The story of the 14-center imaging chain called Cypress Partners, LLC, [link to: http://www.cypresspartners.com/index.html] is a tale of two partners who honed their skills as hired guns at corporate entities operating in the diagnostic imaging space before becoming masters of their realm with their own imaging center company. Joe A. Paul, CPA, was president and CEO of US Diagnostic, Inc. Paul N. Cote spent eight years as a regional manager for DVI Financial Services, reviewing business plans for many startups in the outpatient imaging field. When they co-founded Cypress Partners, LLC, neither man wanted to move, ergo two home offices in Jupiter, Fla, and Atlanta, Ga. ImagingBiz.com caught up with Paul, president and founder, and Cote, founding partner, by telephone to discuss their strategy and unique management style.

ImagingBiz.com: As a medium-size imaging center company scattered geographically, has the job of keeping Cypress Partners operating as a profitable business become more complex?
COTE: Our centers are primarily in Alabama and Georgia and we have two PET centers in Maryland just out of Rockville, so we have 14 centers total. There is no doubt that the job of operating imaging centers in a profitable mode has become more difficult for everyone in the industry. As we all face similar challenges with the cuts in reimbursement and the radiology benefits management companies, which have controlled utilization through the pre-certification process. That job has become much more difficult for us. Joe and I have been able to rely on his experience as a former president of a large imaging center chain and my experience in the financing field of radiology equipment to manage through those challenges. We’ve cut our expenses down to as little as possible and work on driving revenues as best we can through the facilities.

PAUL: The DRA cuts obviously impact all federal patients, but many of the payors have elected not to follow Medicare’s lead on that. On the other hand, there are a number of contracts that most imaging center operators have that are based on the Medicare fee schedule, and so DRA has had an impact. Fortunately for our company, given the markets we are in, we do not have a hugely Medicare-reliant population base, but it still is somewhat significant. Between that and some of the pre-certification processes that a number of carriers have started to implement again, in some ways it feels like we’re going back 10 years, but those are all very large challenges not only for our company but the industry.

ImagingBiz.com: Is this a good time to grow? What are your goals with respect to growth?
PAUL: From our standpoint, I don’t think the growth opportunities are much different today than when we went into business almost seven years ago. What we see out there for sale most of the time are distress centers. Very rarely do you see very profitable, thriving imaging centers put up for sale. Usually, what you see is a company that has gone through some financing troubles or small one-off or two-off imaging centers, whether physician-owned or corporate-owned, that are at a point where, in order to stay competitive in the market, they’ve got to replace or upgrade their equipment. That is what we primarily see for sale out there: someone who has run a center for a number of years and is looking to upgrade their equipment and doesn’t want to take the risk. Or, somebody who got into the business a couple of years ago thinking this was a pretty easy business, got into trouble, and the lender took the equipment back. A lot of times, we will work with our lenders if there is a situation where they need management help or somebody to come in and take over the center.

We look primarily at opportunities that are in our market or adjacent to our market or unique, such as the only imaging center outside of the hospital in a particular market. But we are looking for something unique, either a one-off that has competitive advantages or additional markets to where we are already.

COTE: Where it made strategic sense, we have taken a look at some of the opportunities that are adjacent to some of the markets we are in, but a lot of times it is somebody who used bad judgment in opening the center to begin with, and we’re just not into taking on somebody else’s problem.

ImagingBiz.com: In your efforts to acquire new centers, what are you looking for and what are you seeing out there for sale?
PAUL: I’ve got two books on my desk of imaging centers, one is a fairly decent size chain of centers and one of the issues they are going to have is anybody buying it, they are going to have all single modality older equipment-type centers. Acquiring it, you might be getting something from a standpoint of not having to go through setting it up from scratch and not having to negotiate payer contracts, but on the other hand, you are going to have to spend significant amounts of money replacing equipment.

So in determining whether something is a good fit, it means going back to the same criteria. It’s either got to be an acquisition that is going to enhance our market, give us more coverage, or it’s going to have to be a unique opportunity. We like to stay in the Southeast: Alabama and Georgia. We look at opportunities in South Carolina and Tennessee, and we’ve seen a couple of others in Louisiana and Mississippi.

Paul and I primarily own all of the centers, the majority share, but our other partners are usually the radiologists who provide on-site coverage for facilities. We feel very strongly about having owners either at the facilities on a full time basis or within a very short geographic range. Paul can hit every one of our centers, except the two in Baltimore, with an hour-and-a-half to a two-hour drive. Again, looking at opportunities, they would have to fall into that of criteria, which limits what we are looking at, but that’s our business model. We are not looking to be the biggest.

ImagingBiz.com: What about organic growth in this market? How are you growing same store sales?
COTE: That’s a tough thing to accomplish right now with all of the RBMs controlling pre-certification. Most imaging centers, probably all, have experienced some difficulties in growing their current business, organically at least. We have a pretty detailed three-pronged marketing effort. One is our marketing representatives who go out and ensure that everyone is happy with the level of service the physicians in the office setting are getting and with the operations in terms of turnaround and scheduling and such. The next would be our radiologists, and we typically contract with radiologists who are involved in the community, interact with the referring physicians, and are very good about calling the referring physicians to attend a social event or, more importantly, calling with the results of a positive exam. And the third approach is really from a senior management level, which involves Joe and I going out to the facilities and spending time with the referring physicians to see if we can get any feedback on some of the services, things we are doing well and things we are not doing so well. That’s how we try to accomplish organic growth… it is a little bit difficult at this stage to count on that.

PAUL: One of the positives about the health care industry and specifically diagnostic imaging is that, due to population dynamics, MR and CT should continue to see somewhere between 8 and 12% growth, at least, for the next four to five years, and possibly even longer because of the aging of the population and the fact that the majority of imaging is done on patients as they get older. One of the things that we try to get across to our people is just that: we expect to see volume growth in that range on a modality basis, or we are not maintaining our market share. Obviously, when you have situations where big players bring in RBMs to implement a pre-cert process, they can have a dramatic impact on the way physicians refer out their patients. That tends to weed out some of the unnecessary exams and changes some of the patterns, but after a period of time, 12 to 18 months, you usually will see volumes begin to creep back up, and you will be back to your 8% to 10% growth unless you are losing market share.

With some of the changes happening in the industry, the DRA and others, you are starting to see some of the companies that were marginally profitable or break-even begin to slide. They may be able to stay in business as long as they don’t have to upgrade their equipment, but at some point in time, when they’ve got to spend another $1 million, $2 million, or $3 million depending on the types of modalities they have, you won’t see them do that. We see, long term, in most markets, fewer players and fewer players coming into those markets, which translates into more volume.

COTE: Joe and I have spent a lot of time lately looking at different avenues to grow revenue in existing facilities, not necessarily with the current modalities and current procedures, but by looking at additional modalities such as digital mammography or looking at performing additional procedures, such as (MR, CT?) arthrograms, in our facilities to broaden the services we provide to referring physicians in the markets we are in.

ImagingBiz.com: Which modalities do you currently have, and are you planning on adding or eliminating?
PAUL: With the exception of our specialized PET Centers in Baltimore, most of our centers are multi-modality. We have a couple single modalities, primarily in rural locations, but for the most part, we have multimodality at every center. In Birmingham, where we have multiple centers, we needed an open in our system, so we opened up a freestanding open, but we didn’t approach it as a new center because we had payer contracts and relationships with referrers in the market. We needed to offer the modality, and we put it in a central location so that the other centers that we market had the ability, if they needed an open, to have that as an option.

We recently started to upgrade our regular mammography to digital mammography. We have a center that has a large established mammography business, and by switching from analog to digital, that will translate into an immediate increase in revenue and profitability. In a couple of markets, we’ve also added options to our existing equipment such as our CT units to allow us to do arthrograms, and in some cases, we’ve put in R/F equipment so that we can do other types of special procedures, such as mylograms, discograms. We are trying to complement the referral base with as many modalities as it call for. Adding more services to produce revenue makes it a win for everybody. The offices want relationships with centers that can provide their full imaging needs. So that’s how we focus on what to add.

ImagingBiz.com: What about day-to-day management of all of those shops? What are the touchstones?
PAUL: There are 3 or 4 different things that we do. All of our centers operate for the most part as standalone centers from the standpoint of management and operational authority. We like to hire strong center managers and give them responsibility and accountability, so that is where it starts. Once we have a number of centers in a geographic area, we will then add an operations manager, so for Birmingham/Alabama, we have an operations director that oversees all of those operations and reports to Paul. In Georgia, we have an individual who not only manages a particular site, but who also helps facilitate on the operations side. So I think it starts with very top-notch, credible people operating all the way down to the center level.

My background is primarily financial, I’m a CPA by trade. Having run public companies with 130 centers, the skills that you needed to manage not only that many centers but 200 employees, we use those same management tools. We track volume by modality daily, it is reported to this corporate office here in Florida weekly, we put it into spread sheets, compare it with budgets and prior years, so we have our pulse on volume. We track cash daily. I get that every day from the banks, and we track it on spreadsheets. I can tell you every day whether our deposits are where I expect them to be, lower or higher, and we are always following up on those reasons.

In addition to those things, we have financial statements prepared every month, again, tracking the actual to the budget. Any time there are things that get out of whack, we follow up on them immediately. And then, the other thing we do from a financial stand-point, is I personally sign every check. There is not a vendor that gets paid unless I sign off on it. Some might argue that that is over-control, but one of the things we like about being a medium-size, regionally based company is we have that luxury. I think for a lot of companies, once they have implemented three or four layers of infrastructure and have to depend on somebody else to watch the dollars, it gets more and more difficult.

So those are the touchstones. We have very sophisticated management tools from the standpoint of being able to track referrals by modality from a physician standpoint in each center, and we monitor those trends. We have sophisticated billing reports that track our charges by modality, track our days outstanding, graph collections on a percentage basis, our mix of business, our write-offs, and delinquent accounts. So there are a number of management tools that have been perfected, from running a several hundred million, 130-plus chain, we use those same tools to run 14 centers.

We went to in-house billing in all of our centers. We use Sage Software for our front end RIS and for billing and collections software. We have a myriad of different radiologists who all have different systems, so we don’t have an enterprise PACS. Many of our radiologists have their own PACS, and we’ve had to develop interfaces with our system, which is always challenging. Even though vendors tell you their software is HL-7 and easily interfaced, easily is not very true, and it takes a lot of work. All of our centers, at least from the front end system to the billing side are handled in-house from two regional billing centers, one that does Alabama and one that does Georgia, because there are unique billing circumstances between those states. Our two Maryland facilities are managed by one of our partners who lives there, and the billing is outsourced based on an existing relationship.

ImagingBiz.com: How do you perceive the importance of training and developing your people? How much do you invest in this?
COTE: At least once a year we try to invest in some type of program for our people, whether it is a Dale Carnegie-type program, or something along those lines. It’s very important that we continue to educate our staff. One of the things that’s always a challenge as you grow is sharing knowledge across your network, meaning we may have a manager in Columbus who has some unique ideas and policies that may need to be implemented elsewhere, and one of our challenges is disseminating that to the other locations. One of the things we’ve had to do is make sure we have highly qualified managers to run the centers, and we’ve given them a lot of autonomy in running those locations. Previously, I would be at every location at least every three or four weeks. At the size we are now, we’ve got to make sure we have well-trained staff and people with strong experience in the imaging field to run those locations.

ImagingBiz.com: Is marketing more or less important today? Where are you putting your effort?
COTE: When you look at the expense related to marketing, a lot of times you wonder if it’s all worth it. But it’s incredibly valuable to our organization that we spend time out there in the market. We look at our marketing representatives as individuals who are highly educated, well-trained people, rather than someone who’s handing out bagels and donuts, who can go out there and spend time at the referring physicians’ offices, teaching them about the capabilities of the equipment and the services we have and investigating any problems with existing operations, We take a lot of pride in the sales force we’ve been able to build, the marketing team we have been able to build.

PAUL: We’ve had marketing training for our staff, and we’ve invested in software, SalesForce.com, so that our people have better management tools at their disposal for following up on referring offices, keeping those relationships, and subsequently reporting on those efforts to us in a format that allows other people, ie Paul and myself, to be able to review and track how many offices are getting touched.

ImagingBiz.com: You have an interesting shared management approach. Could you describe how that works, who does what?
PAUL: Paul is primarily focused on the operations of the center, whether it be marketing, getting feedback from the managers on adding ultrasound or upgrading MR, those baseline decisions are typically handled by him in making our people justify what their recommendations are. So Paul is typically operations and marketing, and I primarily handle financial and cash management of the business.

COTE: Included in that are the billing and cash collection aspects. Joe’s got a much better background in that, and this is the unique thing about our relationship, the complementary backgrounds that we have.

PAUL: Paul sends out emails about why Dr So-and-So is doing this, or this has fallen down, or why aren’t we negotiating better contracts here,or we have to look at this rate over there, or we have to keep raises to a certain level. My emails rad: we are not collecting enough cash, why is the cash down, do we have problems, let me see the report. They are accounts payable-related, they are financial statement-related, they are making sure that we have sufficient working capital in place. When there are legal things that need to be done, whether it is preparing the contracts or reviewing the contracts, whether it be for radiology services or leases on our space, those are the types of things that I handle in our office here in Florida. Paul, having financing in his background, is the one who usually looks over equipment finance documents to make sure we are getting the best terms and rates. You can ask a question and our people pretty much know. All of the major things, whether it is adding modalities, expanding our operation base, hiring our top-notch people that we have out there, that we do that together. One of the advantages is that it’s always better to have two heads, two people with very different backgrounds, to call on and I think Paul and I use that to the fullest. You can hire somebody, and there are very talented people out there, but at the end of the day, if it’s your own money, and every dollar that is spent is our money, there is nobody who is going to do it better than we.

ImagingBiz.com: You have been active in imaging center politics. As you see it, who are the constituents of outpatient imaging political action efforts and what needs to be done?
PAUL: One of the problems with our industry, going back several years now, is that imaging as an industry has really had no voice. For the most part, the majority of it is provided by either very small–to-medium-sized companies, or radiologist-owned. There are a few larger entities, but even the largest is still under a hundred centers today, which is less than four and a half to five percent of what’s out there. Historically, this industry has done a poor job of getting out its message, its issues, its concerns with respect to whether quality is being provided and what the differences are in being imaged on a low-field scanner versus the high field scanner, and whether technologists should be accredited or not accredited.

One improvement over the past several years is the National Coalition for Quality Diagnostic Imaging Services. It has gotten to a level that its operations have been consolidated and moved, and they’ve hired a professional manager for the organization in Washington, DC. But it is still deficient from the standpoint of getting the full participation of all the imaging center operators, whether you are a one-off center or a small- to medium-sized regional chain. Unfortunately, you need the dollars to do the lobbying and the grass roots campaigns to make more and more people aware of the effects that legislation has in our industry. So many groups out there are all fighting for their share of the dollars that it is almost incomprehensible that we didn’t have a better lobby 10 years back.

Close to 50%, I believe, of all imaging is still done in an outpatient setting. If we went back to the hospital setting, we’d also go back to the days when you’d have to wait a month or two for an MR. So, clearly it is in the interest of everyone in this country to have imaging providers like us. And I think that we have also done a poor job, and it’s gotten better in the last few years, of keeping the government organizations like CMS aware of what the real data is. NCQDIS commissioned a number of studies over the past 12 months to determine equipment utilization percentage rates at the imaging centers and a fairly widespread market analysis shows that utilization rates are closer to 50% to 60%. CMS has considered moving them up to 75%. So I think that’s the type of action that needs to be done on a consistent basis to make sure our voices are heard. At the rate at which cuts are being forecast, and there are more forecast going forward, there is a certain rate at which you make those services unavailable because no one can stay in business at those rates.