This is part three in a series of posts about private equity in radiology. The first was this essay. The second was an interview with former PE analyst and current independent radiologist Dr. Kurt Schoppe.
This third entry is a Q&A with a radiologist who recently left a PE-owned practice and their experience as someone who joined a freshly purchased practice, made “partner,” and then left anyway.
I suspect this radiologist’s experience is very generalizable, but regardless it’s a rare and interesting perspective to hear, especially regarding their equity/stock holdings. The person providing their perspective will remain anonymous, and I’m also not interested in naming and shaming the group. This is intended to share a novel viewpoint and be helpful for trainees (and maybe also be interesting to spectators):
BW: You joined in the aftermath of the sale to private equity. What is your impression of how that went down? How unified were the partners? How did the partners break the news to the employees? What did people in various stages of the partnership workup get (if anything)? What did non-partners do, emotionally and practically (did a lot of people quit immediately?)
Based on secondhand accounts, it was a contentious experience for the associates as the sale culminated. The group heard several pitches before the sale occurred. Once the group’s leadership decided to sell, the path was chosen. Having spoken with several partners, it wasn’t a uniformly popular action to sell but the money was significant and the sale was sold as an inevitability in a consolidating market. There was a meeting where the associates in work-up were told of the news; several were devastated.
The associates had heard all of the pitches by word of mouth. They were disappointed both at the sale itself and that the deal taken was the least favorable to associates.
Several associates left within a year of the sale. This was mostly the junior associates, who received little compensation. The associates further in their work-up received more cash/stock compensation and were advanced to partner immediately.
BW: That’s interesting. From what I often hear it’s usually the group’s board that determines what the associates get out of the buyout amount. Though of course the more you give the associates, the less the partners keep, so there’s obviously an incentive to give as little as you can while still preventing an exodus. I wonder how that really played out behind the scenes.
In what ways has the day-to-day job changed over time since the sale, if at all?
Little at the beginning. Over time we started rolling out initiatives from the big company. This includes adding quality metric-type information into our reports. Some of this is related to CMS’s MIPS program, some of it is not. The group would not have implemented these types of changes without direct financial justification otherwise. Overall, the day-to-day work is similar from day 1 until now.
BW: If the work hasn’t changed since you started, what made you leave?
It’s not the job I signed up for. The differences in compensation and leave between what they told me when I interviewed and what I am currently receiving are significant. By about 20-30% of both.
BW: Any changes to productivity or workload? How has staffing, retention, and recruiting been since the sale? Was the group able to absorb the junior associate exit with new hires?
Productivity per radiologist is trending higher steadily. Staffing, retention, and recruiting have been slow-burn problems that are coming to a head as the vesting period approaches. The group was able to absorb the junior associate exits to the extent that the work continued to get done. Vacation was slashed across the board to accomplish that. Recruitment has been insufficient to cover the junior associate exodus.
BW: With total fairness given the current nationwide radiologist shortage (and falling reimbursement), I do think a lot of groups have been trending higher on productivity metrics. But how about culture/climate? Has that changed over time as the group gets closer to the vesting period? Do current employees and young partners fear a mass exit?
There was a growing divide between the older generation that got the buyout and everyone else. The younger generation became bitter and disenfranchised. The older generation was happy with the money and mostly oblivious to the developing problems. They were insensitive to the complaints of the younger generation and later on even developed a callous “you need to get over this” attitude.
Everyone fears a mass exodus. The younger generation fears the older generation all leaving when they vest their stock. The older generation fears unhappy juniors leaving en masse.
BW: If I were to ask your colleagues what they think is going to happen after the vesting period, what do you think they would say?
Kindly put, most expect significant reorganization in some form. The current rate of attrition relative to staffing needs and current compensation/leave is unsustainable. They will need to take a deep look at contracts to see what is able to be staffed and what contracts are worth keeping. New compensation models will have to be considered.
BW: If you had to predict what’s going to happen to your old group (or other PE groups you’ve seen) after the vesting period, how do you think it’s going to play out?
It’s not going to be the same. On the macro level, I think the group will lose contracts. That may right-size the work to staffing, but it will be a turbulent transition. On the micro level, the quality will go down and the work will become more commoditized. My old group took pride in the quality of the radiologists it recruited. The recent recruitment efforts suggest they will take anyone who can dictate a study willing to work for their current offer.
BW: Were you given “stock” in the company? How much are the shares worth on paper, and how much do you think they’re actually worth?
I received a stock grant upon becoming a partner rather than a buy-in. It sounded too good to be true and it was. I received [X] number of shares worth $0 at the time of issuance. That was sold as a positive, as it would not be a taxable event. My shares were unlike other shares in the company which, upon reaching a strike price, are worth whatever the current valuation is. My shares had no strike price and effectively accumulated value from $0, mirroring the company’s main share class valuation in gains and losses. [ed: as in, if the share price dropped below the current valuation, the stock would continue to be literally worthless]
How much I think my shares were worth: significantly less than the promised value of the grant. If the main share class went up $1 from the time my shares were issued, my shares would be worth [X] shares times $1. That amount of value is not remotely close to the grant value I was told.
Even if I believed the stock price the company announces to stockholders, it’s entirely possible that the touted valuation is completely made up. A recent article from the Center for Economics and Policy Research had this to say about private equity valuations:
Unsold companies are illiquid assets whose true value won’t be known until they are sold. In the meantime, in the years before the fund reaches the end of its life span, typically 10 years, the fund manager (that is, the General Partner) provides “guesstimates” of what these companies are worth. These estimates may be optimistically high, thus inflating the fund’s value and exaggerating its performance until the fund reaches the end of its life span and cashes out entirely. Only then will the fund’s investors learn what the fund actually earned and how it performed.
As mentioned in that article, the share classes the radiologists received in the sale are illiquid. Shares can only be divested in a liquidity event (e.g. another sale or bankruptcy). Otherwise, there is no way to get value out of those shares. This holds true for everyone though: original investors, partners at the time of the sale, or new partners.
Another thing to consider is that there are multiple classes of stock within these large PE companies. The share classes in the hands of the radiologists are not the preferred classes. In liquidity events, the radiologists’ shares are among the last to get paid off. In a bankruptcy situation, I expected nothing for my shares. The original investors/C-suites of the national company are paid off first. It’s called a distribution waterfall (credit to Investopedia):
Understanding Distribution Waterfalls
A distribution waterfall describes the method by which capital is distributed to a fund’s various investors as underlying investments are sold for gains. Essentially, the total capital gains earned are distributed according to a cascading structure made up of sequential tiers, hence the reference to a waterfall. When one tier’s allocation requirements are fully satisfied, the excess funds are then subject to the allocation requirements of the next tier, and so on.
Though waterfall schedules may be customized, generally the four tiers in a distribution waterfall are:
1. Return of capital (ROC) – 100 percent of distributions go to the investors until they recover all of their initial capital contributions.
2. Preferred return – 100 percent of further distributions go to investors until they receive the preferred return on their investment. Usually, the preferred rate of return for this tier is approximately 7 percent to 9 percent.
3. Catch-up tranche – 100 percent of the distributions go to the sponsor of the fund until it receives a certain percentage of profits.
4. Carried interest – a stated percentage of distributions that the sponsor receives. The stated percentage in the fourth tier must match the stated percentage in the third tier.
To my understanding, initial investors in the big company are group 1. The partners of purchased radiology practices at the time of their sale are group 2. The associates in those practices who received shares are group 3.
Put another way, I believe that in the PE-model liability rests on the radiology practices and the upside is heavily skewed to the original fund investors. In a bankruptcy situation, any money goes to making those original investors whole first. The radiologists (and their shares) come next or last.
BW: Given your experience, what kind of private practices do you think would fare best in a sale?
Anecdotally, I’ve heard of a few instances where the PE model has succeeded. The type of group that stands to benefit the most from a sale would be one that sells only a small percentage of their revenues and one that stands to benefit significantly from a national company’s economies of scale (e.g. in areas such as IT infrastructure, billing/revenue cycle management). This favors small to medium-sized groups. [ed: for further discussion of capitalizing revenue percentages, see the prior entries including my interview with Dr. Schoppe]
BW: Have you interacted or heard much from other groups in the same PE umbrella? Perhaps ones that are further along or less far along the buyout process. How much variety have you seen from your perspective?
Mostly secondhand and thirdhand accounts, but I’ve heard similar stories from similarly sized groups. I did hear firsthand from a radiologist whose group took a buyout years before mine had. His group lost a third of its manpower over the course of its vesting window.
BW: Knowing what you know now, would you join a PE or corporate entity again in the future? What characteristics would you look for in a practice that has sold that would make such a job palatable to you? Do you still believe in physician-owned independent practices?
Hard no. I would do remote work for a practice elsewhere before choosing private equity again.
To make a PE job palatable, the compensation/leave to RVU production would have to be better than other market options. The associate work-up would have to be negligible, as being a partner in a PE group doesn’t mean the same thing as being a partner in an independent practice.
Another significant consideration is the stability of their contracts. This applies to any prospective job but doubly so for PE-backed groups. PE-backed groups are facing difficult negotiations with hospital systems. Big hospital systems have noticed the trend of PE-groups struggling/failing and are starting to consider alternatives. This could mean shopping the contract to another group or starting their own hospital-employee model.
In the short and medium-term, I do believe in the idea of physician-owned independent practices. As I’ve heard while interviewing with those groups, it’s a hill worth dying on. Market forces will continue to promote consolidation, but the groups that have chosen to remain independent have a few advantages. 1) In a tight market, independent groups have become more desirable to applicants 2) Independent groups have become more desirable to hospital systems (due to stability).
Long term, the fee-for-service model may not even exist so I don’t worry about 20-30 years down the line. Dr. RAPID is probably more of a threat. If/when a fundamental paradigm change like AI comes, it’ll be impossible to predict what radiology will look like then.
BW: What advice do you have for trainees when it comes to finding their first job? What about those who are already out and eyeing the plethora of offerings available on the job forums.
Set your priorities, do your homework, and know your worth.
First thing in the job search is to sort out location and lifestyle preferences. There are plenty of good jobs in different practice settings (e.g. academics, VA, hospital employment, PP). If maximizing income potential is the biggest priority, independent private practice remains the most lucrative overall.
Do your homework. I’d recommend touching base with and possibly interviewing with several groups/employers to get a sense of the market. Compensation/leave/RVU production is the minimum you need to find out. If you are looking for private practice jobs, PE-status is important. In general, look for red flags such as if several people left the group recently or the group has had recent changes to its major contracts. [ed: I cannot stress enough how important it is to view compensation as a function of production; there is generally no free lunch; if the comp seems high, then you’ll probably be working hard.]
For those already out, understand that the job market is probably nothing like when you last went job hunting. The demand for radiologists far outstrips the supply. Every group is short-staffed and can use people. If there is a particular group and/or location you’ve always wanted, reach out to them. Furthermore, understand you have leverage to negotiate terms. If applying to PP groups, I strongly recommend negotiating associate work-up salary, vacation, and signing bonus.
Know your worth: A former colleague of mine mentioned that he was hesitant to go back on an associate track because he didn’t think he could handle a work-up salary in the $200k’s again. I pointed out to him that in our area, experienced rads on a work-up track are starting closer to $400k. He was stunned at the differences in the job market between when he came out of training and now.
If you or someone you love would like to share their experiences working for a private equity company (or other corporate-style practice including hospital-owned or academic), please feel free to reach out (even if that experience is positive!).