Managing Expenses for Greater Cost Control

As Eric Heath from VMG pointed out in his article published on March 18, 2014, titled, “Effects of the Most Recent Reimbursement Cuts to Diagnostic Imaging”, there have been major cuts in 2014 physician fee schedules as compared to 2013.  Imaging centers are feeling top line reimbursement pressure which has directly impacted EBITDA growth over the past few years.  In response to negative growth in reimbursement rates and margins, centers will adapt to change what they have power over, namely expenses.  In this article, we will benchmark 30 freestanding, single site, multi-modality imaging centers for which VMG has had the privilege to provide valuation services. 

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The chart below represents the 25th and 75th percentiles of the major expenses that imaging centers are incurring. The largest components of expenses for centers are Employee Salaries & Wages, Professional Fees, and General & Administrative expenses (inclusive of contract maintenance expense and any applicable management or billing/collection fees). Faced with decreasing reimbursement, these large expense categories become targets for centers seeking to implement greater cost control.


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Employee Salaries & Wages


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As illustrated above, Salaries & Wage expense as a percent of revenue grew moderately from 2010-2012, before decreasing in 2013.  Providing further insight, the variance between the 25th and 75th percentile widened in 2012-2013 as compared to 2010-2011, signaling marked differences in the effectiveness with which imaging centers are able to implement cost controls.  The decrease in the 25th percentile in 2012 and 2013 in comparison to 2011 signaled that some centers did in fact lower Salaries & Wages, and the higher 75th percentiles in 2012 signaled some continued to increase.  In observing these trends, it appears that most imaging centers have exhibited some ability to control Salaries & Wages in recent years however the degree to which cost controls have been successfully implemented does vary in a material manner.  

Employee Benefits 

As would be expected, Employee Benefits will move in tandem with what imaging centers decide to accomplish with Employee Salaries & Wages.  Variance has widened indicating different strategies implemented by various imaging centers in our sample. 


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Professional Fees


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Professional fees are related to the interpretation of the results of a test. As the chart above indicates, the 75th percentile of Professional Fees fell in 2011 and steadily climbed in 2012 and 2013.  The 25th percentile saw growth in all years from 2010 to 2014 and the variance between 25th and 75th percentiles narrowed from 2010 to 2013, indicating an overall growth in Professional Fees as a percent of revenue.  Overall, Professional Fees have been climbing back up since 2011. {It is important to note that some centers in our sample reported only technical revenue (or some combination of technical and global) thereby skewing these results lower.}

Medical Supplies 


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Overall, imaging centers are cutting down on medical costs. After 2011, all imaging centers, whether in the 25th or in the 75th percentile, have reduced supplies as a percentage of net revenues. Although not a major expense category for imaging centers, this suggests that centers are working actively with vendors to ensure competitive pricing or switching vendors when able. 

General & Administrative


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General & Administrative (G&A) costs are another major expense line item for most imaging centers. G&A reflects general overhead including maintenance contracts, equipment leases/expense, office costs, management fees and billing/collection expense. As illustrated above, imaging centers exhibited perhaps the greatest ability to implement cost efficiencies and reductions in these G&A costs. Furthermore, the variance in G&A has narrowed, indicating that centers are sharing similar abilities in trimming G&A expenses. Based on our firm’s work with these centers, it has been our observation that cost reductions have been generally seen in the management and billing/collection contracts that have been negotiated with third party providers as well as reductions in maintenance contract costs.


Based on our sample, imaging centers are cutting down on G&A expenses and Medical Supplies. Salaries & Wages and Professional Fees continue to remain steady and have climbed back to 2010 levels. If reimbursement rates continue to decline, it will be inevitable that extreme cost cutting measures must occur for centers to survive. Hopefully, this has given insight into the expense trends experienced in the past four years, and will give centers an opportunity to look at how other freestanding, multi-modality diagnostic centers have responded to this difficult environment.