Current Factors Influencing Outpatient Imaging Valuation
Todd SorensenEvidence suggests that imaging utilization declined between 2009 and 2011, particularly for the high-tech modalities, including CT and MRI. Data1 from Regents Health Resources published in Radiology Business Journal indicate that growth in medical imaging slowed, relative to US population growth, in this time period, and that CT utilization declined in most geographic regions—in some cases, by as much as 0.38%. This slowing and/or decline in growth has, inevitably, become a factor in valuations of outpatient imaging centers. Many hospitals have attributed the change in volume to internal, structural factors, particularly the use of radiology benefit managers (RBMs). Payors are increasingly employing RBMs to curb inappropriate imaging utilization, with an eye toward lowering costs. With this in mind, many hospitals have arrived at the conclusion that imaging growth will continue to soften; outpatient imaging center valuations, which are based partially on estimated future business growth, are trending downward, as a result. Internal Versus External Factors A key distinction to make, in valuations of outpatient imaging centers, is that between internal factors (which stand to affect the future growth of the business) and external factors, which are less predictable. Internal factors might include the growing influence of RBMs; external factors, on the other hand, might include economic or regulatory changes. It is to the former type of external factor that we should look when attempting to understand the 2009–2011 slump in high-tech imaging utilization. Although use of RBMs has been on the rise, the bigger change that outpatient imaging centers—and health-care providers, in general—have had to adjust to, since 2008, is the economic crisis (along with the ensuing recession). Unemployment has been rising, and with increases in unemployment come increases in the uninsured population—meaning that there are fewer patients, especially at the specialty level. Even for those who remain employed and insured, copayments and deductibles are increasing, making health care a greater financial burden and giving patients economic incentives to avoid seeking care, except in emergency situations. As the economy slowly begins to recover, however, imaging volumes are beginning to climb again. This effect illustrates the reasons that external factors must be examined carefully in any valuation process: Economic changes are cyclical, and their influence is temporary. To assign a value to an outpatient imaging center using a future-growth assumption that is based on the impact of an economic downturn would be a mistake. It would also result in the current owners of the business receiving less compensation than they deserve. Future Volumes On the other hand, regulatory factors can (and should) be used to help anticipate future volumes for outpatient imaging centers. It is worth noting that hospital stocks jumped in price following the Supreme Court’s decision to uphold the constitutionality of the Patient Protection and Affordable Care Act, reflecting investors’ confidence in the future use of health-care services in general. There is no doubt that the addition of 30 million patients to the ranks of the insured will have a positive impact on imaging volumes. In another analysis2 published in Radiology Business Journal, Regents Health Resources predicts 13.6% imaging-volume growth across the country following the implementation of the individual mandate, with some regions projected to see as much as a 23% increase in volumes. It is interesting that this analysis does not take into account the aging of the US population, which could counter the growing influence of utilization management. If, however, we take it as our thesis that utilization management has not had as strong an impact as previously supposed, we can also assume that the aging of the population will add to growth in imaging volumes. Conclusion Even regulatory changes must be approached with caution, however, when used as part of the valuation process. Anticipating future outpatient imaging center growth requires an understanding of local market dynamics: For instance, as hospitals continue to acquire outpatient imaging centers to expand their outpatient presences, some markets might see growth slow because of heavy competition. In conclusion, when approaching the valuation of an outpatient imaging business, it is important to remember that one year does not a trend make. In understanding the true value of a radiology business, future volumes are just as important as current volumes. There is no doubt that there are factors that have had a negative impact on imaging utilization and volumes, but we need to recognize that alongside these factors, there have been positive changes as well. Todd Sorensen is a partner with VMG Health, a national company that specializes in health-care valuations and transaction-advisory services.