It’s been a year and a half since the debut of the DRA imaging cuts, and the dust is beginning to settle in the outpatient imaging market, according to Douglas Lynch, senior vice president and US chief risk officer, and Thomas Bruce, senior vice president and senior credit officer, GE Healthcare Financial Services (GEHFS) Services, Brookfield, Wis.
In a July 24 talk at the Third Annual Beyond Conference in Washington DC, both executives provided a pre- and post-DRA snapshot of the major players in the outpatient imaging center (OIC) environment, along with several case studies based on customers who requested assistance from the division’s DRA task force.
The GEHFS domestic diagnostic imaging equipment portfolio amounts to $3.3 billion, with nearly a third ($1 billion) invested in the outpatient imaging market. Lynch reported that 91 customers representing $185 million, or 18.5% of the OIC portfolio, asked for help. Most of them—but not all—survived.
The picture was not altogether grim. Despite ongoing proposals for volume and price controls, imaging procedural volume continues to grow, and projections call for a continued shift in market share from the inpatient to the outpatient setting. In 2006, 28% of all CT imaging, 59% of MRI, and 55% of PET/CT were performed in nonhospital settings. By 2016, those numbers are expected to increase to 35% for CT, 64% for MRI, and 60% for PET/CT, according to data from Sg2 and the Marwood Group.
Lynch characterized the pre-DRA outpatient imaging business as regional and highly fragmented, with the 10 largest players controlling just 11% of the total imaging center market in 2005, according to the 2006 Diagnostic Imaging Center Market Report from Verispan.
All of the top 10 players on that list continue to operate post DRA, but the changed circumstances of some indicate a fluid market, including some consolidation activity, a major hospital purchase, new corporate players, and strategic acquisitions.
Since 2005, RadNet has taken an aggressive role in the consolidation of the market, first acquiring Radiologix before the DRA and adding numerous tuck-in acquisitions, post DRA, that fit neatly into the organization’s strategic markets in California (13 sites), New York (six sites), Delaware (12 sites), and Maryland (one site). According to a recent 10-K filing, RadNet focused on maximizing performance at existing sites by adding modalities and capacity, building on capitation arrangements to attract new fee-for-service business, and expanding its network with the aforementioned acquisitions.
“They are able to execute in a region because they are strong in a region,” Lynch says, citing the ability to maximize marketing dollars, among other advantages. “If you have a large footprint, you can add high-end imaging selectively at some sites.”
MedQuest was the number-two provider on the list before the DRA, and since was acquired by Novant Health Inc in August 2007 for $45 million in cash plus a contingency, in a deal Lynch described as fortuitous for both parties. MedQuest received a price based on a generous pre-DRA multiple of earnings, and Novant achieved a strong and immediate market presence in states where its hospitals were located; many of those were certificate-of-need states.
InSight, the fourth-largest pre-DRA OIC provider, reported a $5.7 million DRA impact on revenues of $286 million for the fiscal year ending June 30, 2007, and elected to pursue a voluntary plan of reorganization under Chapter 11 in May, 2007, from which it exited on August 1, 2007. The company succeeded in transforming senior subordinated note holders into shareholders in a transaction sometimes referred to as a prepackaged bankruptcy, Lynch says. Earlier this summer, InSight announced a 10-year extension of its deal to provide MRI to four county hospitals serving Los Angeles.
Lynch was unable to find public information on many of the other major players, including number three on the 2006 Verispan list, HCA, which does not break out data for the outpatient imaging sector in its public filings. Health South’s 69 centers were acquired in 2007 by Gores Group, and CDI added six sites in the Seattle area. Closely held Medical Resources, Doshi Diagnostics, PresGar Medical Imaging, and Horizon Diagnostic Centers all appear to be operating business as usual, Lynch notes.
The GEHFS $3.3 billion domestic diagnostic imaging equipment