Valuation of Imaging Centers: 2012 Outlook

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

Kevin McDonoughIf one were to chart trends in physician employment over the past 15 years, the result would closely resemble the recent wild swings seen in the stock market: significant peaks followed abruptly by equally sharp declines, according to Kevin McDonough, CFA, a senior manager for VMG Health (Dallas, Texas).

He recalls his initial experience in the industry in the early 2000s, saying, “My indoctrination into the health-care industry came at a time when hospitals and health systems were divesting themselves of previously acquired practices in droves, following the physician–practice-management company and integrated-delivery network bust.”

That trend has come full circle, McDonough observes; once again, the industry is seeing a tremendous amount of consolidation. At the heart of this consolidation is the acquisition of physician practices and physician-owned ancillary-service lines by hospitals.

The driving forces for such consolidation are numerous. As hospitals continue to see their competitors securing referral sources in their markets, many believe that they have no choice but to make their own practice acquisitions, McDonough says.

In addition to the pursuit of practice acquisition for defensive purposes, hospitals have increased their acquisition activity to position their institutions appropriately for the coming era of accountable care and shared-risk delivery models. All this has led to what McDonough calls the great reconsolidation in health care.

On the physician side, he notes, physicians are seeking shelter from market forces, reimbursement cuts, and cost increases, and they are experiencing an increasing desire for work–life balance. Physician demographics are also experiencing a shift. “Generally, we have an aging physician work force,” McDonough says. “For physicians in the twilight of their careers, it is often attractive to seek out stability by selling to a hospital.” McDonough anticipates that nearly 25% of all specialists will be hospital employed by the end of 2012.

Thus far, in this era of consolidation, McDonough has observed a relatively small number of radiology practices pursuing a hospital-employment strategy. What he has observed are “a huge number of transactions involving physician-owned imaging centers and hospitals/health systems,” he says.

When the cuts to imaging mandated by the DRA went into effect, a trend began of physicians (and specifically, radiology groups) selling their freestanding imaging centers to, or developing joint-venture relationships with, hospitals—and McDonough anticipates that this trend will continue to gain steam in 2012.

Basics in Valuation

Health care is highly regulated, and hospitals working to acquire physician practices and physician-owned ancillary businesses often look to qualified appraisers to determine fair market value in order to remain compliant with Stark laws, anti-kickback statutes, and regulations governing excessive compensation for nonprofit entities.

Although it’s often a necessary step, obtaining an accurate opinion of fair market value should not present an obstacle to consummating a transaction. “An accurate opinion of fair market value should be viewed as a price that will accurately compensate the sellers for the future earnings stream they are giving up,” McDonough says.

In one recent example, a health system asked McDonough to assign a value to a three-center diagnostic-imaging provider. In this case, the health system sought to buy a controlling interest in the imaging centers, creating a joint venture whereby the hospital would control 51% and the radiology group would retain 49% ownership.

Both the hospital and the owner (a radiologist) wanted to keep the centers as freestanding facilities, but the question of price remained. With growing volume, a solid referral base, new equipment, and strong operating margins, the radiology provider was considered by McDonough to be in favorable condition, but with two caveats: heavy debt and one severely underperforming site.

Because of positive growth and strong operating margins (before debt service), the centers’ owner was hoping for a strong valuation to cover his high debt. “The company had centers operating at three sites. One center was very profitable, another was breaking even, and a third was losing a substantial amount of money due to poor volumes. That third center had been built in an area that, at one point, was up and coming, but the housing crash hit