Finding Value in Imaging-center Valuations
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 qualitative macrodynamics seen in many imaging markets today. Reasons for Hope In certain situations, it’s necessary to take the following factors into account when analyzing the fair market value of a freestanding imaging center. Higher barriers to entry: The slowdown in the number of new imaging centers proves that entrepreneurs and physician groups are not entering the market at the rate at which they once did. Much of that change relates to the negative reimbursement environment, but existing centers that have survived the wave of recent closings have a competitive advantage: Their equipment is already in place, the center’s location and reputation are established, and the center has demonstrated operating ability. Less competition: Industry experts expect numerous closings and consolidations in the imaging industry. Survivors in the marketplace should expect rerouted volume as the market’s imaging volume is redistributed among fewer players. Competition for high-quality staff and radiologists will be less acute, and this will probably result in lower input costs (and lower operating expenses). Lower equipment cost: Due to closings and consolidations, the marketplace currently has a flood of used equipment for sale. More than ever, manufacturers are willing to negotiate prices to win an imaging center’s business. At many price points, older (perhaps refurbished) technology will suffice for a competitive situation. In some cases, and from a competitive standpoint, multimodality centers do not need new, more expensive, state-of-the-art equipment. In addition, software and hardware enhancements can sufficiently upgrade most advanced imaging systems. Favorable demographic trends: An aging US population, wider acceptance of advanced imaging technology, and consumers’ growing preference for outpatient services are all increasing demand for freestanding imaging services. These positive demographic trends will continue unabated and will drive volume growth, especially for OICs in demographically favorable markets. Finding Value When properly applied, these factors can affect the inputs of a DCF analysis—and, therefore, the valuation of an imaging center—positively. It is critical to consider both qualitative and quantitative aspects of a business in a valuation analysis. A comprehensive valuation analysis accounts for the specific facts and circumstances of the center, as well as for other macroeconomic industry trends. 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. Elliott Jeter is a partner with VMG Health, a national firm with offices in Dallas, Texas and Nashville, Tennessee, which specializes in health care valuations and transaction advisory services. Sally Inman is a VMG research analyst.