Imaging's 2013 Merger/Acquisition Outlook: Rounding the Bend

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Elliott JeterTodd SorensenFollowing several years of fast-paced merger/acquisition activity, the imaging market is poised to turn a corner in 2013, according to valuation experts Elliott Jeter, CFA, CPA/ABV, and Todd Sorensen, AVA, both partners with VMG Health. “This will be the year where pricing for imaging centers gets too high from the patient’s perspective,” Jeter says. “In past years, a lot of the merger/acquisition activity has been by hospitals trying to roll Part B IDTFs into the better HOPPS reimbursement environment.” Jeter says that this trend will begin to taper off in 2013. “At some point—and I think this point is coming soon—they will realize that the market overcorrected,” he says. “The merger/acquisition activity will then taper off, yielding a less robust environment.” Sorensen concurs; he says, “In 2013, the focus on being competitive after the transaction will become more prevalent, as opposed to focusing merely on taking advantage of the reimbursement differential.” Consumerism and the Market The influence of consumerism in health care is probably the most crucial factor that will drive the imaging marketplace past the flurry of acquisitions activity of the past few years, Jeter and Sorensen say. “When a hospital buys an imaging center and then charges $2,800 for an MRI—for which payment is often, at 100%, the responsibility of the patient—and the patient passes an IDTF on the way there that would have charged him or her $400, the hospital eventually begins to lose volume. We are seeing hospitals lose that volume very quickly now,” Jeter says. As a result, he continues, their enthusiasm for snapping up independent imaging centers has been dampened. The technical term for the process that hospitals nationwide have undergone, when it comes to imaging centers, is arbitrage: taking the same book of business and making more money from it. “The very nature of a lot of the merger/acquisition activity in 2011 and 2012 was arbitrage,” Jeter notes. “By definition, that comes and goes; in the financial world, those opportunities just last a brief moment and are gone. I’d say that opportunity is diminishing now: The system could not sustain the move to the higher-cost setting that resulted from these transactions.” A valuable lesson to be learned from the coming downturn in activity is that health-care organizations ignore the needs of the consumer at their peril. “I have worked on deals in towns of 80,000 to 100,000 people where there is now no low-cost alternative for imaging,” Jeter says. “The hospitals bought up all the Part B businesses that were struggling. Now, the hospitals are making more money per visit, but over time, people in those communities will start driving to the next town for lower-cost imaging, if that’s what it takes.” This is not to say that imaging-center arbitrage will conclude altogether in the coming year, Sorensen stresses. “We are still going to see some effort to conduct arbitrage, but my sense is that it will be less of a focus than it was in the past two years,” he explains. “That comes from both the payor and the consumer perspectives: Both parties are participating in the payment.” Bracing for Impact The primary effect of the coming change in the market will be a growing focus on competitiveness, Jeter and Sorensen predict. “We’re seeing the results of reaching the limits of what patients and referral sources are willing to pay,” Jeter observes. “In 2013, we will see a move toward a midrange pricing structure for outpatient imaging.” For imaging centers that maintained their independence from hospital ownership, this will be a boon, Sorensen says. “I don’t think we’ll see the value of the most attractive assets decline,” he notes. “I wouldn’t be surprised if the most attractive freestanding imaging providers haven’t actually increased their value through greater capture of market share, loss of marginal players, and the maintaining of a competitive advantage over hospitals, in terms of pricing.” There will also be turnaround—independent of hospital acquisitions—as corporate imaging-center operators continue to snap up struggling centers, Jeter says. “When other Part B companies are the buyers, they are looking for good entry points and value pricing,” he explains. “They are buying centers now that are breaking even, but need new MRI systems and can’t afford them. They will buy the centers and put new MRI units in there, capitalizing on their own financial strength.” For hospitals still trying to expand their outpatient-imaging presences, but in a more competitive manner, Jeter predicts an uptick in collaborative approaches. “They may be more interested in putting the hospital and the imaging center into a new-company joint venture,” he says. “Instead of moving the Part B business into the hospital, they move the hospital business out to the Part B. I anticipate seeing a lot more interest in the joint-venture structure. We will see the volume moving in that direction—similar to where we were 10 years ago.” Jeter and Sorensen conclude that the imaging-center acquisition market will continue to be active in 2013, but that the nature of the activity will change. “We are watching a case study in unbridled capitalism,” Jeter says. “We will wind up with stronger operators and fewer weak players, and that is what should happen. This is still a consolidating market, but the nature of the consolidation is maturing.” Cat Vasko is editor of and associate editor of Radiology Business Journal.