Evaluating Mergers and Acquisitions

The forces driving mergers and acquisitions in imaging will only intensify, according to the presenters of Legal and Regulatory Issues Facing Outpatient Imaging Centers, which they gave at Beyond, the Third Annual GE Healthcare Outpatient Imaging Center Conference, in Washington, DC. On July 24, 2008, a three-session presentation emphasizing the push toward consolidation was given by Thomas E. Bartrum, Esq, of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Nashville, Tenn, and Richard J. Zall, Esq, of Proskauer Rose, LLP, New York. In describing what they call the reality of the imaging market, the presenters say that reduced reimbursement and tighter credit underpin many decisions that favor greater consolidation in the segment. Reimbursement has been adversely affected not only by increased scrutiny and payment reductions from commercial insurers, but by the DRA and by the discount imposed on multiple imaging procedures conducted at the same time. In addition, there is ongoing uncertainty concerning the reductions that may be seen in physician compensation under Medicare. Increasing regulation contributes to this climate of uncertainty through the prospect of additional oversight by state governments, further Stark law restrictions, the increasing breadth of regulatory activities from CMS, and the possibility of added standards for IDTFs. Credit is also more difficult to obtain as more stringent conditions (including better ratios of debt to equity) are imposed on borrowers. While there is still some venture capital to be found, investors are more selective and are asking for better returns. Click here for more Combined, these factors mean that the costs of obtaining capital are higher in the public imaging market. At the same time, capital expenditures may be badly needed in response to some payors’ requirements that imaging providers make a full range of modalities available. Broad geographic distribution of access to imaging may also be required by payors, or may be necessary in order to compete, calling for capital investments. Seeking Shelter When these pressures are added to those imposed by the DRA (including its effects on commercial insurers’ reimbursement rates) and by increasing utilization management, it is hardly surprising that so many imaging centers are moving back under hospital control, the presenters say. This is particularly true of radiologist-owned independent centers, many of which are either entering risk-sharing arrangements with hospitals or are being transferred to hospitals completely. Some under-arrangement transactions are also being used in an effort to gain hospital reimbursement advantages. This is a buyer’s market, and some imaging providers will undoubtedly be forced out of it. For the rest, the benefits that only larger organizations can take advantage of will continue to drive ongoing consolidation in imaging. Better managed care rates afforded larger providers are accompanied by the ability to maximize revenue by redeploying assets to better advantage within a larger enterprise, and access to capital is usually improved by the organization’s size. Other advantages of consolidation are the ability to reduce costs by eliminating duplication and the strengthening of referral networks (in part, through the reduction of competition—by bringing the former competitor into the organization). Geographic coverage is nearly always extended through consolidation, and this may give the provider better access to managed care contracts as well. The sharing of risk is also an attractive feature of consolidation, especially when uncertainty prevails in the market. Thorough Assessment Imaging providers choosing to pursue consolidation, whether as buyers or sellers, should consider each transaction’s probable effects carefully, the presenters note, beginning with its influence on cash flow. There will be direct transaction costs to take into account, along with the cost of any debt service associated with an acquisition. Staffing and supervision changes will need evaluation, along with any differences in services provided to remote locations. It may be advisable to avoid transaction structures that involve a Medicare change of ownership, if possible, since this can have far-reaching effects, perhaps even jeopardizing Medicare enrollment for the facility. Commercial insurance contracts may also be affected by consolidation, as may referral patterns. Some of these changes may be positive, so those assessing the decision to consolidate should look for benefits as well as risks. Day-to-day operations will clearly be affected, and regulatory factors should be evaluated carefully. The presenters emphasize that consolidation involves dealing with uncertainty on several levels, so there must be the most full disclosure possible, on the part of all involved, if there is to be any reasonable assessment of the risks and benefits of the transaction. This disclosure process includes the usual due-diligence activities, but should also go beyond them to include the gathering of market intelligence and the prediction of operational changes. The presenters ask providers to put their arms around the risk, as they define it, by assessing worst-case situations in detail before proceeding with any transaction. If there are regulatory risks, these should be quantified, along with the effects of any of the seller’s referral relationships that might have been questionable. In some cases, a form of consolidation that involves less than a full acquisition can be used to spread risks that are hard to predict, or that may have widely varying effects based on upcoming legislation or regulation. Contractual mechanisms may also be needed to help make the risks of consolidation manageable. These can include provisions for indemnification and escrow, and may involve earn-out and noncompetition clauses. Of course, direct adjustments in the purchase price can also be used as a kind of compensation for the risk assumed by the buyer. If All Else Fails Unfortunately, many sellers will not reach the point of pursuing consolidation until they are already in financial distress. This can make an acquisition far more complex, and the level of risk to the buyer may be uncomfortably high, so the seller will probably have to settle for less than might have been gained before the situation became desperate. It can be impossible to create a transaction structure that avoids risks completely, although the presenters report that escrow arrangements provide some degree of protection. There may be no organization left to stand behind any warranties made by the seller, and the buyer could become responsible for some or any of the seller’s defaults. The seller’s creditors may pose a risk to the buyer, depending on transaction structure, so the buyer should always be cautious if the deal seems too good. It is possible for such a transaction to be treated as a fraudulent conveyance in court. In order to shield the buyer from successor liability, it may be necessary for the seller to declare bankruptcy before the buyer can complete the acquisition. Because the bankruptcy court will then protect the buyer from successor liability claims (although it may compel the assignment of contracts), this strategy can be an effective means of managing risk that the buyer could not otherwise be persuaded to undertake. If the seller’s financial condition is truly dire, this may be the transaction structure of last resort, the presenters conclude.