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Capital deployment: changing radiology landscape provides opportunity for investors

November 27, 2016
Andrew Colbert
From the November 2016 issue of HealthCare Business News magazine

By Andrew Colbert

An abundance of capital available in the health care space has investors searching for hot opportunities. Hospital-based radiology groups have historically flown under the radar of investors, but the sector is starting to garner increased attention due to the convergence of industry tailwinds.

Key trends making radiology attractive
The radiology sector is both large and fragmented, two attributes that create tremendous opportunity for growth. In terms of size, the current annual hospital-based professional radiology market is an approximately $18 billion industry with expected 2 percent annual growth. Much of this growth is driven by technological advances that are increasing the number of cost-effective applications for diagnostic imaging and demographic trends. For instance, the over- 65 population, which was found to use 2.5 times more radiology than those under 65 by Radiology Business, is expected to grow 60 percent by 2030, according to U.S. Census 2014 national projections.

In terms of fragmentation, the largest independent hospital-based group has around 130 radiologists, which accounts for less than one-half of 1 percent of the nation’s more than 30,000 radiologists, meaning there are tremendous opportunities to gain economies of scale through consolidation. The majority of groups across the country are small and lack the back office capabilities and infrastructure that are required for success in today’s environment.

At the same time, health care reform is driving changes to care delivery and reimbursement models focused on improving outcomes, decreasing costs and increasing value for consumers. The focus continues to shift toward prevention and lower-cost care settings, and away from the traditional “fee-for-service” compensation model. One of the biggest opportunities presented by these reforms is an increasing focus on hospital-radiologist alignment models that push radiologists to more clearly define and demonstrate quality and be more proactive and consultative in the patient care process.

This will enable hospitals to be more efficient with better outcomes, and radiologists to focus exclusively on providing value-added, high-quality, 24/7 subspecialty services (such as a brain MRI at 2 a.m. being read by a neuroradiologist). But that doesn’t mean strategic growth through investment is a quick decision for radiology groups. There are a variety of alternative options to consider and numerous factors that can affect valuations and a successful deal closing. How can radiologists ensure their business is an attractive investment, and what should investors look for when evaluating potential platform investments?

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