Trends in Mergers and Acquisitions in the Diagnostic Imaging Sector

Twitter icon
Facebook icon
LinkedIn icon
e-mail icon
Google icon

There is little question, and ample evidence, that merger-and-acquisition activity in the diagnostic imaging business sector has increased since the Deficit Reduction Act (DRA) in 2005, and since Medicare Physician Fee Schedule changes and IDTF Standards changes in 2006 and 2007. Many in the prognostication business have been forecasting some sort of shakeout in the freestanding imaging center sector as a result of the DRA and the implementation of certain regulatory changes affecting IDTFs, as well as certain payor-driven initiatives related to diagnostic imaging services. Specifically, what forms the shakeouts might take has been the subject of diverse opinions and equally diverse actual occurrences. Some have predicted, with a fair amount of accuracy, that the diagnostic imaging services sector has been, and continues to be, ripe for consolidation. What we should expect over the next several years will depend on recent history and on several factors that will come into play, based on certain assumptions and emerging trends in the industry.

Before the DRA and other forces now in play, mergers of radiology groups, as well as mergers and acquisitions of imaging centers and imaging center operator companies, were primarily responses to new technologies or specific market conditions within their respective footprints. Fleishon¹ wrote an elegant article on this subject earlier this year.

Following a period of comparatively slow merger-and-acquisition activity in 2006 and into the second quarter of 2007, activity increased dramatically in the third quarter of 2007 and has continued into the first half of 2008. For example, Novant Health acquired MQ Associates (MedQuest); RadNet acquired Radiologix Inc, Papastavros Associates Medical Imaging, Valley Imaging Center Inc, Rolling Oaks Radiology, and six imaging centers from InSight Health Services; Gores Group acquired Health South imaging division, creating Diagnostic Health Corp; Alliance Imaging acquired New England Health Enterprises Trust and New England Imaging Management, LLC; Alliance Oncology, LLC, acquired Bethesda Resources, Inc; CML HealthCare Income Fund acquired American Radiology Services; and DigiRad acquired Ultrascan’s mobile ultrasound business.

In addition, we are seeing several regional and local imaging center operators across the country acquire certain independent imaging centers and divesting single-modality or marginally profitable imaging centers to a broad range of local buyers and investors.

Clearly, the forecast of a trend of consolidation in the industry is playing out as some players learn to digest the realities of the DRA and other reimbursement challenges, leverage their operational infrastructure to improve profitability, and gain access to capital to invest further in strategic and tactical imaging technology to expand market share (and enter new markets with relatively strong reimbursement and unmet demand).

Although the catalysts for the transactions listed above and for less well-known acquisitions and mergers are not known with specificity, it is clear that each transaction came about for different reasons. For some, the acquisition added market share, contributed to a new market-penetration strategy, added financial strength, added technology discriminators, or accelerated entry into new services not in the core portfolio. Still others were opportunities for sellers to access capital, gain access to certain competencies not yet mature in their organizations, gain strength from a national brand, gain access to additional purchasing power, or gain management and marketing experience and expertise. The good old days of saying, “Open it and they will come,” are clearly behind us. Same-store sales is returning to the forefront as an operating philosophy, mandate, and practice.

Hospitals and Health Systems
An interesting trend that we are noting is a resurgence of hospitals as outpatient imaging providers at off-campus settings. After decades of turf raiding (in some hospitals’ views) by independent imaging centers in the hospitals’ backyards, we are seeing the construction and implementation of a fully integrated imaging strategy throughout the continuum of care (inpatient, outpatient, and outreach) by many hospitals and health systems. We could label the Novant Health acquisition of MedQuest as just such a strategy, but we would probably be selling them short on the totality of their thinking. A recent article2 describes a trend