Imaging’s 2014 Merger/Acquisition Outlook: Responding to Reform

Marked by plenty of merger/acquisition activity, 2013 was a more tumultuous year in the imaging industry than anticipated, according to Todd Sorensen, CVA, a partner with health-care valuation and advisory company VMG Health. Experts anticipated that transaction activity would slow following the bull market of 2012, but the downshift didn’t arrive on schedule. “On the radiology-group side, the activity has continued apace; on the imaging-center side, it hasn’t slowed as much as we had anticipated at this time last year,” he says.

Though unusually numerous transactions continue to occur, the nature of those transactions is finally shifting as providers respond to health-care reform and its ramifications. “Hospitals have been eager to take advantage of the differential in imaging reimbursement on the commercial managed-care side, and that play drove a lot of transactions in 2012 and 2013,” Sorensen says.

He adds, “While we continue to see the rate differential drive transactions, we increasingly see more progressive hospital systems considering joint-venture opportunities. Many of the industry participants I’ve spoken with believe that whatever happens with the government’s initiatives (such as exchanges and accountable-care organization), providers and private payors are going to pursue bundled pricing and risk-sharing arrangements aggressively .”

Consumerism and Competition

As government payors, in particular, drove down reimbursement for imaging in the outpatient environment, hospitals were eager to snap up imaging centers, transforming their existing books of business into ever-more-profitable portfolios; 2013, however, appears to have been the year when patients finally had enough of staggering price discrepancies between places of service. “In an outpatient center that is competitive in its pricing efforts, deductibles and copayments are much lower than they would be in a hospital,” Sorensen notes. “Patients don’t like to have to pay more, when they can see that they’re not getting anything better for the increased amount.”

Cost isn’t the only factor to consider, he adds. Increasingly selective patients also avoid logistically complicated care settings. He says, “Patients are much more satisfied with the service they get in an outpatient imaging center than with parking in a garage three tunnels away from where they have to register for an imaging procedure.”

In recognition of how consumerism and competition have shaped outpatient centers into lean, nimble, and effective operations, hospitals—faced with the imperative of lowering episode-of-care costs—are shifting their strategies away from outright acquisitions and toward joint ventures, Sorensen says. “If a health system is participating in some form of a bundled-payment initiative, it can take advantage of the significantly lower imaging costs in an outpatient center versus a hospital through use of a joint-venture model,” he notes. “In these emerging payment models, it’s more advantageous for the hospital or health system to funnel its imaging procedures into the lowest-cost setting.”

Transactions on the Move

For imaging centers that remain unaffiliated with hospitals or health systems, the potential-transaction outlook for 2014 remains promising, Sorensen says. In 2013, he made a forecast that the swell in transaction activity would make the surviving independent operators even more valuable; this year, the downward pressure on reimbursement will continue to eliminate the weak members of the herd. “Multiple-modality centers aligned with premier radiology groups in their markets should continue to benefit from elimination of competition,” Sorensen says.

On another front, imaging centers are actually beginning to see slight increases in lucrative cash business as a result of the implementation of digital breast tomosynthesis (DBT), a newly FDA-approved technology for which reimbursement is yet to be established. “Patients have shown that they are willing to pay out of pocket for screening with DBT,” Sorensen says. “When patients are educated and understand the benefits of a new technology, they don’t mind paying for it.”

He adds that it will be harder and harder for smaller stand-alone and single-modality centers to maintain their independence. “The imaging centers that remain will have a lot of opportunities for new partnerships,” he says. “It’s going to be harder and harder, though, for smaller stand-alone and single-modality centers to survive on their own.” The pressure to partner is reaching a peak now because of fixed-cost concerns such as capital-equipment age, Sorensen explains. Many imaging centers are nearing (or have already passed) the point at which their bread-and-butter CT and MRI systems should have been replaced, but weren’t—because of lack of capital. “These imaging centers continue to stretch this equipment as far as it will go,” he says. “Even when the vendors aren’t supporting the systems anymore, they continue to stretch the equipment to 10 years’ use—and beyond—because they can’t afford to replace it.”

In sum, Sorensen concludes, 2014 will be another active year for imaging transactions, but the industry can expect to see more emphasis on alignment and collaboration than in years past. “I expect that the arbitrage driving many transactions will slowly disappear,” he predicts. “At the end of the day, hospitals are going to be more competitive if their imaging is done in outpatient centers where costs are lowest. It’s a combination of providing the best patient experience and getting imaging into the lowest direct-cost setting possible.”