Operating Expense Margins in Radiology Groups

Radiology groups tend to have lower operating expense margins than many other types of practices. Because many radiologists work in hospitals, imaging facilities, or from home-based offices, they typically incur lesser expenses for building, equipment, or staff compared to physicians practicing in other specialties. Still, despite their relatively lower cost of doing business, radiology group operating expenses, such as they are, should be factored into fair market value opinions and other valuation assignments. That said, determining how much to factor can be a challenging assessment due to the scarcity of benchmark support. In our work in this industry, we've made some observations that may help others who are looking for parameters to guide their thinking around the financial operations of radiology practices.

On a simplified basis, the expenses on a radiology group’s profit and loss statement (“P&L”) can be categorized into "operating expenses" and "provider expenses". Subtracting these operating expenses and provider expenses from the group's revenues equals the group’s profit or loss. For this article, operating expenses will include billing/collection expenses, malpractice insurance, and a catch-all bucket of “other operating expenses”. An illustrative example is outlined below:

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Simple Practice P&L

 

Revenues                                                                  $__________

 

Billing/collection expenses

Malpractice insurance

Other operating expenses

-          Total operating expenses                     $___________

 

Provider expenses

Provider benefits

Provider compensation

-          Total provider expenses                       $____________

 

=            Profit/Loss                                                   $____________

 

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Billing/collection expenses, as well as malpractice insurance, are less of an enigma for valuators. Many groups enter into arm's-length agreements for billing/collection from outsourced vendors. The cost of these agreements varies based on the extent of services being provided, but we generally expect to see a rate of 5% to 7% of collections. Malpractice may be higher in some states, but we generally expect it to average between $9,000 and $12,000 per physician annually.

 

The more challenging undertaking arises when determining the percentage of revenues that “other operating expenses” should account for in a radiology practice.  This category includes non-provider staff compensation and benefits, as well as rents, utilities, legal, accounting, information technology, and other operating expenses. In our work, we typically expect to see these expenses run in the range of 10% to 15% of collections. If/when they run higher in a group, we dig further to see what may be driving higher amounts.  

Reasons for high expenses that we’ve found in past assignments include:

1. The radiology group is providing IT or other infrastructure that would more typically be provided by a hospital partner.

2. Provider benefits, such as dues, membership fees, license fees, education allowances, professional meetings, travel, automobile, and entertainment expenses, are being misassigned to operating expenses.

3. Provider outsourcing expenses (e.g., Nighthawk, locums) are being assigned to operating expenses.

4. Operating expenses include significant amounts of recruitment expenses or non-recurring expenses.

Generally speaking, radiology groups and other hospital-based specialties should have significantly lower operating expense margins relative to their outpatient counterparts. However, radiology group P&Ls may bring some surprises. All in all, appraisers should avoid approaching any radiology practice assignment with a one-size-fits-all mentality, particularly when it comes to operating expenses.

Health systems and radiology groups preparing to enter into subsidy negotiations can expect to encounter some issues with insufficient benchmarks. Contact us for more information or assistance with these types of discussions, including fair market value compensation for call coverage, contrast supervision, and mobile imaging.