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November 15 , 2006 • Volume 1 • Number 12

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Financing Challenges for the Post-DRA Era

By Gordon Baltzer

The pending implementation of the DRA reimbursements cuts has been looming over the diagnostic imaging industry for the past year. Although there has been hope for a fourth quarter moratorium on the implementation on these cuts, we encourage all those to be effected to manage their business planning under the assumption that the DRA cuts will be implemented.

The major impact on the financing of equipment replacement projects or the development of new diagnostic centers really boils down to patient volumes. In the past, many projects that obtained lease- or debt-based financing, reflected slow and gradual growth periods with the usual factors being cited for the projected ramp-up. The business plans almost always include: better quality images, faster report turn-around times, a better patient experience, and the hiring of the best marketer in the industry. While these factors are always an essential element of the proposed business plan, on their own, they are simply not enough anymore. A major effort in the new reduced-reimbursement era must be made on proving patient referral patterns and the relationships with the physicians that exert control on those referral patterns.

We believe that this is becoming more of a pattern in the diagnostic imaging marketplace. As a result of the reimbursement cuts experienced by most physicians over the past few years, non-radiologists are increasingly looking to integrate diagnostic imaging into their practices as a means to mitigate the impact of reduced revenues. Therefore, financing transactions have had to become more complex with physician groups from differing subspecialties being tied together to ensure that the increased patient volumes will be realized. This can be challenging, since most physicians carefully guard the source of their patient referrals as well as their financial information from other potentially competing physicians. There are a number of areas that should be addressed in any new project financing that can mitigate some f the risk associated with financing new projects. These include

Gordon Baltzer

1. A well laid out exit strategy. Medicare and Medicaid budget pressures as well as physician migration to include diagnostic imaging in their practices ensure the introduction of many new regulations over the next 5 years. Since most leases and financing packages span a standard five-year period, it is important to address the structural issues of all applicable partnership or joint venture agreements up front so that flexibility exists to address any changes to regulations that may impact the operation.

2. Consider refinancing any existing debt that may be in place currently on an imaging center to allow for sufficient working capital over the first 6 to 12 months of the post DRA era. Many believe that the DRA cuts will force the centers with older equipment and lesser patient volumes out of the industry and that the well-capitalized remaining centers will absorb the additional patient volumes required to flourish. It is important to plan now and not wait until a problem arises.

3. Do not over-buy when evaluating equipment. More than ever, particularly in the outpatient imaging marketplace, careful attention must be paid to matching your projected patient scans with the capacity and capability of the equipment needed. It is no longer a guarantee that the biggest, best and most expensive piece of equipment will be the right solution in the post-DRA era.

The provider of your financing should be a closely integrated partner in the business planning process. Their independence and objectivity can lead to better outcomes and can be an integral part of ensuring that the business model is a success, while being there to assist when problems arise.

Gordon Baltzer is president and CEO of The MEI Healthcare Group, LLC a privately held group of companies focused on the diagnostic imaging marketplace that provides turnkey development of outpatient diagnostic imaging operations, providing a range of services including the provision of financing, operations support/management, design/construction project management, and equipment selection, as well as the development of physician alliances.