Imaging-center Data: Interpreting New Industry Volume Trends

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C. Elliott Jeter, CFA, CPA/ABVColin McDermott, CFA, CPA/ABVAnalysis of the fair market value of an imaging center requires the analysis of disparate sets of information regarding the environment in which the subject company operates. The valuation analyst will research various sources of economic and industry data, as well as obtaining company-specific information as part of the analysis. Radiology Business Journal and SDI Health LLC (Plymouth Meeting, Pennsylvania) published an article in the August/September issue of RBJ illustrating trends related to the top 20 imaging-center chains and the larger environment in which they operate. The data in this study can assist the valuation analyst in formulating a basis for future revenue projections used in the income approach (discounted cash flow) to analysis. The industry information also assists the valuation analyst in determining the velocity, pricing, and strategic motivation behind market transactions within the industry. This information is crucial in determining the fair market value of an imaging center using the market approach to value. The Study Given the depth and breadth of the economic crisis, commercial and government reimbursement cuts, and challenges in access to capital, one would expect the industry data points to be resoundingly negative, adding support for a lower valuation of an imaging center. Negative data points are no surprise, given what the industry has endured during the past few years. Examples of negative industry trends observed by RBJ and SDI include that the number of imaging centers (both chain and nonchain) has declined since the levels experienced in 2008; that many imaging chains (including eight of the study’s top 20 imaging-center chains) have reduced their holdings; and that more imaging centers have decided not to stay independent and to affiliate with an integrated health network (IHN) or national chain, signifying a challenging operating environment. Many trends identified in the study, however, are positive for the remaining independent industry participants. Examples of positive data points that will affect the valuation analysis of an imaging center include
    that demand for diagnostic-imaging services has increased over the past two years;
  • that same-center volume growth has increased over the last two years, with this dynamic resulting from an increased number of procedures combined with a decreased number of imaging centers; and
  • that there is a robust and well-capitalized universe of buyers of imaging centers, signifying confidence in the future of the industry.
As this shows, the data are conflicting and, therefore, have mixed effects on their application and their impact on the valuation analysis of an imaging center. Impact on the Income Approach According to RBJ and SDI, the decline in the number of imaging centers (chain and nonchain) should have led to a small increase in the number of procedures per center, as there are fewer centers to handle the existing volume. According to the study, average procedure volumes per center per week were just 204 in 2008, compared with 291 in 2002. Procedure volumes per center, however, increased to an average of 266 per week during 2009, which is approximately 30% more than the 2008 levels. This growth in average procedures per week, per center, is much greater than would be expected from the redistribution of volume due to the reduction in the number of centers. As the author suggests, the trend would imply an expanding demand for imaging services. The income approach, using a discounted–cash-flow methodology, requires the determination of a future earnings stream, which is converted to present value by the valuation analyst. For valuation analysts, the study's findings are extremely relevant to the development of future projections for a subject imaging business. Despite the reductions in reimbursement, existing imaging centers have been able to maintain revenue stability (on average) through an increase in procedure volumes. Although this information does not supersede specific company volume trends, the valuation analyst must consider how future volume growth for a subject center might be affected by this overriding industry trend. The Market Approach Based on the data presented by RBJ and SDI, it is apparent that there is an active acquisition market for imaging centers. According to the study, the top 20 imaging-center chains added 65 centers between 2008 and 2010, for an increase of approximately 7.5%. While several of the chains did reduce their holdings, nine of the top 20 chains increased the number of centers in their networks. Another significant observation is the number of IHNs with imaging-center relationships. The top five IHNs for 2008 had relationships with 182 imaging centers, while currently, the top five IHNs have relationships with 298 centers. This implies a significant amount of acquisition activity due to hospital purchases of freestanding imaging centers. The increase in IHN relationships should continue into the future as more hospital systems try to capture local market share, especially in markets with multiple systems as potential buyers. The fact that there is a robust and well-capitalized universe of buyers of imaging centers, including national chains and IHNs, should be considered in the market approach to value. it is important for the valuation analyst to consider the active market for an imaging center because this provides the analyst with both observations of current market prices and an understanding of the acquisition activity that exists in a given industry or market. Effects on Value Imaging centers that have survived the reimbursement cuts and the effects of the economic/credit crisis are better positioned to survive into the future due to the continued and increasing demand for imaging services, providing support for optimistic estimates of future volume growth in an imaging-center valuation analysis. In addition, there is a robust and well-capitalized universe of buyers of imaging centers, signifying confidence in the future of the industry. Combining these macrotrends with a specific center’s facts and circumstances will yield a more thorough and accurate imaging-center valuation analysis. C. Elliott Jeter, CFA, CPA/ABV, is a partner with VMG Health, Dallas, Texas. Colin McDermott, CFA, CPA/ABV, is a manager with the company.