Private equity sets sights on acquisitions of radiology groups

2020 02 06 21 14 6532 Men Working Business 400

The private equity industry continues to see radiology groups as promising targets for mergers and acquisitions (M&A). Despite some recent consolidation, investment firms view the healthcare sector as a fragmented market that's ripe for consolidation.

Andrew Colbert.Andrew Colbert.

This activity is being driven by a confluence of factors, including significant availability of private equity capital. These favorable market trends should continue well into 2023, with no sign of market activity slowing down anytime soon.

In all, $30 billion of capital has been raised in recent years by private equity funds specifically targeted at healthcare companies, attracted to the sector's highly attractive fundamentals, such as increasing demand, high fragmentation, cost synergies achievable through scale, reimbursement complexity, and capital requirements for growth. The physician services sector is of particular interest due to high fragmentation across over 130,000 independent groups.1

Many of these groups lack access to growth capital and are not making significant investments in technology, marketing, and back-office resources to maintain their competitive advantage. Additionally, many independent physician groups are overwhelmed by the ever-increasing reimbursement and regulatory complexities.

Radiology is of particular interest to private equity investors, health systems, and managed care, due to the strong projected growth in imaging demand, coupled with a highly fragmented landscape.

Below are five key tailwinds that are expected to fuel continued M&A activity in the radiology market in 2023:

1. Migration of volume from inpatient to outpatient settings

Roughly 60% of the $100+ billion radiology market is being performed in the hospital setting.2 We can expect a significant portion of these volumes to shift from the higher-cost hospital setting to lower-cost (and more convenient) outpatient settings over the next five or more years. This presents a potentially significant opportunity for high-quality outpatient-focused providers to position themselves for an increase in demand over the coming years. Many radiology groups will need to reevaluate their outpatient and broader consumer strategies -- and if they do not offer care in the outpatient setting, they will need to consider building one.

2. Significant market fragmentation with room for multiple market leaders

Combined, the private equity-backed radiology groups represent only about 15% of the market, with over 70% of the market still ripe for consolidation. However, independent groups across the U.S. are finding it harder to compete, as the average group has only 10 radiologists, which is not large enough to provide full subspecialty service.

To succeed in today's market, it is critical to be aggressive in adding service lines, gaining market share, and building scale, which equates to investing in IT, management, and personnel, which may result in a decrease in owner income distributions, in exchange for more favorable long-term practice positioning.

3. Consumers are looking for a more modern "retail" experience

The COVID-19 pandemic has placed a greater emphasis on consumer engagement and immediacy of services -- with the increased availability of telemedicine and on-demand appointments, patients have become accustomed to being seen immediately and no longer tolerate sitting for hours in crowded waiting rooms. Radiology groups would be wise to make investments to meet these new consumer realities and expectations, as well as be in a position to market how the practice is delivering outstanding patient service in a convenient care setting and in an affordable manner. Practices able to clearly articulate that they are delivering high-quality, high-touch patient care while leveraging cutting-edge technology will maintain a competitive edge.

4. The reimbursement and regulatory environment is more complicated

The U.S. Centers for Medicare and Medicaid Services (CMS), the agency that oversees the Medicare program, is shifting reimbursement dollars to primary care, at the expense of physician specialists, while keeping overall spending constant. These reimbursement changes will need to be offset with increases in both productivity and efficiency.

In addition, surprise billing legislation that bans the practice of sending surprise bills for out-of-network care became law on January 1, 2022. For many physician group practices, these changes will consume considerable staffing resources and require greater practice scale for negotiating leverage with payors. Regardless of reimbursement mix, physician groups need to be proactive in planning for and investing in new sources of revenue and cost efficiencies to help offset any potential future revenue cuts.

5. Keystone for value-based care

Radiology is uniquely positioned as a keystone in enabling value-based care, given its significant impact on downstream savings. Radiology is one of the only medical specialties that touches almost every discipline of care and has such a profound impact on the diagnosis and interventions.

In addition, the opportunity to leverage artificial intelligence will only further elevate the role of radiology -- to help detect cancers earlier (thereby lowering downstream costs), as well as to prevent unnecessary procedures.

Looking ahead

The radiology operating landscape will only become more complex in 2023 with the tightening labor market, reimbursement changes, regulatory dynamics, and greater consumer demands. We will continue to see a move toward larger group consolidation across physician practice specialties as many independent groups are looking for greater scale to drive their continued success.

Also, 2023 will be another busy year for healthcare M&A transactions fueled by robust private equity and public market activity. Investors will continue to focus on the themes of increasing quality while decreasing costs across the healthcare landscape. There will be significant investments in care models that are favorably positioned to manage the overall cost of care for entire patient populations and have the opportunity to move costly hospital procedures into the more affordable outpatient setting.

One clear takeaway is that scale is an absolute requirement for ensuring success over the long term. It seems that 2023 will be a pivotal year for radiology groups, which must be ready to answer the question of whether they want to build the required capabilities in-house (i.e., be the "platform") or partner with a larger national platform.

In order to be the platform, you need to be aggressive in adding service lines, gaining market share, and building scale. Such groups must be willing to make the IT, management, and personnel investments to get there -- and those investments will come at the sacrifice of owner distributions.

Physician owners can also decide to partner with a regional or national group that can offer them new resources and the benefits of scale. National group models are built on the concept that clinical control and governance remain in the hands of the local group while the partner brings the necessary capital, extensive administrative, technology, and operational capabilities to help ensure success.

Additionally, partnerships can be structured to align the incentives so that the local group is able to participate in the future upside and growth.


  1. https://www.definitivehc.com/resources/healthcare-insights/top-physician-groups-size-medicare-charges.
  2. https://www.radnet.com/sites/corporate/files/radnet/imce/investor-relations/RadNet-Investor-Presentation-9-21-2021.pdf
  3. Ziegler Research

Andrew Colbert is a senior managing director and founding member of Ziegler's Healthcare Investment Banking practice. Andrew has represented 24 radiology groups on innovative transactions. He specializes in advising physician groups on strategic and financing alternatives including merger and acquisitions, joint ventures, capital raising transactions, and partnership development. More information is available at www.ziegler.com/radiology.

Ziegler is a privately held, national boutique investment bank, capital markets, and proprietary investments firm. It has a unique focus on healthcare, senior living, and education sectors, as well as general municipal and structured finance. Headquartered in Chicago with regional and branch offices throughout the U.S., Ziegler provides its clients with capital raising, strategic advisory services, fixed income sales, underwriting, and trading, as well as Ziegler Credit, Surveillance and Analytics. To learn more, visit www.ziegler.com.

Information contained or referenced in this document is for informational purposes only and is not intended to be a solicitation of any security or services.

B.C. Ziegler and Company | Member SIPC & FINRA.

The comments and observations expressed are those of the author and do not necessarily reflect the opinions of AuntMinnie.com.

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