ISO consolidation matters, and it won’t stop soon
August 07, 2015
by Gus Iversen
, Editor in Chief
Every time you turn around it seems like one health care company is being acquired by another. Consolidation is happening at a rapid pace and it’s no different among independent service organizations (ISOs). Someone unfamiliar with the industry could be forgiven for thinking that having fewer options is a bad thing for hospitals looking for alternative service from the OEM, but there may be more to it than meets the eye.
The majority of independent service companies start small with a field engineer straying from an OEM to compete with them on a local scale. The successful ones grow in the right place and the right time, and these are the companies that are falling under the umbrella of bigger companies today. Some of the most successful players in the ISO sector spoke with HealthCare Business News about how — in the current health care paradigm — sometimes less is more.
With his current company, Mark Alvarez, president of BC Technical, has overseen nine acquisitions and has positioned his company as a dominant force in a segment where most players have historically operated on a smaller scale. In over 30 years in the industry, Alvarez has participated in over 80 business acquisitions. He says that more and more, small ISOs are reaching out to him in the interest of being absorbed.
For Jeff Fall, president of Oxford Instruments Service, a merger between Platinum Medical Parts and Eclipse Medical Imaging in 2009 signaled the beginning of his experience in consolidation. About two years later that company was acquired by Oxford Instruments. In his role as president, Fall oversaw the acquisition of Medical Imaging Resources earlier this year.
Bill Biddle, an industry consultant from BASA Consulting, was also once part of the BC Technical family and also has deep roots in consolidation. He started off with a company called Inoserve which was acquired by GE. Then he went to work for Premier, which spun off its clinical technology service division to Aramark, where Biddle was on the acquired side. From there he went to BC Technical where he participated in seven acquisitions.
In 1987, Ed Sloan, owner of Ed Sloan and Associates, founded ReMedPar — one of the early independent equipment powerhouses. By the time Sloan left in 2008 the company had been sold or merged on three separate occasions. Currently under the Aramark umbrella, the company continues to offer parts and services.
Why is consolidation happening?
The amount of talent and expertise in the field has not necessarily changed in the past few years, but the way that expertise is organized definitely has. Restructuring resources has meant greater access to ISO services. The Affordable Care Act has ushered in an era of accountable care organizations (ACOs) that are financially incentivized to efficiently provide health care to a particular community.
As the vehicles of health care — hospitals, physician groups, urgent care centers, imaging centers — are being tied together in the interest of funneling patients to the best care, so too are the independent companies servicing their medical imaging equipment.
According to Alvarez, there are two reasons people sell their ISOs to BC Technical: legacy and money. He says they either need financial security, or they want someone to carry on their legacy of success while tending to the employees and customers who depend on them.
“ISO consolidation is driven by the same thing that drives all consolidation: the dollar,” says Sloan. Hospitals are trying to get more mileage out of equipment that, in another era, might have been upgraded. “I tell [hospitals] we’re going through the same consolidation with the same benefits right now,” says Alvarez. “We want to offer all the hospitals an alternative to the OEM. When you consolidate at that level we become bigger, more national, wider scope, more people, more resources, thus, we can do bigger and bigger deals.”
“In this day and age, newer equipment does not necessarily mean you’ll get a larger amount of reimbursement. Frankly, in a lot of cases you could get as much reimbursement for a piece of equipment you’ve already paid off as you would for something you’re financing for a million dollars,” says Biddle.
To meet the needs of those hospitals and care systems, an ISO needs comparable size and resources. Oxford has ISO certification to 901 and 1345 standards, which Fall says are difficult certifications for smaller companies to obtain.
“We currently go through three on-site audits every year, those audits cost money,” says Fall. Before each audit, Oxford hires a consultant to ensure they get off on the right foot, in addition to keeping a full-time staffer to ensure they retain their certifications.
If a smaller ISO’s client joins a larger health system, that ISO may have a difficult time either servicing that entire health system or convincing their old client that there are benefits to remaining subcontracted.
For customers, integration is everything
For hospitals working with an engineer they’ve known and trusted for years, finding out they’ve been acquired by a larger institution can be a tough pill to swallow. They might wind up sacrificing some of the direct and personal contact they had valued in that provider, and it’s up to the acquiring company to integrate those engineers accordingly, while illustrating the added benefits of the larger footprint to the customer. In most cases, those customers will have to become accustomed to a more process-based business model.
Personal connections may be exchanged for 24/7 centralized customer service, and a back end that is driven by documenting customer queries. “If the company that is doing the acquiring is strong and communicates well, and the acquired company or individual had a good relationship with the company, it will strengthen the relationship and bring more skill sets and faster response to the table,” says Biddle.
“The downside is if you have a small company that does a great job for the customer and they’re acquired by a company that is bottom-line driven and lacks the same mindset for customer care.” Alvarez says hospitals are often very happy with their small ISO, but may not realize the limited supply of resources at their disposal. “These companies have a few engineers, they have small buildings, they have limited quality processes, many are not ISO certified, and many don’t have a lot of parts,” Alvarez said.
He believes these highly capable engineers — as well as the hospitals they serve — only benefit from the added resources of a larger company. With few exceptions, Alvarez says those engineers acquired by BC Technical remain contracted with the hospitals they already have relationships with. “Part of our integration plan involves making sure we communicate with all customers and vendors of the target entity we’ve acquired,” says Fall, “to communicate what the change means for them.
”For key customers and vendors, Oxford sometimes arranges face-to-face meetings with those entities to make sure they understand how valued their business is. Fall points to the size and stability of Oxford as the ultimate selling point to the customers of his newly acquired companies. “We tell people that with Oxford Instruments they’ve got a publicly traded company that’s been in business since 1959 and invented the superconducting magnet, while retaining the third-party pricing advantage.”
The situation in Europe
According to Sloan, European ISOs are going through a growth pattern that mirrors the one taking place in the U.S. — except they are a few years behind, and trying to manage additional challenges. “In Europe you’ve got multiple countries and currencies, language barriers, customs, lots of nuances with those issues. How you conduct business is altogether different,” says Sloan.
But the demands are similar. The European health care industry is facing “lower reimbursement and tighter margins, so providers are looking for cost-effective ways to service and upgrade,” says Sloan. Some companies based overseas have started tapping into the U.S. market.
Although Oxford Instruments Service is owned by a European company, it is not active in the European ISO market. Instead, it conducts business solely in the U.S. market, where Sloan says ISOs are a more evolved segment of the industry.
Crothall, which is owned by a U.K.- based company called Compass Group, purchased a Texas-based company called Crest Servicesin 2013. Sloan says that was a decision made in the interest of bulking up their presence in the U.S., where the market is more mature.
"The biggest hurdle to creating the European market is creating an effective supply chain — which ReMedPar provided for the U.S. market in the ‘90s — but in Europe they still don’t have the one-stop shop for all their third-party equipment needs,” says Sloan
Tidy bookkeeping and the acquired company
For Alvarez, acquisitions are a multi-stage process. He says the first step is building trust between the two companies. The second phase is negotiating a deal. Due diligence follows as phase three, in which all the financial details are processed. After that the unified company gets to work on integrating its businesses.
Each company offers a unique set of challenges in terms of what its owner’s goals and objectives are when considering an acquisition. It’s crucial to have paperwork, the financial documents and contracts, neatly organized in order to determine the value of a company and the long-term viability of contracts.
Ideally, those documents should be reviewed and audited before moving forward. Biddle says acquisitions put a lot of stress on all parties involved. “People wonder, will they keep their jobs? Will they start wearing more hats? It impacts a lot of dynamics — particularly for the company being acquired,” he says.
“One acquisition I was a part of became bumpy and was bumpy for quite a while in large part because things were not made clear enough on the front end,” says Biddle. “Lack of communication and lack of documentation, those things lead to a bumpy road.”
The acquired company should also be prepared to offer a concise narrative, over viewing the company and its values, according to Fall. That means articulating its mission statement, goals, financial projections, head count, how long people have been with you, what their expertise is. “We put together a 100-day plan that covers everything from finance to IT, to HR, to operations, to sales and marketing – all those things – and we assign teams to them.
Typically that team will include members of both the acquiring company and the target company,” says fall. When acquisitions happen, it isn’t only the two parties involved that take notice. According to Biddle, other ISOs are likely to be looking at the amount of money changing hands, and also asking themselves how it will impact them and the ability to compete. “It depends on who you are and where you’re at, but it can make you extremely uncomfortable,” he said.
Will this consolidation trend ever end?
While ISO acquisitions have shown no signs of slowing down, the size of the companies being bought is starting to decline.
Just as the number of independent hospitals has declined, Fall says there will be fewer and fewer small third-party providers. For Sloan, although larger ISOs are emerging, the process of consolidation is here to stay. Successful small companies will distinguish themselves by purchasing even smaller successful companies, and in that sense the ISO food chain will perpetuate itself — even if there are fewer big fish for the taking.
Alvarez says that while there will always be a few niche ISOs specializing in certain equipment in certain regions, those companies will not grow. “An ACO is not going to sign on with a guy in California who only does GE CT scanners, because what if they have a couple of Philips or Siemens systems, too? You’re not going to have two suppliers.” That trend is happening among OEMs, too, according to Alvarez.
“That’s why they love us — they use us so they don’t need 20 different agreements with high-risk, low-capital, small, singular focus companies.” XR-29, the MITA dose standard that will cost hospitals a percentage of Medicare reimbursement if their CT systems do not meet certain standards, is likely to accelerate that cycling process. Biddle says that a stronger ISO may be able to help customers using slightly outdated scanners make them compliant without doing a complete upgrade.
As for the guy who got into the industry as an independent and is working on those 10- or 20-year-old systems, he won’t have the infrastructure or time to learn or buy the new equipment to keep those modalities viable, according to Biddle.
“In the old days people would leave the OEMs and go out on their own, and they would start their own organizations, and you will continue to see that into the future,” said Biddle. “You’ll continue to have individuals coming out and starting their own companies. Some will figure out how to grow those companies, and it’s just a cycle that our industry goes through.”