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.

Here are some thoughts from a seasoned radiologist who was there for the sale and just bailed from an unhealthy private equity-owned radiology practice. They’ve seen many trainees filter through the recruitment process recently as the group aggressively recruits to combat attrition, and they reached out with some brief advice on how to approach the contract/job when evaluating the offer to join a similar practice.

Their perspective is in the blockquotes, and my commentary follows.

As with most of the work on this site discussing private equity, most lessons and pitfalls are not unique to PE. Private equity is a funding model; no organization has a monopoly on unsavory business practices, and every contract requires scrutiny.

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What was sold

You need to know what exactly was sold. The most accurate assessment would be in terms of a percentage and the understanding that X percentage of your future earnings have been sold.

When taking an employee job, your compensation is isolated from this calculus. You’re being paid what you’re being paid. The reason it matters? If the partnership is unstable because compensation is too low for the degree of work relative to the market, then the group is or will likely be unstable. In the short term, that may mean being asked to work harder or the job being less pleasant. In the long term, that may mean being back on the job market.

If you’re taking a “partnership”-styled job, there will eventually be a “profit-sharing” component; now it really matters, because your “bonus” can be $0.

The Big 3: income; time off, and location.

Traditionally you would be given information and have a good reason to believe what you’ve been told. But to a staff-starved organization, you need to be careful.

Even in a stable group, staffing needs may change. In an unstable one, they may change dramatically. You may be asked to cover additional sites or different practice settings. Your income, once a “partner,” may change. When things get very tight, you may not be able to use your vacation.

In some settings, you may be insulated from these shifting demands during the work-up. Once a partner, a bump in compensation will shackle you to dealing with the problems. You may even, rarely, be paid less per work unit than as an associate.

Contracts

PE contracts will often state a salary with specifics like bonus and vacation TBD by the local practice board. When doing so, notice you’ve got nothing in writing beyond your contractual salary. By splitting these variables in a contract there’s little responsibility. You need to get hard numbers in the contract to protect from time off takeaways or continually shockingly low bonuses.

One of the most helpful things may be to ask for a copy of the employment agreement. This will allow you extra time to scrutinize and ask questions before the clock on an offer starts ticking.

Many institutions actually employ a similar tactic where you’ll sign a relatively boilerplate employment agreement and receive a separate, shorter, often more plain-Englishy document that will include the details. That second document—sometimes called a Letter of Understanding (I discussed this more here)—will often include qualifiers like ‘this is what people in your section do currently’ or other weasel words to allow those details to change as needed.

Keep in mind, this isn’t always nefarious. To give you a personal example, I’m a partner in a great group. During my workup, we had to adjust our call coverage hours at the hospital a bit and that changed how my division scheduled our call. These contract structures allow those operational changes to happen without requiring a contract negotiation or a signed addendum for every small detail change.

If you’re a strict employee and expect to be dumped by the group when times get tough, it’s more reasonable to want everything you care about in writing.

Income Verification

Some groups may tout a salary that’s purely wishful thinking. One thing to help assess is to ask for W-2 forms for a partner and/or associate. If there’s a big delta between hope and historical income…caveat emptor.

Note that some PE groups have offered their franchises 0% loans which would increase W-2 numbers. Fortunately, I’ve heard of no groups taking up this deceptive practice to artificially inflate incomes.

That last part is a very sneaky move and bears a bit more discussion. We’ve discussed previously the relative ease with which a corporate entity can temporarily fund supra-market compensation for a position through debt instead of operations (i.e. using borrowed money to take a loss on an employee in order to get the work done).

I’d not heard of this new play before, but this would be a related but different move: by giving the group money to play around with, the PE owner can flush a practice with cash and make them look more successful and better paid than they really are. This would, of course, be a temporary move. Taking a partnership-track job in a practice that took a loan like that would likely result in the future partnership salary being substantially lower than you’d have expected.

RVUs: What are they and why are they important? The relative value unit is the value CMS assigns to different CPT codes to determine payment for a ‘unit’ of work and allows for variable value/compensation for work across the medical spectrum.

Not all things are equal for example. Some radiology examples: CT brain w/o contrast ~0.85; MRI brain w and w/o contrast ~2.29; CXR ~0.22; CT abd-pelvis with contrast ~1.82. One good way to assess compensation is $/rvu.

My personal rough considerations:
<$20: Horrible deal for the radiologist. Someone is getting the technical fee and a large chunk of your professional fee.
$20-29: suboptimal, losing some of the interpretation fee
$30-40: close to full or full professional fee
$40-50: full professional fee
$50+ is an excellent payor base and or some technical fee.

For background, the other components of a CMS payment are the conversion factor (which is what keeps falling every year, currently 33.89 in 2023) and the geographic practice cost index (GPCI, which is an adjustment for locoregional cost factors). For our purposes, we’re ignoring the MIPS quality program. When people discuss RVUs, they are often referring to the wRVU (the work RVU related to physician effort), but there are also peRVU (for practice expenses) and mpRV (for malpractice expense).

Reimbursement for the professional component = [(wRVU*GPCI) + (peRVU*GPCI) + (mpRVU*GPCI) * CF]

For example, the GPCI in Dallas where I live: Work = 1.018; PE = 1.009; MP = .772 (malpractice expense is “low” here thanks to tort reform).

So for a brain MRI with and without contrast, this year Medicare should pay: [(2.29*1.018)+(.85*1.009)+(.13*.772)]*$33.89 = $111.47

Compensation per RVU varies a lot by region and payor contract, so, again, an apples-to-apples comparison is challenging to obtain but important to attempt. A big component of how much you make is how hard you work, but it’s not the only metric.

You also have to distinguish between working as a partner/shareholder and an employee. Historically, a person in the workup is going to be relatively low as part of the so-called sweat equity (i.e. earning their place as a shareholder). So when attempting to figure out a fair partner compensation per RVU, you can see what CMS pays per RVU as a lower-end reference rate. A group’s real-life take-home per-RVU compensation has so many nuances: payor mix, percentage of bad debt, the (increasingly uncommon) share of the technical component, billing expenses, other overhead, etc. No group or individual radiologists is simply earning per hour the total of everything they bill, even before the PE group loses a big fraction to its owner.

When evaluating a job, a per-RVU number like this is a helpful shorthand for comparison, but unless you’re taking a mercenary job and actually being paid per RVU or paid per shift (with a strict productivity requirement), then things can get confusing. Every group has its own compensation plan, and it’s surprisingly difficult to infer fairness from a simple number. It therefore works best when comparing jobs in the same local market or when comparing teleradiology positions.

In the workup, this $/RVU number is going to change over time as your salary typically grows every year, and it will also be different for partners. Some people are faster or slower, and depending on the group’s compensation plan (i.e. unless there is a very strong productivity focus), that means people who are slower/less productive tend to be paid more per RVU.

Different groups also have very different benefits. If your group is flooding your 401k, putting money in your HSA, good healthcare, etc, it’s not always as simple as dividing your take-home pay by your total RVUs or dividing your per-shift compensation by your daily RVU requirement and seeing the number. It’s a useful shorthand, but it’s still only one tool in your arsenal. It is important to keep in mind, however, because it’s easy to hide a lot of suffering in what seems like good compensation and good vacation if you’re reading a ton of RVUs per shift.

Don’t discount high-RVU demands. There are a lot of radiologists working much harder on a daily basis than they ever did taking call as residents. If the comp seems too good to be true, the higher salary may just end up being golden handcuffs.

Attrition

This is a huge sign of group health. There are two types: topside and bottom. Off the top, older/end-of-career isn’t all that concerning. But bottom-side, younger rads with decades of career left, is a tell. At my group, the number of associates at the time of sale was close to 50. Soon there will be single digits remaining. Applicants would be wise to ask for and speak with young radiologists who have left the group to get a 360 perspective on the organization.

This is true. The one caveat I will add is that job mobility is and has been common in radiology for quite a while. So while an exodus is a real problem, a little context will be needed to understand the situation and the stability/trajectory of the group. As I’ve referenced before, a recent 2020 study showed 41% of radiologists had changed jobs in the past four years. Motion is common, so look deeper. A couple of folks leaving may be no big deal just as easily as a harbinger of doom, especially in the current job market.

You should absolutely know specifically when the vesting period ends for the legacy partners. No one has a crystal ball, but it would be prudent to operate under the assumption that when that time comes, there will be a bolus of people leaving/retiring and the group will never be the same.

Internal moonlighting

This a great opportunity normally. But many PE groups are using this as an income growth model. We bring in extra work which you can do and make extra money. Sounds good right? Sure–but it needs to be viewed from the perspective of the primary 8-5 job income adequacy. If young folks are having to sell their time off, take extra jobs or side gigs, then your primary job is inadequate and probably too much of the group was sold off.

Internal moonlighting is great, and it’s very common for folks to supplement their income this way. But it’s different when it’s mandatory, and it’s different when the numbers from internal moonlighting are being used to prop up W2 and make the group look more successful (“we’re making X per year,” when X is a number inflated by lots of work after hours). Moonlighting may be fun and desirable when your daily demands are reasonable; it may be pure burnout on top of barely achievable productivity requirements or lots of call.

In order to do an apples-to-apples comparison, you need to be able to break total compensation down into its components (e.g. salary, call, moonlighting, bonus, 401k profit-sharing) and see how many hours people are putting in.

The Break Up

The break-up process should be scrutinized, specifically tail insurance and non-competes…if you take a job that winds up being $100k’s less than what was advertised and you want to leave, you need to know if you’ll get hit with a hefty tail insurance bill or have to move to avoid a non-compete.

It is still generally common in groups of all stripes for the radiologist leaving to be responsible for tail coverage on a sliding scale over time, paying more if you leave quickly and paying nothing after being there for several years.

Overall, the particularly onerous break-up conditions from PE-owned groups have significantly softened as the job market has become more competitive. Anecdotally, I’m not even sure at this current timepoint if they are “worse” than independent groups. Things I’ve been hearing recently seem comparable from that front. There’s a decent fair range here, and—as with all things—must be judged on a per-group basis and put into the overall context. Ideally, you’d pick a job that you’re less likely to need to bail from in a short timeframe to begin with, but it seems like a good idea when considering a PE-owned practice to be able to pack your bags without feeling locked in.

What I have seen a lot recently is more and more people leaving these groups to stay physically where they are and take on teleradiology work. It seems that this is often a combination of not wanting to move their families and waiting out non-competes. People leaving are in a fortunate situation at least that there is a way to make a living online these days.

Where to work is an important decision, but it is nonetheless a reversible one.

I asked Poe, a new AI chatbot, to write me a sonnet about a negative CTA for vertigo:

A CT scan of the head and neck was done,
To search for the cause of vertigo’s plight.
But alas, the results came back as none, No evidence of any wrong or right.

The images showed the structures so clear,
The bones and vessels, all in their place.
No sign of tumors, no sign of fear,
No cause for vertigo’s dizzy chase.

The scan was negative, the results normal,
The cause of vertigo’s still unknown.
But rest assured, there’s no need to mourn,
For further tests will surely be shown.

So let us trust in the power of medicine,
And hope for a cure with each new exam done.

“Further tests will surely be shown” is some (awkwardly phrased and presumably unintentional) incisive commentary on American healthcare.

From Matthew Davenport’s upcoming article in AJR, “Incidental Findings and Low-Value Care“:

It is increasingly recognized that incidental findings are incompletely understood, expensive, and surprisingly harmful. Rather than a benefit of imaging, they are usually a harm. They are not sought, the odds of them being important is low, and they create tremendous uncertainty and low-value care.

A good primer on an often unintuitive and yet incredibly important problem in medical diagnostics (both for radiologists and clinicians).

I had a brief chat with OpenAI’s ChatGPT about noise, radiology, and AI in medicine:

Human: Summarize the book Noise by Daniel Kahneman
AI: Noise by Daniel Kahneman is a book that examines how our minds work in a noisy, uncertain world. It dives into the cognitive biases and heuristics we use to make decisions with limited information, and explains how they can lead us astray. The book covers topics such as perception, intuition, and decision-making, and explores how noise and confusion can shape our lives and our thinking.

Human: How does the book argue that noise impacts radiology?
AI: In Noise, Daniel Kahneman argues that noise can have a major impact on radiology. He explains that radiologists are often subject to cognitive biases like confirmation bias and anchoring bias, which can lead them to make decisions that are not in the best interest of their patients. Additionally, he shows how noise can affect diagnostic accuracy and decision-making, making it harder for radiologists to provide accurate treatments and diagnoses.

Human: How could radiology address those limitations?
AI: Radiologists can address the limitations of noise in radiology by taking steps to reduce cognitive biases and increase accuracy. These steps include utilizing evidence-based decision-making, double-checking results for accuracy, and employing advanced imaging technologies such as computer-aided detection systems. Additionally, radiologists should strive to keep up with advances in medical technology and imaging techniques so that they can identify any noise or errors in their images.

Human: What are the current limitations in utilizing AI in radiology?
AI: Currently, one of the biggest limitations in utilizing AI in radiology is the potential for errors and false positives. While AI systems have the potential to be more accurate than human radiologists, there is still a risk that the AI system will miss diagnoses or misinterpret images. Additionally, AI systems can be costly to implement, and require significant computing power, which may not be feasible in many medical settings.

Human: What would be the easiest type of medicine to outsource to AI?
AI: The easiest type of medicine to outsource to AI would be administrative tasks such as scheduling appointments and completing insurance forms. AI can quickly and accurately complete these types of tasks, saving time and resources for medical professionals.

Even the machines think there’s some low-hanging fruit out there.