Three Key Considerations for Streamlining Imaging-center Acquisitions

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Chris GauvinMatthew StrotherAdditional reimbursement cuts are on the horizon, so 2013 is expected to present ample acquisition opportunity for buyers hoping to purchase pressured imaging centers. In planning to acquire an imaging center, there are three key items that should be addressed early in the process to help streamline a potential acquisition. If not adequately addressed in advance, these items have the ability to create significant tension between a buyer and a seller, and they might lead to unnecessary delay or wasted effort for both parties. Professional Radiology Agreement A professional radiology agreement is often at the center of a potential negotiation. The questions that should be asked are whether the terms of the existing professional radiology agreement will be altered and how this will affect the up-front purchase price of the center (as well as the compensation paid to the radiologists after the transaction). When a radiologist group maintains ownership of a center to be purchased, this issue can become even more acute. Specifically, the buyer should address five questions. First, what effect will a new radiology agreement have on the post-transaction earnings of the business? Second, will the professional radiology agreement be structured to limit the reimbursement risk to the radiologists (for example, will it be volume based or salary based) or to reduce risk to the acquirer (based on a percentage of revenue)? Third, if the professional fee reimbursement is expected to be more favorable after the transaction, how will this benefit be shared by the current owner group and the potential buyer, and is there agreement on this issue? Fourth, does the professional radiology agreement allow the radiologists to read for competing centers? Fifth, is the radiology agreement consistent with fair market value? Volume Retention Another important issue that a buyer must consider prior to an acquisition is the ability to retain the volume of the acquired entity. The post-transaction volume retained depends on the decision of the buyer to operate the acquired entity as a freestanding center or incorporate it into a hospital department. In the case of a hospital acquiring a freestanding center and converting it into a hospital outpatient department, it might lose volume as a result of higher exam prices. Therefore, it is necessary for the buyer to gauge the price elasticity of imaging services to ensure that the revenue stream of the acquired entity does not deteriorate. The price elasticity of imaging services is market specific and depends on a variety of factors. These include the concentration of managed-care providers and their ability to influence patient flow, pricing transparency within the market, and the price points of the offerings of competitors within the marketplace (that is, whether the market consists primarily of freestanding centers or of hospital outpatient providers). It is also common for existing imaging operators to increase their market share by acquiring a center and continuing to operate it as a freestanding center. In this case, the post-transaction volume of the acquired entity is unlikely to decline, as pricing will not significantly change. The buyer, however, needs to ensure that it will be able to grow the volume of the acquired entity without cannibalizing the buyer’s existing volume within the market. Even without additional volume growth, the buyer can still earn a return on the acquisition through shared cost savings, such as combining the management and billing functions of the two centers. In either case, if the buyer plans to operate the acquired entity as a freestanding center, it needs to ensure that it will be able to earn a sufficient return on its investment through a combination of additional volume growth and cost savings. Key questions to ask regarding volume retention include: Will the acquired center maintain the same competitive advantages in the market that it held before the transaction? How will a change in the exam-pricing structure affect the acquired center’s use? Will the terms of the noncompetition agreement with existing owners be sufficient to protect the expected cash flow to the acquired center? Are all assumptions used in the business valuation consistent with fair market value? Equipment Considerations It is important for buyers and sellers to discuss not just the value of the imaging equipment to be contributed as part of a transaction, but also its characteristics. For example, while older imaging equipment is less costly to purchase initially, it might require substantial upkeep expenditures if it is near the end of its useful life. Therefore, it is recommended that a buyer understand and consider the asset characteristics of the equipment (such as age, alternative equipment options, repairs and maintenance, and software/hardware upgrades required). Unexpected capital expenditures, discovered late in the process, can cause unnecessary delay and potential pricing adjustments. Key questions to address are whether the existing equipment has been well maintained; when it is likely to need replacement; whether the cost of repairs and maintenance will increase, in the future, due to asset age or poor upkeep; and whether technological changes expected in the industry could make existing equipment obsolete—or necessitate an upgrade. Conclusion These issues highlight the importance of engaging a qualified valuator and specialist, early in the process, to help the parties navigate considerations of fair market value. A qualified valuator will be able to address fair market value pertaining to an imaging center’s professional-services agreement, business valuation, and equipment. The qualified valuator can also facilitate dialogue between the two parties, introduce critical issues for discussion, and help bring both parties to a common understanding of issues pertaining to fair market value. If properly identified (and discussed early), these issues and hurdles can be resolved in an efficient manner—to ensure a successful, streamlined transaction. Chris Gauvin, CPA, is a manager with VMG Health. Matthew Strother is a manager with the company.