2007 Medical Imaging Symposium: Consolidation Underway

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Increased imaging center transactional activity, changes in health care regulatory law, increased scrutiny of self referral, and a full year under the Deficit Reduction Act (DRA) conspired for a lively roundtable discussion at the 2007 Medical Imaging Symposium, sponsored by the law firm of McDermott, Will & Emory on November 27 in Chicago.

“The confluence of these events—DRA, increased transactional activity, multiple changes in the laws—have really led to exciting yet very interesting times in the medical imaging industry.”
—Jerry J. Sokol, JD, partner, McDermott Will & Emery LLC, Miami, Fla

The program grew from a half day in 2006 to a full day this year, primarily due to the increased transactional activity in the imaging center industry, Sokol said. “When we first contemplated putting this program on, we wanted to have an M &A focus, we wanted to discuss deals, but quite frankly, last year deals had come to a virtual standstill in light of people’s concerns about the impact of DRA,” Sokol revealed. “Because the impact of DRA is being absorbed by the industry, we are clearly seeing this increase in transactional activity that led us to incorporate a number of M & A and transactional topics throughout the day.”

This year, as last, the program began with a roundtable discussion moderated by Ira Coleman, JD, managing partner of MWE’s Miami office, featuring Robert V. Baumgartner, CEO, Centers for Diagnostic Imaging (CDI), Minneapolis, Minn, Howard G. Berger, MD, CEO, Primedix Health Systems, which operates Los Angeles-based RadNet Management, and Paul S. Viviano, chairman of the board and CEO, Alliance ImagingViviano The ensuing discussion revealed that it has been a busy year for all three gentlemen, as each company responded to the DRA and worked their respective strategies in a rapidly evolving marketplace.

“There is no doubt that a lot of mom-and-pop operators in small markets have been impacted meaningfully by the DRA, and the consolidation that the three of us predicted last year is now beginning in earnest in our industry,” said Viviano.

The Players React
Alliance’s hospital-centric model insulated the company from the full impact of DRA, but its mobile PET/CT revenue remained exposed. “About 90% of our revenues have not been affected by the DRA, but 10% has been affected by the DRA, almost exclusively PET-CT,” Viviano said. “We provided guidance at the beginning of the year that approximately $14 million of our revenue would be impacted by the DRA, and that turned out to be an accurate prediction. So we’ve worked hard to reduce costs to offset the impact of DRA and to continue to invest in our diversification, to add new products, to add new services, to add new centers. The DRA impact certainly has certainly been meaningful to us at that $14 million dollar level.”

Once almost exclusively a mobile MRI company, Alliance has diversified significantly the services it provides to approximately 1,300 hospital customers. Today the company has about 250 mobile MRI units, 81 fixed sites, approximately 85 PET/CTs, most of which are mobile, and is moving aggressively into radiation therapy, having acquired two radiation therapy companies in 2007 with a combined 19 centers, most located in CON states. With $450 million in revenues last year, Alliance has $55-65 million in free cash for acquisitions in 2008, Viviano said.

In response to a question about whether his hospital clients were fielding offers from referring physicians to sell their imaging centers, Viviano replied: “We’ve tried to turn those into opportunities, whereby we would work with the hospital to acquire those centers and operate those centers.”

RadNet, with approximately $500 million in revenues last year, experienced a similar impact: $16 million. RadNet derives 20% to 25% of revenue from Medicare, but Berger said that RadNet was able to achieve sufficient cost savings through the merger to essentially negate the impact of DRA. However, the $16 million represents an almost dollar for dollar impact on the company’s EBITA line, an impact Berger described as significant.

Opportunities to grow company abounded in the latter half of 2007, and RadNet has grown to operate 153 centers nationwide, primarily in five states: California, New York, Maryland, Delaware, and Florida.

When asked if he saw any surprises last year, Berger said he was surprised by the delayed reaction to the DRA, and the disintegration of the credit market. Due to