Financial Adventures in Imaging, Post DRA

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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.
imageThomas Bruce
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.
imageDouglas Lynch
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. Relative Stability 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. Some Fallout The GEHFS $3.3 billion domestic diagnostic imaging equipment portfolio is divided among four market segments: 54% hospital, 30% OIC, 12% group practice, and 6% described as other. As mentioned, 91 customers representing $185 million in the OIC sector requested help. According to Bruce, the division succeeded in coming up with viable, workable solutions for 34% of those customers, resulting in an average reduction of 20% in annual financing costs. An additional 40% of the 91 customers ultimately did not opt for a financing solution. “Many of them were performing better, and if they were close to the end of their financing, they decided to wait it out,” Bruce says. The outcome was not as positive for 19 customers representing $45 million in financing who were unable to sustain themselves, resulting in bankruptcy or sale of assets. The modality most negatively affected by the DRA was PET/CT. “It would take three to four to break even before DRA,” Bruce notes. “Now it takes seven to eight to break even. Because PET is such a viable and valuable modality, it is moving to cancer centers, where they are also working in the cyberknife.” Bruce shared representative case studies of four clients that GEHFS helped to navigate the waters of the DRA with four different solutions. Case study number one was a radiologist-owned company operating eight imaging centers with $30 million in revenue and a 22% Medicare patient base. Post-DRA strategy included filling modality gaps, exiting capitated contracts, reducing staff, expanding support technology, reducing fluorodeoxyglucose costs, credit relief/restructuring, and reducing owner compensation. Revenues ultimately grew 4.8% in 2007, compared to a –0.1% growth rate in 2006. Case study two was based on a multimodality center opened in December of 2005 and generating revenues of $2.9 million. It was co-owned by a physician group, a developer, and a hospital. Post-DRA strategy included leveraging relationships with the hospital physicians, adding digital mammography and a breast-MRI coil, lowering financing costs by adding 12 months to their deal, and an additional capital contribution of $550,000 from the owners. Scan volume went from 11,814 in 2006 to 14,735 in 2007, and although revenue per scan dropped from $232 to $193, the center achieved a 3.9% revenue growth over the previous year. Case study three was based on three multimodality centers owned by radiologists with a hospital referral base. Post-DRA strategy included expansion through purchase of a competitor in 2006 (which also resulted in a reduction of professional fee expenses in 2007) and reducing owner dividends. Revenue per scan dropped from $442 in 2006 to $372 in 2007, but scan volume increased from 29,548 to 36,843, and revenue grew 5%. Case study four involved a radiologist-owned multimodality imaging center with revenues of $10 million. The center added PET and MRI technology in 2007, but didn’t implement a robust post-DRA strategy. Financing costs and wages increased in 2007, and the center’s revenue shrunk by 13.7% in 2007. The practice was forced to close a women’s center to reduce costs. In summary, Lynch and Bruce made the following post-DRA financial observations, based on the GEHFS portfolio:
  • The majority of surviving OICs experienced revenue growth in 2007.
  • Average revenue growth was 8%.
  • Growth was driven by additional modalities and new referral sources.
  • Nearly half of the clients GECF consulted with made significant personnel changes.
  • Average personnel reductions were 12%.
“The centers that are surviving are actually growing,” Lynch says. “Know your market, be efficient, and work closely with your lenders. Together, we can consult and find ways to grow your business.”