Finding Value in Imaging-center Valuations

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After unprecedented growth over the past two decades, freestanding imaging providers have found the past few years challenging. Increased regulatory oversight, negative reimbursement changes, tighter access to financing, and general business uncertainty have all taken their toll, and pessimism within the industry runs rampant. In response, some freestanding imaging providers have consolidated, downsized, restructured, or closed—trends that have undoubtedly altered the competitive landscape in many saturated markets.

With all of the pessimism in the freestanding imaging market today, it is more important than ever to ensure that your valuation consultant considers all factors, positive and negative, when performing an analysis of fair market value.

Most imaging-center transactions must have the support of an independent opinion of fair market value. Understandably, many business-valuation experts who perform imaging-center valuations fail to consider the freestanding imaging industry’s many positive dynamics adequately, and they therefore undervalue the business. With the negative headlines and heightened uncertainty, it is too easy to focus on these concerns at the expense of the more complex (and less obvious) factors that the analysis should also consider.

Forced change sometimes results in positive outcomes. Many imaging providers have emerged from this challenging period leaner and more efficient, having adapted well and adopted a survivor’s mentality, rising to overcome the industry’s new obstacles. In valuing an imaging center, it is important to recognize and consider the current environment’s potential benefits and how they affect the center in question.

Pervasive Pessimism

Reimbursement is the most challenging factor of the current environment. Radical changes promulgated through the DRA reduced Medicare payment rates, especially for advanced imaging modalities such as CT, MRI, and PET/CT. Additional Medicare cuts occurred in 2010, with more expected in the future. Because many payors either follow Medicare rate changes or emulate negative reimbursement trends, commercial reimbursement has also been under pressure.

Federal and state regulatory changes have targeted, and continue to take aim at, the freestanding imaging industry. Since August 2007, CMS has focused on (among other areas) increasing regulations associated with joint ventures between hospitals and physicians, especially those that involve outpatient ancillary services such as imaging.

Some of the regulatory changes that CMS implemented include:
• expanded requirements for classification as an IDTF,
• a redefined in-office ancillary exception to the Stark law,
• a revised antimarkup rule,
• accreditation requirements, and
• increased physician oversight requirements.

Negative headlines associated with overutilization, radiation exposure, accreditation requirements, and capital constraints appear frequently. It is easy to see why pessimism permeates the industry. Much of it is justified, but does it tell the whole story?

Imaging-center Valuations

Valuation consultants typically use a discounted cash-flow (DCF) analysis to determine an imaging center’s value; this is a systemic quantitative approach and a widely accepted valuation methodology in health care. Performing a DCF analysis generally involves projecting the cash flows of a business and discounting them back to present value at the investors’ required rate of return or discount rate. Under this methodology, cash flow equals net income, plus depreciation and amortization, minus capital expenditures and incremental working capital.

In the case of an imaging-center DCF, a valuation consultant estimates the center’s future cash flows based on historical financial information, management’s expectations, and macroeconomic trends. Which volume, reimbursement, and operating-expense assumptions the valuation analyst uses will all affect the projected future cash flow (and therefore the value) of the imaging center.

Reimbursement cuts imposed by government and commercial payors, coupled with a pessimistic outlook about the industry as a whole, cause many valuation consultants to apply low—and sometimes negative—volume- and reimbursement-growth rates to the imaging center being valued. The result is a severely diminished valuation conclusion. Despite a technically accurate methodology, the analysis and conclusion might be superficial because the consultant did not consider the key