Transactions Outlook 2011: More of the Same
From a transactions perspective, 2010 was marked by a frenzy of imaging-center acquisitions on the part of hospitals. A number of factors came together to create the perfect storm of a buyer’s market for imaging centers, including uncertainty surrounding health-care reform and the opportunity for cash-strapped hospitals to augment the bottom line quickly and easily. The strongest motivating factor for both groups, though, was a strong differential between hospital reimbursement for outpatient imaging and freestanding-center reimbursement. Irrespective of whether health-care reform progresses according to its current trajectory, undergoes significant changes, or is even repealed, there is an understanding in the marketplace that this reimbursement differential will not persist indefinitely; it is likely either to be greatly decreased or to be eliminated entirely over some period of time. Forward-thinking members of the radiology business community will thus be asking themselves whether the acquisitions frenzy will continue in 2011, and what the marketplace will look like when it has finally concluded. All of the elements for a perfect storm of hospital acquisitions are still in place this year, but how has last year’s frenetic transaction environment affected imaging centers that remain free of hospital ownership? What are hospitals seeing as they survey a newly reshaped landscape for health care (in general) and imaging (in particular)? The Imaging-center Perspective From the perspective of the imaging center, hospital ownership is often seen as a measure of last resort—and with reimbursement continually on the decline, many imaging centers welcomed (or at least begrudgingly accepted) the employment alternative in 2010. There is a perception, on the part of many imaging centers, that their value has never been higher and that the current marketplace provides optimal conditions in which to sell to interested hospitals. On the other hand, many imaging centers still fear what will become of the professional side of their business if they enter into an ownership arrangement with a hospital. Thanks in no small part to the strong acquisitions environment in 2010, there might be a silver lining on the horizon for imaging centers that have, thus far, evaded hospital ownership: Every marketplace demands a low-cost option. In a city of 100,000 where the only two freestanding imaging centers have been purchased by hospitals, the low-cost alternative for imaging has been eradicated; once the economy improves, the basic laws of the marketplace dictate that those freestanding imaging centers that remain will be in an optimal position to play the role of the local low-cost provider of imaging services. Further, 2010 can be viewed as the low-hanging–fruit phase of the acquisitions trend. Hospitals have snapped up those freestanding imaging centers that were vulnerable (either from a financial or an operations perspective), and those that remain under their own purview probably are still in the game for good reason. A year ago, it appeared that a large percentage of imaging centers would explore the option of hospital ownership because of the dire reimbursement outlook; today, much of that percentage has completed the transaction, and the stronger imaging centers remain. Many of these stronger, persistent centers are likely to grow stronger still as more marginal players in the marketplace are acquired by hospitals; they also have the opportunity to explore purchasing their competitors. The Hospital Perspective Hospitals are, in many ways, facing more uncertainty than imaging centers are in facing down the looming specter of health-care reform. If hospitals believe that health-care reform, in its current version—or one similar to it—is likely to take hold, then their attention will be on new care-delivery models, be they integrated delivery systems or accountable care organizations. This gives them incentives to be interested in outpatient imaging in the lowest-cost setting possible—and freestanding environments where radiologists manage the clinical operation of the business tend to be lower-cost settings than hospital-based outpatient imaging is. This uncertainty might be the leading factor contributing to a new type of hospital–imaging center transaction wherein the two parties enter into a joint venture for all of their existing operations. Under this model, the hospital contributes its outpatient-imaging service lines, while the radiology group contributes its freestanding imaging centers, building a more aligned relationship while avoiding ownership. We expect to see these types of arrangements continue among the courageous who are willing to be trailblazers, as well as among those who are strong believers in health-care reform continuing on its current path (which will eventually reward stronger alignment between hospitals and imaging centers). Another alternative for hospitals and imaging centers seeking to take advantage of the reimbursement differential (while minimizing risk) is a short-term hybrid arrangement. Examples include service agreements that are designed to function over an agreed-upon period of time, as opposed to permanently, and deals that are structured as leases of imaging centers rather than purchases. These solutions mitigate risk for those anticipating a leveling of the reimbursement playing field, and we expect to see them become more prevalent in 2011. In conclusion, potentially significant changes are in the pipeline for hospital–imaging center transactions, but how soon these changes will take effect—and what form they will take—remains to be seen. Until then, we can expect to see the hospital acquisitions trend continue in 2011, although it is likely that there will be fewer such acquisitions than there were in 2010. Todd Sorensen is a partner with VMG Health, a national company (with offices in Dallas, Texas, and Nashville, Tennessee) that specializes in health-care valuations and transaction advisory services. Elliott Jeter is a partner with the company.