opposed to deriving entirely from the professional side. Since 1998, the ratio of technical focus to professional focus has only grown, and Radiologix’s revenues have likewise increased at a rate of 22% on a compounded basis over 4 years. By 1999, the company also made a decision to no longer buy a minority interest in radiology groups.
“We use our excess cash flow to grow the technical side of our business instead,” Abbasi says, noting that more than 75% of the company’s revenue is now derived from its technical services. “This has further endeared us to radiologists. In focusing on technical revenue and building that side of the business, the physicians appreciate that. They don’t have to think about getting the MR software upgrade, they know it’s going to happen.”
While Radiologix has spent the last 18 months repositioning itself as an imaging services company and disassociating itself from the PPM model, Abbasi believes the company in its current incarnation more accurately reflects the ideal behind the original PPM concept.
“Radiology is a capital intensive business,” Abbasi explains. “We provide greater access to capital than they can achieve on their own and, in the process, help grow their incomes faster.”
Current State of Affairs
Radiologix currently consists of 10 member radiology group practices staffed by about 290 board-certified physicians and more than 1,500 nonmedical employees. Overall, the company has a total of 2,400 employees. Diagnostic services are provided by 120 owned or operated imaging centers located in 18 states, with concentrated geographic coverage in markets located in California, Florida, Kansas, Maryland, New York, Texas, and Virginia. Of the 120 imaging centers, 86 are owned by Radiologix, 21 are joint ventures (14 of these with hospitals), and 13 are owned remote locations, where a specialist requires on-site imaging services. Among the imaging centers there are 30 MRI sites owned by subsidiary Questar, Dallas. The hospital joint venture portion of Radiologix’s business in particular is expected to expand significantly over the next few years.
“When we went public, we went public with seven practices and we paid them in cash and stock for a portion of their revenue stream, and that essentially amounts to taking a minority interest in the practice group,” explains Mark Wagar, chairman of the board and CEO.
“We made that same arrangement and same investment three more times in 1998 for a total of 10 practices, and those same 10 practices are the same 10 practices that we continue to work with today. That relationship is an economic, a capital, and a management relationship in that we help the radiologists operate their practice and in return we are paid a percentage of their revenue.”
Radiologix practices provide referring physician groups with a full spectrum of technical and professional radiology services including general radiology, MRI, CT, mammography, ultrasound, nuclear medicine, interventional radiology, and radiation oncology. A capital expenditure plan begun after the initial public offering (IPO) in 1997 called for updating equipment in acquired imaging centers, and now the average age of key medical equipment is less than 5 years old. Radiologix also has three positron emission tomography (PET) cameras in place as well as plans to invest in some mobile operations.
“That modality diversity serves a number of our needs particularly in the small markets,” explains Mark Laurent, CIO and vice president of information services and clinical operations. “We are able to leverage the front-end cost of technology across our market and add value to our hospital partners where we have joint ventures. For example, affiliation with Radiologix provides practices and hospitals with access to a PET scanner, which perhaps they otherwise would not have. PET in particular is a steadily growing area, and I think the interest is increasing as more providers in the industry have experienced confidence in its diagnostic value.
“In the past 18 months we have spent considerable time building our in-store volume, and kept a close watch on market demands,” Laurent adds.
Decisions about which technology to acquire are made by regional and practice level management staff, as well as physician staff. Radiologix then maintains agreements with several manufacturers based on each modality, with an emphasis on providing several choices of each technology.
“For instance, within CT there are high, middle, and lowend scanners, but not all applications will need the highend scanner,” Laurent says. “The typical cost-benefit question for most practices is therefore ‘How much is enough and where do we stop to meet our clinical needs?'”
Market Concentrations
 Radiologix monthly stock price since it went public in November 1997 as American Physician Partners. |
Radiologix strategy is to dominate each market it enters, clustering both practices and facilities. “We strive to be a service leader from a quality and market share standpoint in every market we choose to be in,” Wagar says. “And we recognize that outpatient diagnostic imaging specifically will have tremendous underlying growth over the next decade as it is driven by population growth, aging, and the continued expansion of clinical applications of the high-end digital modalities.
“There are two essential components to this business: driving throughput and collections,” continues Wagar. “And in addressing those, there are two primary strategies: Having multimodality centers, which helps drive throughput, and market concentration, which benefits Radiologix in two ways. If one center has a backlog for a couple of days for an MRI, there should be in that market a center within 5 to 10 miles that may have an immediate opening. The other way our market concentration strategy is beneficial is in negotiating contracts with payors. Radiologix has a bit more strength in its position in areas where we have a significant market share.”
Growth has presented some challenges in the past year with a self-imposed freeze on major capital expenditures. “All growth has had to come through capital expenditures in the $12-14 million range, what we call maintenance capital expenditures, for instance equipment upgrades, software upgrades, and making sure facilities are in good shape,” notes Abbasi. “You have to have that as your foundation, and if you have good technology, good facilities, and great service, then the referring physicians will hear about the pleasant experience the patient had at Radiologix and doctors will continue to refer patients.”
A Place for PACS
Meeting the most advanced clinical needs must also be a priority for Radiologix, which has had some early experience with computer-aided diagnosis (CAD) for mammography in one of its subsidiaries. Martin says Radiologix is most excited, however, about the potential of picture archiving and communications systems (PACS) and their ability to reengineer the way people, paper, and information flow through an operation.
“A large component of where we are moving within radiology is getting films to radiologists by digital transfer,” Martin says. “We are moving toward taking imaging centers to a PACs environment by making sure the technology is available to enable radiologists to do that. That means they can eventually be more profitable with higher utilization of the equipment, and be more productive without working harder.”
“We are not doing this because the technology is cool; it has to make business and economic sense for it to succeed,” says Laurent. “Long-standing patterns of behavior will need to be modified in order for this to realize its full potential.”
Radiologix therefore has invested considerable time in the last 18 months looking at PACS. Its first enterprise-wide PACS will be installed in the next quarter at Community Radiology Associates, Rockville, Md.
According to Laurent, the Rockville location represents all of the essential components of other Radiologix facilities, including size. “It has a strong relationship with nearby Montgomery hospital, as well as joint venture experience with that hospital, and that is an important component in using this technology,” Laurent says, adding that Radiologix plans to make the Rockville practice paperless as well as filmless.
“In order to take full advantage in moving imaging studies around a practice, paper must go away. In order to leverage PACS to go filmless, we need to go paperless and that is part of this deployment,” he says. “So far, very few imaging businesses have actually accomplished that in a distributed environment.”
Radiologix also is researching a web-based radiology information system, and the company has done a number of client server installations in the last 3 years. It is now narrowing the list of probable vendors to find the next generation of information products. In 2002, the company hopes to roll out electronic patient satisfaction surveys, which it has already been beta testing.
“Hopefully, those will clarify further opportunities for improvement, and that in turn is important for our growth and effectiveness,” Laurent says.
The Management Side
None of the company’s 86 wholly owned imaging centers actually bear the name of Radiologix, nor is the name evident in any of the 21 joint ventures it operates with hospitals. However, the company is very much present at each location.
Over the years, Radiologix has developed uniform standards for billing, collection, reporting, and negotiation procedures and processes. Practices are networked into a company-wide communications infrastructure that features both the financial accounting system and the executive information system, in contrast to billing and collections, which continue to be performed by Radiologix employees at the local level. “Our controller, through the network, can monitor what is happening financially at any of the practices,” explains Abbasi.
An operations team monitors statistics every day that indicate the backlog of patients for a particular piece of equipment and wait time. There also is an approved method for moving patients through their appointment as expediently and pleasantly as possible. Two customer satisfaction surveys are performed annually, and the company is working on a touch screen survey that would be available to patients as they leave the facility.
“We have found that if a patient does not have a good experience, the first person who hears about it is the referring physician or his staff,” says Martin. “That is why we do customer satisfaction surveys and that is why it is so important to stay in touch with the referring physicians. Our marketing group monitors referral patterns so that if referrals from a given doctor change, we can contact that doctor and ask what his sensitivities are: perhaps we do not have a modality he needs or a customer had a bad experience. Our job is to find that out as soon as possible and rectify it as soon as possible.
“If that [solution] represented the best practice in one market, we could translate that practice into our other markets through our regional directors of operations (RDOs). When you affiliate with a practice, one of the advantages is sharing best practices across geographies. This goes on in marketing, billing, collections, and all facets we touch. The RDOs [there are six of them] have a conference call each week and get together once a month.”
The company develops and implements national group purchasing arrangements to provide cost savings associated with equipment purchases, leasing and service agreements, and the general purchase of medical and office supplies.
“We set out in the beginning to create an infrastructure with a level of service and support that no one else could provide,” Martin says. “We then went on to provide a higher level of support in accounts receivable, attracting marketing and creative services, and focusing on employee benefits and management. We built that at a national level while utilizing concepts from the individual units, and we pride ourselves on the concept of inclusion. We felt that each component could contribute to making an organization better than it would be on its own.”
Martin notes that though the original rationale behind PPM was a partnership, the structure of Radiologix today is really an embodiment of that strategy.
“Our philosophy from the start is that we were coming together by acquisition, and we wanted to compile the best components from each of the operating subsidiaries to form the culture of the company,” he says. “We like to assess what people do best and what they like to do, getting them involved in the organization in that way. We utilize individuals as team players, whereas other companies in health care view radiologists as a commodity.”
Radiologix has working joint planning boards that decide where to expand, what kind of services to offer, how to better provide services, and how to look critically at operation management issues.
“Part of the decision-making process is not giving directives,” Martin says. “In our mind, physicians are not employees of the company; they are individual entities, so they should not feel they are being directed. The two entities reach their decisions together.”
THE RADIOLOGIST PERSPECTIVE
While Michael Sherman, MD, does not represent necessarily the rank and file among Radiologix physicians, he is a radiologist, a Radiologix board member, and chairman of the board of Advanced Radiology, Baltimore, the largest group affiliated with Radiologix, with 100 radiologist members. Advanced Radiology was one of the initial groups to join Radiologix in
November 1997, following a merger of seven separate radiology groups in 1995.
“Aligning with Radiologix was very important in our development,” Sherman says of Advanced Radiology, which services seven hospitals and 23 imaging centers. “We had great capital needs and we were merging several administrative departments. Trying to run this practice prior to our association with Radiologix was extremely challenging. The physicians were trying to set policy and run business aspects in their spare time.”
When Advanced Radiology joined Radiologix, the group was able to benefit from Radiologix’s expertise in several arenas. The primary benefits include the capital infusion that Radiologix made into the practice, allowing it to purchase many millions of dollars of new equipment and thereby making the practice much more efficient, according to Sherman.
“Radiologix also has broad expertise in the technical operation of radiology facilities and we have reaped the benefit of that experience,” he says. “We have access to their purchasing agreements with major vendors on a national scale, and we have definitely benefited from Radiologix’s knowledge of issues like compliance and legal considerations.”
Sherman says Advanced Radiology’s affiliation with Radiologix also provided support for its large number of subspecialties. The company’s practices include 10 neuroradiologists, three specialists in musculoskeletal radiology, seven or eight mammographers, 18 angiographers, and six or seven board-certified nuclear radiologists.
“They have a very nice collegial atmosphere and are able to consult with each other,” Sherman says. “Similarly, our group also shares the experiences of best practices of groups across the country, such as approaches to scheduling physician practices, benefits packages, and protocols for the various modalities.”
Members of Radiologix share that kind of information on a regular basis, and physicians from different practices are not hesitant about having conference calls to discuss specifics of mammography or PET, according to Sherman.
“You get to know people in different groups so you also are quick to pick up the phone and bounce ideas off of each other,” he says.
While Advanced Radiology has been happy with its affiliation, that does not mean that joining a larger entity such as Radiologix is right for every practice. Sherman notes that one of Advanced Radiology’s initial fears was the loss of autonomy that comes with bringing in a technical partner-a fear that inspires many radiology groups to remain independent.
“We were concerned about that, but the development of managed care, the consolidation in the insurance industry, and the regulatory complexity of running a practice created a need to become involved with a company or management organization with significant expertise,” he says. “I don’t know that we would have been able to handle the complexities alone.”
Advanced Radiology’s practice has grown significantly over the past 3 to 4 years, a fact that Sherman says is mostly due to the group’s hardworking, productive physicians.
“A share of that credit goes to Radiologix as well,” he says. “We have mutual incentives. We compensate Radiologix for their services, but we share in the technical growth of the practice, which has significantly offset what we pay them.”
Advanced Radiology also has had success in attracting new radiologists over the past few years, a fact that Sherman says has little to do with the Radiologix affiliation.
“In a group this large, some see that connection as an advantage, while others see it as a disadvantage. It just depends on the likes and dislikes of the candidate,” he says. “But Radiologix has certainly not negatively affected our recruitment.”
Life on the Street
Nonetheless, being affiliated with a publicly traded company represents a dramatic culture shift for most physicians, and the Radiologix stock slide could not have been good for morale. Sherman, however, insists on seeing the upside.
“The issue of morale over the stock downturn really becomes less relevant as time goes on,” Sherman says. “There is a possibility of economic downturn whether you are involved in a public company or you own it yourself. I sleep a little better not owning the imaging centers.”
Wall Street’s drumming of PPMs in general has seen many companies, including Radiologix, distance themselves from the term, focusing instead on repositioning itself in the marketplace as a diagnostic imaging services company.
“There are no PPMs left, and as survivors, we have explained that being a physician practice management company is not our business strategy,” Abbasi says. “Our aim is to deliver true value to all the parties involved: radiologists, patients, insurance companies and other payors, and the referring physicians.”
The combination of those elements supports Radiologix’s long-standing premise, which Wagar says has always been that the way to be successful in outpatient diagnostic imaging is to be a complete, high service-level provider to patients and referring physician offices.
“At the moment we are content with what we have,” Wagar says. “If we were moving into a new market or a market adjacent to one we are already in, we would look to contract with a strong, reputable radiology practice that has been in the market for many years to supply reading services and not look to expand the management side of the business.
“Our goal in the next decade is to continue providing the kind of service improvement and financial performance that we have evolved to at this point,” Wagar adds. “Our idea of success would be when a radiology group feels it needs help running its imaging business and finding a capital partner, we are the first organization that comes to mind.”
Elizabeth Finch is a contributing writer for Decisions in Axis Imaging News.
