Imaging on the Move: Q & A with RadNet CFO Mark Stolper
As the trend of consolidation among imaging centers continues, RadNet, Inc (Los Angeles, California) is at the leading edge, having added 24 freestanding outpatient centers in 2010 alone. The company, founded in 1984, today owns and/or operates a network of more than 200 quality-oriented, cost-effective facilities, and it is poised to continue increasing that number. Mark Stolper, executive vice president and CFO of RadNet, spoke with ImagingBiz about the company’s present and future ambitions. ImagingBiz: With all the uncertainty that exists in health care today, why is RadNet so confident about the future of outpatient imaging centers? Stolper: Imaging, in general, is a necessary service that’s in the sweet spot of where health care is today and where it’s going to be in the future. It’s part of preventive medicine. Ultimately, although money must be spent up front for imaging tests, the result is a cost savings to the health-care system. Imaging reduces the need for more invasive alternatives, such as exploratory surgeries, and allows detection of problems earlier in the disease process, when disease is often treatable more economically. With respect to outpatient imaging within freestanding centers specifically, there’s been a trend toward it and away from hospital-based settings over the past several decades. The reasons are obvious. First, outpatient imaging is a far more effective way of dealing with nonemergency cases. Access is more convenient for the customers, and the customer experience is better because the patient will not be made to sit next to very sick patients. Second, outpatient imaging is far more efficient. Reports are turned around much more quickly. The communication between radiologist and referring physician is better because it’s much more service oriented. Most important, outpatient imaging within freestanding centers is much more economical for the payors. It is not uncommon for costs to be 30% to 50% lower in freestanding centers than within hospital settings. ImagingBiz: RadNet has been aggressively shopping for and purchasing outpatient imaging centers. What are the overarching strategic objectives behind these acquisitions? Stolper: We’re two to three times larger than any other outpatient imaging center player in the United States, yet we’re really only an East Coast and West Coast company in limited markets. What we want to do is drive further penetration into the six states that are our existing core markets—California, Delaware, Maryland, New York, New Jersey, and Florida—in order to make our regional presence stronger. We’ve settled on this strategy of regional markets because we believe regionally dense networks of facilities are much more efficiently operated than are those with far wider reach. This strategy also nicely accommodates our desire for a stronger negotiating hand with regional health plans, when it comes to pricing. ImagingBiz: You named six states; why these, in particular? Stolper: These states are where the opportunities exist most abundantly, we believe: 25% of the US population resides in just that handful. Moreover, these high-population states also happen to have their populations distributed in fairly dense patterns, which makes our efforts to serve them more cost efficient—and, of course, one of those states, California, is where we started. ImagingBiz: In the past six months, RadNet has expanded beyond the acquisition of imaging centers and has made forays into some other areas. Can you tell us about these ventures? Stolper: For starters, we’ve diversified into the IT world with our purchase, in October 2010, of a radiology software company, eRAD (Greenville, South Carolina). This now puts us in the PACS business. In addition, we’re developing our own RIS product, which should be completed in 2012. Another diversification area for us has been teleradiology, made possible by our acquisition of Imaging On Call (Poughkeepsie, New York). We’ve also entered the business of breast-cancer–care management. This happened in 2008, when we acquired Breastlink (Orange, California). ImagingBiz: What drove that acquisition? Stolper: At the time, RadNet itself was providing a tremendous amount of women’s imaging—over half a million mammography exams annually, many performed in women-focused centers. In the course of this, we observed that the disease-management process for breast cancer is highly fragmented—and, as a result, highly inefficient. For example, after we detect a cancerous mass and report the finding back to the ordering physician, he or she then starts the process of referring the patient to different medical oncologists, radiation oncologists, surgeons, reconstructive surgeons, and others. Each of these physicians in the chain of care has his or her own medical records for this patient, but none of them communicates with another. There’s no sharing of charts and no coordination of care. Worse, each is plying the patient with quantities of his or her own information, which frequently has the effect of confusing the patient and wasting a lot of critical time. Breastlink has allowed us to pull together the oncology and surgery pieces with the radiology piece, so there is now one digital medical record, and the various providers are talking to one another and creating a comprehensive and coordinated treatment program. This proves to be a much more efficient way of creating positive outcomes in the world of breast cancer. We started with just one Breastlink facility and now have six, all located in California. The idea is to roll this out to other regions where we have a presence. ImagingBiz: Why did you want to diversify into IT? Stolper: We, like the rest of the industry, contracted for these software products—but because RadNet has grown so large and has such an extremely complicated and demanding workflow pattern and a requirement for scalability, our then-current providers (large vendors all) were not able to keep up with our requirements. Cost was also a factor, in large part because licensing agreements are often based on procedural volume; last year, we did over 3.5 million exams, and this year, we’ll do even more. It became clear to us that we needed to have our own systems. Besides, we liked the idea of being able to package the IT solution with certain of our other core competencies and provide them to the rest of the imaging industry. ImagingBiz: What transpires when RadNet contemplates a prospective acquisition? Stolper: Typically, we’re pursuing acquisitions of multimodality facilities, since about 80% of our procedural volume is routine imaging: radiography, ultrasound, and mammography. Multimodality facilities better position us to serve as the one-stop shop for local referring physicians. With about 80% of payor requirements in the market revolving around routine imaging, multimodality facilities make it possible for us to meet their needs better as well. Our acquisition process involves, too, identification of candidate facilities with radiologists who have longstanding referring-physician relationships in the market, reputations for providing high-quality care, and subspecialty expertise. This is important because once we complete the acquisition, we typically invite those radiologists to become part of our RadNet family. ImagingBiz: There are many challenges involved in acquiring an imaging center. Of them, which is the biggest? Stolper: The biggest challenge has been overcoming the imbalance of expectations between buyers and sellers, a problem stemming from the fact that in the past few years, there have been many sellers and relatively few buyers. Despite purchase multiples having dropped substantially over historic levels, sellers’ expectations have been slow to align with the new realities. Further, many acquisitions now are complicated by the presence of third parties—creditors, mainly, but also landlords. Fortunately, third parties usually take comfort in the fact that the prospective buyer is a well-capitalized large company that has a core competency in successfully completing acquisitions. ImagingBiz: What determines the operational success of your imaging centers? Stolper: Scale, for one thing; with it comes purchasing power, which helps us obtain the best pricing on contrast materials, film, equipment service, billing, and collections. Furthermore, we have some of the most knowledgeable and experienced operations teams in the industry. ImagingBiz: Centralized, decentralized, or hybrid: Which best describes your corporate management strategy? Stolper: Hybrid; we make all the major strategic decisions centrally, from our corporate headquarters in Los Angeles. These include decisions about company financing, acquisition targets, equipment provisioning, and so forth. Decisions affecting the day-to-day operations of the imaging centers, though, are made at the regional and individual-site levels. ImagingBiz: How is RadNet positioning itself in the market? Stolper: We differentiate ourselves as a high-quality provider of imaging services, very much focused on subspecialty interpretations, fast and thorough communication, and customer satisfaction. ImagingBiz: Expansion ambitions can be expensive. How is RadNet financing them? Stolper: We’ve been financing them almost entirely with cash. This has been possible because our company, each year, produces a significant amount of free cash flow, to the tune of $25 million plus (after capital-acquisition and interest expenses). In April 2010, we also undertook a $585 million refinancing of our capital structure, which provided us with a $100 million unfunded revolving-credit facility that we can tap for acquisitions. ImagingBiz: RadNet has been known to bring strategic partners in on some of these ventures. Who are these partners? Stolper: Local hospitals and health systems: We currently have 10 such joint-venture relationships, predominantly in the Mid-Atlantic region. The idea is that instead of competing against the local hospital and battling for outpatient work, we work together in the most cooperative of ways—that of equity partners with a common goal of providing the best possible service to the local market. This makes a great deal of sense when you consider our teleradiology, IT, and women’s breast cancer capabilities, in addition to the fact that, in certain cases, our radiology groups are already staffing the hospitals’ radiology departments. The partnerships we currently have are very successful, and we’re interested in forming more. ImagingBiz: How do you measure your market-share growth? Stolper: Market share is very difficult to measure because of all the radiology that takes place within any given market—especially when you include self-referral and in-office imaging. When you look just at nonhospital-based outpatient imaging, however, RadNet is the largest provider in each of the states in which we operate (with the lone exception of Florida, where we have only, as yet, dipped our toe). ImagingBiz: What’s in store next for RadNet? Stolper: Our revenues are at about the $600 million mark, as we have quadrupled the size of the company over the past six years. Our goal, now, is to double in size over the next five years. If we can do that, we’ll emerge as the first billion-dollar imaging company. To get there will require a significant number of acquisitions as supplements to our internal growth. With that in mind, we’ll be focused on making acquisitions within our existing markets, or perhaps spreading into new ones that are contiguous with these existing markets. Although we have a seemingly insatiable appetite for acquisitions, we’re very disciplined with regard to the market multiples we’re paying for these businesses—three to four times trailing EBITA. Fortunately, there is such a product available in our markets. Rich Smith is a contributing writer for ImagingBiz.com.