The Consequences of Poorly Conceived Admission Requirements

05.05.23 // Medicine

From “The relationship between required physician letters of recommendation and decreasing diversity in osteopathic medical school admissions“:

Osteopathic and allopathic physicians, DOs and MDs, are already essentially the same and have been increasingly so over recent years. But one admissions practice is very common for osteopathic schools and exceedingly rare for allopathic schools: requiring a letter of recommendation from a practicing physician (PLOR):

Although requiring a PLOR is very common practice among osteopathic medical schools, with 81.8% (36 out of 44) requiring it, it is rare among allopathic schools, with 3.9% (6 out of 154) requiring a PLOR. Allopathic medical schools only require LORs from a student’s undergraduate institution and strongly recommend a clinical letter but do not require it. According to the Association of American Medical Colleges (AAMC), allopathic schools matriculated 14.6% URM students in the year 2020 [28], compared to 11.1% URM students at osteopathic schools [4]. They also had more than double the percentage of Black matriculants (7.6 vs. 3.3%) [4, 28].

But.

On average, schools that required a PLOR have 37.3% (185 vs. 295; p<0.0001) fewer Black applicants and 51.2% (4 vs. 8.2; p<0.0001) fewer Black matriculants.

That’s a painful number. Schools that have this requirement receive end up with half as many black students.

Perhaps there are confounding factors here, but that difference demands at least further study. Frankly, I’m not sure whatever the purported benefits of a physician letter are that they could possibly justify the practice given the functional barrier they seem to create.

If you look at the data, applicants across the board are actually down with the requirement. While the barrier wasn’t specific to any group or underrepresented minority, the changes reached statistical significance only in that subgroup. It’s just a cudgel to decrease the admissions administrative burden.

I’ve written before about the “good reason to be a doctor” police. I think we, as a profession, are simply not that good at choosing candidates, and I sincerely doubt a letter from a random doctor means literally anything. Letters of Recommendation are mostly useless, but I especially fail to see how a letter from someone you follow around for a shadowing experience tells me anything about you as a person that I care about that couldn’t be determined from someone else.

There are social determinants of medical school admissions that are entrenched and difficult to change. Then there are the incredible costs of medical school that are baked into the status quo. But this? This is not a good or equitable way to shrink the applicant pool to a more manageable size for the admissions committee.

This is a petty, minor detail that every school should delete today.

(hat tip Bryan Carmody)

The Looming Spectre of Automation Bias

05.04.23 // Radiology

From “Automation Bias in Mammography: The Impact of Artificial Intelligence BI-RADS Suggestions on Reader Performance“:

Inexperienced radiologists were significantly more likely to follow the suggestions of the purported AI when it incorrectly suggested a higher BI-RADS category than the actual ground truth compared with both moderately (mean degree of bias, 4.0 ± 1.8 vs 2.4 ± 1.5; P = .044; r = 0.46) and very (mean degree of bias, 4.0 ± 1.8 vs 1.2 ± 0.8; P = .009; r = 0.65) experienced readers.

Small but pretty clever study.

“Automation bias” is an insidious combination of anchoring and the authority fallacy, and it demonstrated a huge (though experience-mediated) effect here. We are still very much in the early days here (most radiologists are still very skeptical about the current powers of “AI” tools).

As machine learning tools grow in power and complexity, they will undoubtedly become a larger part of the radiology workflow. But counter to enabling inexperienced practitioners to function without oversight (e.g. a non-trained non-radiologist working independently with AI bypassing radiologists), we will instead need more robust skills: Raising the floor to miss fewer fractures and PEs is the easy part; it takes knowledge and experience to countermand the computer you increasingly rely on.

This isn’t going to be easy.

Goodbye, Nanoism

04.28.23 // Writing

When I started the current iteration of this site in January 2009, I was also writing short fiction. In fact, one of my self-imposed creative writing projects was an exercise in the form of a daily tweet-sized story. Very strange, it’s true, but 2009 was a long time ago in internet years, and it seemed like a good idea at the time. Perhaps even odder, but I found this experiment so creatively fulfilling that I decided to do something that remains unique: a paying venue for literary Twitter fiction, self-contained stories in 140 characters or fewer. (For reference, this is so long ago that it predates the official retweet function, and to this day, most literary magazines do not pay writers for their stories.)

After 14 years of continuous publication, Nanoism remains by far the longest-running venue of its kind. This has been on the About page since day one:

We’re not just catering to the 21st-century attention span, we’re publishing flexible fiction: stories that you can read on your computer or cellphone, stories that fit in the cracks of your day.

Over the past fourteen years, we published 1000 standalone tweet-sized stories from 660 writers, multiple longer serials, ran contests to raise money for charity (judged by amazing writers like Ethan Canin and Robert Swartwood), been on NPR, and had stories featured in best short fiction anthologies and books on craft. Not a bad run.

It was a fun hobby and relatively well-suited to the preclinical/basic science years of medical school. But in the years since, through residency and fatherhood and the many wrinkles that make up a life, it was harder and harder to find the bandwidth to promote this art form, this venue, and the hundreds of writers I’ve published.

This is a small project (forgive the pun), but it took what I had just to keep it running week after week. I was remiss in rarely taking the time to submit stories for the many possible awards and anthologies that work like this can appear in (especially since they often did well!). But the fact is that even if the recognition were to start and stop with just my nomination, every writer who sits down to do the work, puts themselves out there, and hopes for the best deserves as much recognition as they can receive. And for that lack, I truly apologize.

I know that it seems silly to publish things so small and call them stories, but, sincerely, it was an honor and pleasure to read and share your work.

Backwards to the Future: The Return of the Radiology Oral Boards

04.23.23 // Radiology

Earlier this year at the Texas Radiological Society annual meeting, I attended an ABR update given by current ABR president, Bob Barr, where he announced the rapid progress of the ABR’s plan to revitalize the Certifying Exam to address widespread discontent. I wrote about it here. The plan was to announce the change no later than June but potentially as early as April. The takeaway summary at the end of that short post?

But the ABR did reiterate that their hope for the Certifying Exam is a better demonstration of the skills needed for general practice.

But no, I don’t think they’ll be bringing back the oral boards.

The news broke on April 13.

I was wrong.
Continue Reading

United against Radiology Partners

04.19.23 // Radiology

Update 10/24/2023: The case went to arbitration this fall, and the panel has initially ruled in favor of RP. United is going to fight this, and there are still outstanding counterclaims from United against RP. From the Radiology Business article: “We do not agree that Singleton will recover an award from UnitedHealthcare,” the Minnetonka, Minnesota, company said.

* * *

The big radiology news of the week? United Healthcare–generally felt to be a font of diabolical greed–is suing Radiology Partners:

In its unscrupulous pursuit of profits Radiology Partners orchestrated a pass-through billing scheme intended to defraud United, its customers, and its members of tens of millions of dollars.

Takes one to know one, as the childhood saying goes. You can read the initial complaint here.

United claims that RP illegally funneled the work of multiple groups across and even outside Texas through its most lucrative contract held by a small group in Houston (so-called ‘pass-through’ billing fraud).

The suit alleges that Singleton, a small group in Houston that RP bought in 2014, had an especially lucrative contract dating back to 1998 for ~6x Medicare rates “to practice at two local hospitals.” According to the story, everything was going just fine, until…

That changed in 2014 when Singleton was effectively acquired by Radiology Partners. Once Singleton was controlled by Radiology Partners, Radiology Partners caused Singleton to breach the Agreement by submitting claims for services performed by providers who were not shareholders, partners, or employees of Singleton (the “Unauthorized Providers”) and who were not performing services at hospitals where Singleton was contracted. Likewise, Radiology Partners caused Singleton to fraudulently bill United for services performed on individuals who were not Singleton’s patients.

Now, groups merge all the time or sell to hospitals to take advantage of stronger contracts, so that’s clearly not an issue in all circumstances. It depends on whether or not RP is truly engaged in true pass-through billing or not:

Pass-through billing occurs when an ordering physician requests a service and bills insurance for it but does not perform the service, nor does anyone under the physician’s direct employ. Insurance companies generally forbid this practice.

Per United, the Singleton contract specifically “prohibited Singleton from assigning its rights and responsibilities under the contract without written consent from United, and required Singleton to notify United of any changes in ownership or control.”

As in, RP wasn’t actually allowed to buy them in order to funnel every Texas claim through that Tax ID.

This was presumably RP’s exact business model.

In 2013, the Singleton agreement had 70 unique providers. By 2022, there were more than 1000 providers billing under the Singleton contract. For more context, according to RP’s recent 10-year anniversary press release, RP employed ~3300 radiologists in 2022. (So…1/3 of RPs nationwide practice was added to this contract? Yikes?)

There are also some nice digs about RadPartners as a company in section “III. RADIOLOGY PARTNERS’ BLIND PURSUIT OF PROFIT” (yes, again, United Healthcare clearly has a pathological sense of irony):

While claiming that medical groups are “Locally Led,” Radiology Partners carries out its operations through a web of subsidiaries and affiliates under the umbrella “RadPartners.”

In some cases, medical groups are organized as professional associations. When Radiology Partners takes over, these professional associations become owned by physicians who are executives at Radiology Partners, thus giving Radiology Partners effective control over the medical group.

Radiology Partners controls various functions of these professional associations, including payor contracting and billing.

In exchange for these services, Radiology Partners siphons off large amounts of revenue from the medical groups. Indeed, on information and belief, the affiliated medical groups no longer retain any profits resulting from the radiology services that they provide, and all profits are instead kept by Radiology Partners.

Ouch. Back to the lawsuit, so how does RP get away with keeping the old contract when there is a new owner?

On October 31, 2014, Singleton filed an Amended and Restated Certificate of Formation that changed Singleton’s ownership and made Anthony Gabriel the only member, officer, or director of Singleton. In addition to becoming the sole member, Gabriel became the sole officer and director of Singleton.

Anthony Gabriel is a co-founder of Radiology Partners and its Chief Operating Officer.

No notice was ever provided to United of any change in Singleton’s ownership.

By appointing Gabriel as the sole member and director of Singleton, Radiology Partners can exercise control over all actions taken by Singleton without formally owning it. Radiology Partners and Singleton structured their relationship to remain two separate entities.

And that, I suspect, is the crux. In the real world that you or I live in, RP owns this practice. But they own it by siphoning off all the profits and by installing one of their own as the sole officer with all operational control. But, Singleton remains Singleton. While it’s not exactly “locally led” if Dr. Gabriel is the sole director, Singleton remains a separate legal entity.

The dicier part of the story is that obviously all of these extra rads clearly don’t really work for or at Singleton. I’m not sure what justification RP uses here if that is specifically stated in the contract. It seems like an eating-your-cake-too situation where RP wants to take advantage of a lucrative contract by not formally owning a local practice but also wants to pretend that nonaffiliated RP practices are somehow all the same. After all, Singleton isn’t the one that bought these other “locally led” groups.

While the Agreement contemplated that providers could be added to the Singleton medical group subject to the other terms of those [sic] Agreement, only providers who were actually working for Singleton—and providing services to Singleton patients—could be added to and have their services billed under that contract.

United has since learned that the vast majority of providers that Singleton, acting in concert with Radiology Partners, added to the Agreement were Unauthorized Providers. They were not employees, shareholders, or partners of Singleton and were not providing services to Singleton’s patients (i.e., at hospitals where Singleton was previously contracted to provide radiology services).

I’m obviously not a lawyer, but it would seem the precise wording in the contract for this claim is basically everything. Twitter is full of eating popcorn gifs at the moment.

* * *

The initial complaint of a lawsuit is by definition a one-sided narrative. And, one assumes, this is the strongest story United can tell. Obviously, this has been going on for years, and it’s completely unclear why this is happening now. My initial reaction was to assume that RP and United were in a heated billing dispute of some kind and this was United playing hardball.

RP, for their part, is indeed arguing just that, saying this is just a cynical maneuver in an ongoing reimbursement fight:

We believe UHC’s complaint represents an obvious attempt to delay or disrupt the conclusion of an underpayment dispute currently in arbitration involving a Texas-based RP-affiliated practice.

The lawsuit as a bullying tactic remains alive and well.

It’s challenging to know who is right and wrong this early in the plot. It doesn’t help that neither company is deserving of anyone’s sympathy. I suspect for most observers it’s like hoping for a rare double knockout: it’s a shame there can only be one loser.

As a layperson who reads the news, I am frankly not convinced the legal system even really works. For another radiology example, I enjoyed the legal briefs from the antitrust lawsuit against the American Board of Radiology, but even though I wasn’t impressed by the ABR’s lawyers or their various arguments, they still managed to get that suit dismissed. Clearly what I think doesn’t matter.

But, I will admit, this looks a little…er, fraudy? Perhaps this should come as no surprise given that the RP brass came from DaVita, itself no stranger to fraud (and which has paid ~$1 billion in settlements so far).

If this is just a 3D Chess negotiation ploy, the real question is: Will it work? And, will this get far enough that discovery leads to interesting revelations? From an outsider‘s perspective, it would seem likely that they will settle this quietly out of court for an undisclosed sum without admitting wrongdoing.

* * *

Other than the making public of a previously private spat between United and RP, what does this mean?

Well, for one, this is just one insurer in one (admittedly large) state. You know everyone is going to be pouring over their books looking for evidence of the same and watching closely to see how this turns out. This could be a big nothingburger or the harbinger of doom.

As for RP, how else does this affect things other than the obvious dollars at risk?

I won’t pretend to know how strong their case is, but again, if you read the complaint, it literally looks bad. As in, the raw optics aren’t great.

Now obviously I don’t have the mind of a large institutional investor. A lot of these PE roll-ups looked suspect to me even in the age of zero percent interest rates, and the history of the industry’s company management is mixed, to say the least. But If you’re running a fund considering buying RP’s distressed corporate debt or someone big enough to consider buying the whole thing, I don’t see why you would with this on the table. Yes, their massive leverage in the form of high-interest floating debt is a bigger problem. Yes, their revenue growth is already constrained by the current reimbursement climate and the tight job market. One insurer asking for millions isn’t necessarily a big deal when you already owe billions, but in the face of all these big-picture headwinds, I don’t think this is going to help their marketing department. RP needs help to deal with its debt, and unless they win very quickly, this lawsuit won’t help.

Lastly, I feel bad for some of the individual radiologists named in the suit. RP Executives aside, I doubt any of them knew how billing was being carried out on their behalf. I even recognize some names that no longer work for RP. Perhaps I am being unfair, but this is just one more strike against going to work for an RP company, especially for new graduates. Who wants to have their name dragged as part of a False Claims Act investigation, whistleblower complaint, or other lawsuit? This doesn’t need to be the future of our profession.

Evidence is Ubiquitous

04.12.23 // Medicine, Miscellany, Radiology

When you look for the answers needed to confirm your beliefs, you can almost always find evidence. That doesn’t mean you’re right. It means confirmation bias is a real cognitive trap.

Radiologists (or clinicians of any stripe) need to constantly regulate and bring to consciousness balanced decision-making between observation and synthesis (putting together multiple findings to reach a conclusion) and anchoring on initial observations in ways that can impair objective analysis.

As in: is this additional imaging or clinical finding subtle or simply not there?

Imaging interpretation is a surprisingly noisy process. Sometimes we simply don’t know if a finding is “real” or not—we make judgment calls based on intuitive probabilities all the time. When findings make sense for a given clinical picture, we are more likely to believe them. Conversely, when we know what to look for, we are more likely to marshall our attention effectively and be able to identify subtle findings.

But: balance in all things.

There are two facets of confirmation bias that deserve their own discussion here: cherry picking and selective windowing.

Cherry Picking

You can’t retrospectively judge the likelihood of an event after the fact. This is part of the unfairness of Monday-morning quarterbacking and medical malpractice. You can’t predict the weather that occurred last week. Forecasting is a prospective process.

From Richard Feynman’s classic The Meaning of It All: Thoughts of a Citizen-Scientist:

“A lot of scientists don’t even appreciate this. In fact, the first time I got into an argument over this was when I was a graduate student at Princeton, and there was a guy in the psychology department who was running rat races. I mean, he has a T-shaped thing, and the rats go, and they go to the right, and the left, and so on. And it’s a general principle of psychologists that in these tests they arrange so that the odds that the things that happen by chance is small, in fact, less than one in twenty. That means that one in twenty of their laws is probably wrong. But the statistical ways of calculating the odds, like coin flipping if the rats were to go randomly right and left, are easy to work out.

This man had designed an experiment which would show something which I do not remember, if the rats always went to the right, let’s say. He had to do a great number of tests, because, of course, they could go to the right accidentally, so to get it down to one in twenty by odds, he had to do a number of them. And it’s hard to do, and he did his number. Then he found that it didn’t work. They went to the right, and they went to the left, and so on. And then he noticed, most remarkably, that they alternated, first right, then left, then right, then left. And then he ran to me, and he said, “Calculate the probability for me that they should alternate, so that I can see if it is less than one in twenty.” I said, “It probably is less than one in twenty, but it doesn’t count.”

He said, “Why?” I said, “Because it doesn’t make any sense to calculate after the event. You see, you found the peculiarity, and so you selected the peculiar case.”

The fact that the rat directions alternate suggests the possibility that rats alternate. If he wants to test this hypothesis, one in twenty, he cannot do it from the same data that gave him the clue. He must do another experiment all over again and then see if they alternate. He did, and it didn’t work.”

His conclusion?

“Never fool yourself, and remember that you are the easiest person to fool.”

This is also why when we evaluate a new AI tool, we don’t just judge how well it works on its training data. That information doesn’t help us predict how well it will work in the real world.

Cherry picking is seductive, which is why it’s so easy to fool yourself. We can’t just learn key lessons from post hoc judgments.

Selective Windowing

Selective windowing refers to the tendency to selectively seek and interpret the subset information that confirms our pre-existing beliefs or expectations while ignoring or discounting information that contradicts them. By analogy, a window constrains your view of the outside world.

The selective windowing of attention can dramatically skew decision-making.

I had an attending once who would review a case, and upon seeing one finding pointing in a direction, “see” several subtle supporting features to confirm a diagnosis. I assume some of this ability stemmed from experience and reflected true expertise.

But, some residents would also play a game during readout where they would describe the patient’s symptoms but purposefully not mention the side, and the attending would concoct a tidy narrative beautifully tying together a number of subtle observations. The problem, as I’m sure you guessed, is that frequently it would be the wrong side. The observations were only possible through that selective window. Too narrow a window and your view of the world is woefully incomplete and distorted. To torture another metaphor, the anchor of that initial observation sunk the proverbial diagnostic ship.

But, in practice, what a fine line to walk! Being sensitive to subtle manifestations of a complex process versus just seeing what you expect to see. Many radiologists have pet diagnoses that they call more than their colleagues. There are neuroradiologists who seem positively primed to see the findings of idiopathic intracranial hypertension or normal pressure hydrocephalus. Some of them are even assuredly better, more thoughtful radiologists. But some aren’t. Some will anchor on an initial observation and confirm their way to the story.

* * *

Attention is a finite resource. The world is too rich and vibrant to be seen unfiltered. We are always windowing, and when faced with important decisions, we must always seek to widen our window to consider competing information and address alternative explanations. Evidence is ubiquitous: it’s usually easy to find support for your preferred position, even when it’s wrong.

The Sin of Monotony

04.06.23 // Miscellany

Delightful:

Monotony, the cardinal and most common sin of the public speaker, is not a transgression—it is rather a sin of omission, for it consists in living up to the confession of the Prayer Book: “We have left undone those things we ought to have done.”

Emerson says, “The virtue of art lies in detachment, in sequestering one object from the embarrassing variety.” That is just what the monotonous speaker fails to do—he does not detach one thought or phrase from another, they are all expressed in the same manner.

To tell you that your speech is monotonous may mean very little to you, so let us look at the nature—and the curse—of monotony in other spheres of life, then we shall appreciate more fully how it will blight an otherwise good speech.

If the Victrola in the adjoining apartment grinds out just three selections over and over again, it is pretty safe to assume that your neighbor has no other records. If a speaker uses only a few of his powers, it points very plainly to the fact that the rest of his powers are not developed. Monotony reveals our limitations.

In its effect on its victim, monotony is actually deadly—it will drive the bloom from the cheek and the lustre from the eye as quickly as sin, and often leads to viciousness. The worst punishment that human ingenuity has ever been able to invent is extreme monotony—solitary confinement. Lay a marble on the table and do nothing eighteen hours of the day but change that marble from one point to another and back again, and you will go insane if you continue long enough.

Project Gutenberg–a library of online/ebook public domain works–is amazing. Why else would you casually come across books published over a century ago like The Art of Public Speaking by Dale Carnagey and J. Berg Esenwein.

CFE 2023

04.06.23 // Finance, Medicine

The online course version of WCICON23, “Continuing Financial Education 2023: The Latest in Physician Wellness and Financial Literacy” is now available. It includes 55 hours of content and qualifies for 22 hours of CME. It also includes a talk from yours truly on the surprisingly interesting topic of thinking about thinking.

Enrollment is $100 off through midnight on April 17th and would be–in my opinion–a great way to use your CME funds.

(Signing up from this post also supports my writing, thank you.)

The Negativity Tendency

03.20.23 // Medicine, Reading

The late Hans Rosling gave an amazingly popular TED talk back in 2006 (and many other popular talks since). You may have seen it. It’s the one showing recent human progress by following counties over time as a series of bubbles. It’s not all rosy, but it shows us how counterintuitive reality can be compared with our usually grimmer assumptions. One could summarize: things can be bad but still be improving. Trajectories matter.

In his follow-up book, Factfulness, Rosling discusses the fact that almost all “news” by definition is bad news. His helpful grounding suggestion: When you hear bad news, ask yourself if similar good news would be able to reach you.

* * *

In healthcare, M&M is full of bad outcomes. Do you hear about the patients who recover uneventfully in the hospital? Not really. Do people gossip about the patients who go home after surgery with well-healed incisions? No, they do not. As a radiologist, I only hear about my misses. About once a year, someone congratulates me on a good catch, and usually, that’s coming from another radiologist who read the follow-up.

As an attending evaluating my residents’ overnight work, I have to grade every change. We have grades for verbiage changes, incidental additions, small relevant misses, and big emergent misses. There’s nothing forcing me to tell my residents that I recognize the great job they’re doing tackling a large volume of complex cases. Most of what they see is negative feedback, even though that parade of bad news doesn’t really tell them an accurate story about the work they’re doing.

When I was a resident, my program had a separate grade for doing an amazing job. You could receive a coveted “1” on the 1-4 scale for crushing a subtle case, performing at a subspecialty level, etc. 1’s were rare.

One evening as I logged in for another shift, I was reviewing my grades from the night before and I saw I’d received a 1. Exhaustion aside, I was always excited when I earned a 1. The comment said, “Everyone deserves a 1 every now and again, so here’s yours.” I didn’t know how to parse that cryptic statement, so I clicked on the link to see the case.

It was a completely normal head CT in a young patient.

I hadn’t changed a word of the template.

* * *

We learn medicine through the slow accumulation of emotional microtrauma. As an educator, it takes special effort to try to really teach through praise and positive reinforcement; usually the vague “great jobs” show up on end-of-rotation evaluations. I’ll be the first to admit I can be too far on the pedantic curmudgeon spectrum.

Yes, feedback–even negative feedback–is a critical component of the learning process. But, when you’re beating yourself up about your mistakes and questioning your skills/growth, you also need to ask yourself:

What are the odds that I’m receiving the true positive side of the same coin?

The answer is you’re probably not.

Things can be bad and still be improving. Trajectories matter.

You can have a lot to learn and a long way to go and still be doing a great job.

The Distressed Debt of Healthcare Private Equity

03.13.23 // Medicine, Radiology

I’m guessing it doesn’t feel great for Radiology Partners to once again be one of a handful of named companies in another “distressed debt” article. From last month’s “Health-Care Debt Gets Harder Look as Distress Builds” in Bloomberg:

The companies face legal and regulatory pressures too. The No Surprises Act, which makes it harder for medical providers to charge patients large amounts of money for work done outside their health insurance network, has weighed on some companies.

Loans to Radiology Partners, a group of radiology practices, have deteriorated since the end of 2021 in part due to the law, according to Moody’s Investors Service, which downgraded the company to Caa1 in November. The company’s $1.6 billion first-lien loan due 2025 is currently quoted at about 86.8 cents on the dollar, Bloomberg-compiled data show, down from nearly par a year ago.

Note the ungenerous implication that the inability to squeeze patients through surprise billing is a mention-worthy driver of its worsening financial outlook. Please note, non-radiologists, that the RP story isn’t much different from other highly-leveraged companies operating in this space. Recall that behemoth Envision just finished with its round of financial machinations aimed at screwing over its creditors.

In their December 2022 healthcare sector report, Moody’s gave this cozy summary:

The healthcare sector’s credit default risk is rising. So far this year, the ratings of 25 North American healthcare companies have been downgraded to B3 negative or lower, representing a material deterioration in the sector’s credit quality. Healthcare now accounts for approximately 16% of the companies on our B3 Negative and Lower List, compared to less than 4% at 31 December 2015.

Nearly 90% of healthcare companies rated B3 negative or below are owned by private equity. Attracted by healthcare’s historical stability and buoyed by accommodative debt markets, financial sponsors have aggressively consolidated fragmented subsectors, including physician practices, emergency medicine and anesthesiology, to name a few. The resulting roll-ups carry high levels of debt, which will pressure their cash flow and limit their ability to adapt to the changing macroeconomic environment, as well as to increasing social risk, new legislation and litigation.

Capital structures will become unsustainable.

90%!

For those who usually ignore market gibberish, here’s some context about credit agency ratings and corporate bonds:

Moody’s is an independent firm that grades the quality/riskiness of investments. When Moody’s downgraded Radiology Partners to Caa1 from B3 last fall, that grade reflected a move from “speculative” and “high-risk” to “poor quality” and “very high credit risk.”

From Bloomberg’s analysis, “86.8 cents on the dollar” and “down from nearly par” are talking about the current value of RP corporate bonds on the secondary market. Unlike a mortgage or car that gets amortized over a specific term, bonds are issued with a par (face) value and a coupon rate. The par value is what the bondholder gets at the end of the term (i.e. the loaned money that you get back at the end). The coupon rate is the interest rate paid during the life of the bond.

When a bond trades below par, it’s discounted. In this case, the discount is likely a reflection of both the decreased credit rating (possible default/increased uncertainty regarding being paid back when the bond reaches maturity) and rising interest rates (the fixed rate of the old bonds are not competitive with higher current market rates).

Back in 2020, RP raised $800 million at 5.25% for 5 years to buy vRad from Mednax. So, for example, if you bought that $100 bond in 2020 at 5.25%, you would have earned $5.25 in interest every year before getting $100 back in 2025. But if you bought that bond today at $86.8, that same $5.25 is an effective interest rate of 6% (you still get the original $100 at the end as well). That relative increase reflects the extra return investors currently require given current bond yields and the risk of default. RP’s cashflows in the short term are presumably fine. The question is what the market will be willing to provide in terms of letting them raise more money to pay off or roll over that $1.6 billion in 2025 and another $1.6 billion by 2028.

Back to Bloomberg:

Healthcare companies used to be some of the safest to lend to during economic downturns, until private equity firms bought them out and larded them with debt. Now they’re some of the riskiest borrowers in the world of leveraged loans. Five companies in the healthcare space defaulted last year, compared with a historical average of roughly one default a year for an industry that often has stable demand, according to S&P Global Ratings.

The article points out that many of these PE-owned healthcare companies are leveraged at around 7:1 debt to earnings. That figure was apparently around 5:1 back in 2014. In their downgrade release, Moody’s stated RP’s debt to EBITDA was 10:1.

The outlook for healthcare companies, especially service providers, looks bleak. They face labor shortages as medical professionals retire en masse, and regulatory changes are weighing on how much they can charge government payers and insurers. And as leveraged loan investors pare back their exposure to riskier healthcare borrowers, the companies face higher refinancing costs. The industry’s financial difficulties may hit not just investors, but also patients seeking treatment or care.

I don’t think the collapse of SVB last week is going to help. One driver of its spectacularly rapid fall was unrealized bond losses.

Unless inflationary pressures subside and the economy improves, there’ll likely be fewer loan sales coming to the market, money managers said. Companies with bloated debt and projected weaker cash flow will probably pursue transactions such as debt swaps and capital raises to create more breathing room.

Let’s go back to Moody’s again for some more about that:

Distressed exchanges will remain the most common form of default. Saddled with unsustainable capital structures, many healthcare companies rated B3 negative or lower will likely pursue transactions that we consider to be distressed exchanges (DEs). DEs have always been popular among private equity sponsors when the companies they own get into financial difficulties and we expect their popularity to continue. We consider a transaction to be a distressed exchange if it allows a company to avoid default or bankruptcy and results in an economic loss for creditors.

For companies with deteriorating operating performance, lenders will likely be unwilling to refinance upcoming debt maturities unless they believe their economic loss would be less than it would be if the borrower filed for bankruptcy. Companies that are unable to meet greatly increased cash interest expense may seek to convert their debt to payment-in-kind (PIK) obligations, pursue debt-to-equity conversions, or even enter bankruptcy, in order to shed debt and revise their capital structures to make them more sustainable. Here too, lenders will often agree to such transactions because they represent less economic loss than their alternatives…Completing a distressed exchange is often less expensive than undergoing a formal bankruptcy process, and often enable financial sponsors to retain control of a company, which may well not occur in a bankruptcy.

This is future I think we’re likely to see, which is why people who are hoping that somehow these companies will cease to exist in a couple of years are in for disappointment. There are real and potentially irreversible changes in how medicine is practiced that may even worsen as these companies struggle.

Let’s finish with a practical consideration: distressed exchanges, if they occur, will almost certainly decrease the values of the stock owned by “shareholder” radiologists. The bondholders always get paid first. So yes, take the shares of stock when you work for one of these companies, but I wouldn’t consider them as a real investment opportunity, as many radiologists did during the early buyout days. And never take the IOU in lieu of real money.