Imaging’s Merger/Acquisition Outlook: Buy, Sell, Hold, or Joint Venture?

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Todd SorensenDoug SmithAt the 2012 Fall Educational Conference of the RBMA in Chandler, Arizona, on October 9, a panel of industry experts assembled by ImagingBiz presented “Is It Time to Buy, Hold, Sell, or JV?” to discuss the current mergers-and-acquisitions outlook for imaging. The speakers were Curtis Kauffman-Pickelle, CEO of ImagingBiz; Todd Sorensen, AVA, a partner with VMG Health; and Doug Smith, managing partner of the Strategic Positioning and Consulting Group of Integrated Medical Partners. Kauffman-Pickelle first notes that consolidation is “characteristic of a mature marketplace. He continues, “When we read about these transactions, we wonder: What was the strategy behind that? Which avenue is best for us to take? Do we buy, sell, or hold?” Noting that the largest driver of imaging-center transactions today is the rate differential between hospital and outpatient reimbursement, Sorensen observes that hospitals are currently the primary strategic buyers in the marketplace. “Sometimes, that differential can be pretty small, and in other markets, it can be 200% or 300% of what an outpatient imaging center would get,” he notes. “It makes the business case for doing a transaction very appealing to hospitals—it’s an easy sell.” State of the Market In an assessment of the state of the hospital acquisitions market. Sorensen and Smith agree that venture capital and private equity have played limited roles in financing these transactions: “There were some private-equity players who came in over the past five years,” Smith notes, “and then they pulled out; they realized this isn’t what they thought it would be. They bought into the business without a lot of expertise.” Instead, Sorensen says, hospitals have capitalized on the rate differential to make acquisitions out of their existing capital sources (or even operational budgets). “You have many hospital systems that have a lot of access to capital,” he notes. “The other thing to consider is that the business case for these transactions, all else being equal, often includes a two-year payback period. Hospitals aren’t going to worry too much about financing.” Smith points out that in this environment, imaging businesses that are joint ventures or otherwise aligned with hospitals should be expecting conversations about full-on acquisitions—if they haven’t had them already. “There is a propensity, or a perceived need, in several hospitals or health systems (especially the more sophisticated or larger ones) to design a strategy for access to imaging throughout the continuum of care,” he says. “They will assess what is available in the marketplace versus what they need to create on their own. Expect those conversations about buying out your interest in a joint venture to come.” Impact of Valuation Sorensen says that the rate differential that is driving many of these transactions will not last forever; for that reason, it is important that valuations be forward looking, rather than based on past financial performance. “There’s a tendency, from a valuation perspective, to look at multiples of historical performance, and that’s really not the correct format,” he notes. “What matters is what’s going to happen in the future.” For that reason, Smith says, imaging centers should emphasize nonfinancial aspects of their businesses, including their workforces and service levels. “In imaging centers, technologists see the patients coming in as customers, and that’s a good thing—in hospitals, they’re an interruption to an otherwise great day,” he jokes. “There is value in that, as well as in relationships with medical staff in the community, referring staff, and payors. When these guys come to interview management, that is your opportunity to sell the value of your practice. If you don’t do that, the purchasers will do everything they can to suppress the value.” Sorensen concurs that market share and referral base are critical elements. “The important thing is what the future holds,” he says. “Your value proposition is really important to keep in mind. If your competition is a hospital, this value proposition is a huge asset for you.” Looking Forward Looking into the future, Smith sees hospitals doing much more than attempting to capitalize on a short-term rate differential: He sees them working toward what he calls integrated delivery 2.0. “We’re seeing a lot more discussion and activity in integration,” he says, “but the difference, this time, is that there is a plan, on the part of radiology, to own this, be the leaders of it, and have a seat at the table with the C-suite. Hospitals are beginning to recognize that they don’t know this business—you do.” Sorensen agrees. “There is an alternative worldview out there that accountable-care organizations are coming, and the focus is going to be on getting paid for quality, outcomes, and value,” he says. “There are hospitals out there going the other direction and forming joint ventures—because in that world, what matters is how we can do all of those things really well. Generally speaking, that’s not within the four walls of the hospital.” Kauffman-Pickelle points to another factor that might soon slow the wave of hospital acquisitions of imaging centers: negative attention from regulators. “They know that this rate differential has not benefited the patient,” he says. “The consumer-driven health environment is going to make it very obvious, when someone starts asking why the copayment went from $150 to $1,200, overnight, for the same radiology practice and imaging center.” Sorensen’s advice for radiology practices and imaging centers, given these considerations, is to maximize their value to future integrated models by doing what they do best. “Hospitals’ buying of physician groups and ancillary services has resulted in increased costs for the patients,” he says. “That’s where you come back around to being more forward looking and proactive. The focus should be on doing things at the lowest cost, with the best quality. What hospitals are achieving right now makes sense financially, but the question is this: In the long term, will it support what we are going to become?” Cat Vasko is editor of and associate editor of Radiology Business Journal.