Over the past few years, hospitals have been acquiring imaging centers at a brisk pace. Hospital and imaging-center transactions require an independent opinion on fair market value to ensure regulatory compliance; a thorough fair-market analysis will incorporate macroeconomic industry trends, along with the facts and circumstances specific to the individual center.
In 2011, Radiology Business Journal and SDI Health LLC published the results of their second annual survey¹ illustrating trends related to the top 20 imaging-center chains and the larger environment in which they operate. The data in this survey can assist the valuation analyst in formulating a basis for the future financial performance of a center that is used in the income approach (discounted–cash-flow) methodology of valuation. The industry information also assists the valuation analyst in determining the velocity, pricing, and strategic motivation behind comparable transactions within the industry, and can be very helpful when preparing an analysis of fair market value.
In 2011, the economy stabilized in many areas of the country; however, imaging-center operators were hit with a new round of reimbursement cuts and were forced to run more efficient operations. Many of the imaging-center chains divested themselves of centers, and the largest integrated health networks (IHNs) did not increase their market shares. These negative data points are no surprise, given the challenges that the industry has endured through the past few years. Examples of negative industry trends shown in the survey are that 10 of the top 20 imaging chains reduced the number of centers owned and that more imaging centers were sold to IHNs, signifying a challenging operating environment.
Many trends identified in the survey, however, are positive for the value of the remaining independent industry participants. For example, the total number of imaging centers, including single-site operators, increased during 2011. Demand for diagnostic-imaging services has increased as patient visits continued the upward trend. In addition, there is a well-capitalized universe of buyers of imaging centers, signifying confidence in the future of the industry. Overall, the data are conflicting, resulting in mixed effects on their application and impact on the valuation analysis of an imaging center.
Impact on the Income Approach
According to the survey, imaging centers hit a significant milestone during 2010. Average visit volumes (per center, per week) increased to 298, which exceeded the previous high of 291 for 2002. Imaging-center operators had strong motivation to increase throughput in response to the latest round of reimbursement reductions, but demographic trends also suggest that volumes will continue to increase as baby boomers age. This is an important positive trend for imaging-center operators that survived the increase in the number of imaging centers opened during the mid-2000s and that continue to experience reimbursement reductions from both commercial and government payors.
The continued targeting of outpatient imaging by CMS for reimbursement reductions has forced operators to obtain greater cost efficiencies. Mark Stolper, CFO of RadNet, Inc, illustrated this point during the RadNet fourth-quarter 2011 earnings call. According to Stolper, EBITDA margins, for about four years, have remained at 19% to 20%. Increased efficiency has been partly offset by private and Medicare reimbursement reductions. He expects this pattern of becoming more efficient to withstand pricing pressures to continue and to help maintain the stability of margins.
The income approach to valuation, using a discounted–cash-flow methodology, requires the determination of a future earnings stream that is converted to present value by the valuation analyst. The survey's findings are extremely relevant to the development of our future projections, as valuation analysts, for a subject imaging business. Despite the reductions in reimbursement, existing imaging centers have been able to maintain profit-margin stability (on average) by increasing procedure volumes and by decreasing expenses. Although this information does not supersede a specific company’s performance, the valuation analyst must consider how future profitability for a subject center might be affected by this overriding industry trend.
Based on the data presented by Radiology Business Journal and SDI