The Impact of Industry Trends on Imaging-center Valuation
Elliott JeterColin McDermottOver the past few years, hospitals have been acquiring imaging centers at a brisk pace. Hospital and imaging-center transactions require an independent opinion on fair market value to ensure regulatory compliance; a thorough fair-market analysis will incorporate macroeconomic industry trends, along with the facts and circumstances specific to the individual center. In 2011, Radiology Business Journal and SDI Health LLC published the results of their second annual survey¹ illustrating trends related to the top 20 imaging-center chains and the larger environment in which they operate. The data in this survey can assist the valuation analyst in formulating a basis for the future financial performance of a center that is used in the income approach (discounted–cash-flow) methodology of valuation. The industry information also assists the valuation analyst in determining the velocity, pricing, and strategic motivation behind comparable transactions within the industry, and can be very helpful when preparing an analysis of fair market value. The Survey In 2011, the economy stabilized in many areas of the country; however, imaging-center operators were hit with a new round of reimbursement cuts and were forced to run more efficient operations. Many of the imaging-center chains divested themselves of centers, and the largest integrated health networks (IHNs) did not increase their market shares. These negative data points are no surprise, given the challenges that the industry has endured through the past few years. Examples of negative industry trends shown in the survey are that 10 of the top 20 imaging chains reduced the number of centers owned and that more imaging centers were sold to IHNs, signifying a challenging operating environment. Many trends identified in the survey, however, are positive for the value of the remaining independent industry participants. For example, the total number of imaging centers, including single-site operators, increased during 2011. Demand for diagnostic-imaging services has increased as patient visits continued the upward trend. In addition, there is a well-capitalized universe of buyers of imaging centers, signifying confidence in the future of the industry. Overall, the data are conflicting, resulting in mixed effects on their application and impact on the valuation analysis of an imaging center. Impact on the Income Approach According to the survey, imaging centers hit a significant milestone during 2010. Average visit volumes (per center, per week) increased to 298, which exceeded the previous high of 291 for 2002. Imaging-center operators had strong motivation to increase throughput in response to the latest round of reimbursement reductions, but demographic trends also suggest that volumes will continue to increase as baby boomers age. This is an important positive trend for imaging-center operators that survived the increase in the number of imaging centers opened during the mid-2000s and that continue to experience reimbursement reductions from both commercial and government payors. The continued targeting of outpatient imaging by CMS for reimbursement reductions has forced operators to obtain greater cost efficiencies. Mark Stolper, CFO of RadNet, Inc, illustrated this point during the RadNet fourth-quarter 2011 earnings call. According to Stolper, EBITDA margins, for about four years, have remained at 19% to 20%. Increased efficiency has been partly offset by private and Medicare reimbursement reductions. He expects this pattern of becoming more efficient to withstand pricing pressures to continue and to help maintain the stability of margins. The income approach to valuation, using a discounted–cash-flow methodology, requires the determination of a future earnings stream that is converted to present value by the valuation analyst. The survey's findings are extremely relevant to the development of our future projections, as valuation analysts, for a subject imaging business. Despite the reductions in reimbursement, existing imaging centers have been able to maintain profit-margin stability (on average) by increasing procedure volumes and by decreasing expenses. Although this information does not supersede a specific company’s performance, the valuation analyst must consider how future profitability for a subject center might be affected by this overriding industry trend. Active Market Based on the data presented by Radiology Business Journal and SDI Health, it appears, at first glance, that the acquisition market for imaging centers is not as strong as in previous years. According to the survey, the top 20 imaging-center chains only increased their collective holdings by 10 centers, and half of the chains reduced their holdings during 2011. In addition, the IHNs with the greatest number of imaging-center relationships did not increase their share of the IHN-affiliated pie, with the top 10 IHNs holding 25.8% of the total imaging centers affiliated with an IHN (compared with 27.5% in the 2010 survey). Although it appears that the market for imaging centers has softened, this could not be further from the truth. The total network of imaging centers associated with IHNs increased significantly, from 1,519 imaging centers in 2010 to 1,620 imaging centers is 2011. This is consistent with anecdotal reports of imaging centers selling out or partnering with hospitals. The largest chains have undergone alternating periods of growth and contraction in recent years, which would suggest that 2012 could turn out to be a strong year for imaging-center acquisitions. This is consistent with the comments of Howard Berger, CEO of RadNet, during the company’s fourth-quarter 2011 earnings call. According to Berger, RadNet will continue its acquisitions in core markets, and 2012 will be characterized by partnerships and targeted acquisitions. The fact that there is a robust, well-capitalized group of buyers of imaging centers, including national chains and IHNs, should be considered in the market approach to value. It is important for the valuation analyst to consider the active market for an imaging center, as it provides the analyst with both observations of current market prices and an understanding of the acquisition activity that exists in a given industry or market. Summary Imaging centers have found ways to operate more efficiently, and they are better positioned to survive in the future due to the continued, and increasing, demand for imaging services. This fact provides analytical support for optimistic estimates of future economic performance in an imaging-center valuation analysis. In addition, buyers still exist for imaging centers, and some have become quite active in this space, signifying confidence in the future of the industry. Combining these broad industry trends with a specific center’s facts and circumstances will yield a more thorough and accurate imaging-center valuation analysis. C. Elliott Jeter, CFA, CPA/ABV, is a partner with VMG Health. Colin McDermott, CFA, CPA/ABV, is a manager with the company.