In “Discovering Emerging Value and Transaction Drivers in Imaging,” presented on September 9 in Boston, Massachusetts, at the 2013 RBMA Fall Educational Conference, three panelists from different corners of the imaging industry discussed the topic of emerging value and transaction drivers in the field. Elliott Jeter, CFA/ABV, is a partner with VMG Health; Arun Jethani is CEO of Medical Imaging Specialists; and Richard Townley is president and CEO of AGI Healthcare. The intersection of the panelists’ three perspectives reveals recent market changes affecting imaging-center transactions in 2013 and beyond.
Townley says, “A big part of the dialogue, in the past three to five years, has been this: Does it make sense to transition imaging centers to being hospital or provider based, as opposed to operating them as freestanding services? Over the past couple of years, in particular, many hospitals are rethinking that. The differential in reimbursement is shrinking, and many payors are steering patients to lower-cost providers, which are almost always the freestanding centers. Hospitals and groups are looking at this scenario and wondering how long the outpatient premium will be there.”
New Drivers of Deals
As Townley’s comments highlight, the uptick in imaging-center transactions driven by the reimbursement differential between hospital-based and freestanding settings—which, by many estimates, peaked in 2012—is now on the decline. As predicted, the differential is shrinking, making hospitals less bullish on the prospect of acquiring (or entering joint ventures in) an outpatient imaging center. “In 2009 through 2012, we saw a significant amount of consolidation, with hospitals buying into freestanding imaging centers,” Jeter says. “In the past 12 to 18 months, given their very high deductibles, patients have been voting with their feet, and the hospitals are losing significant volume to freestanding facilities.”
Jethani underscores the point that consumerism is an increasingly critical consideration for those in the imaging field. “As an imaging-center owner or manager, you may have seen your volumes slide a little,” he says. “Consumerism is taking a significant role in where patients decide to go.” He adds that hospitals aren’t charging just higher professional and technical fees; they often charge patients facility fees and parking fees that add up to a cumbersome bill.
Further, Jethani points out, large insurance companies are becoming more proactive with large employers in reducing benefit expenses. “We’re finding that human-resources directors are looking for better solutions than cutting benefits and increasing copayments,” he says. “Human-resources directors are putting pressure on the large payors to use their networks to help them with solutions such as shifting patients to lower-cost providers.”
Hospital–radiology-group alignment is another emerging factor in imaging dealmaking. “Hospitals understand the profitability of radiology better than they did five years ago,” Jethani says. “What we’ve found is that they need help with appropriateness, utilization, and patient access. Hospitals truly want to align for the future, and we think there’s a huge opportunity for radiologists to take the knowledge they have in the outpatient environment and help the hospital become much more competitive.”
Townley adds that radiology groups that remain completely independent might experience challenges, down the line. “Hospitals are putting more and more pressure on groups to align with them,” he says. “They are becoming more and more loath to pay stipends for after-hours interventional coverage, financial subsidies for payor-mix problems, and so on. They are also becoming less tolerant of radiology groups that are competing with them in the provision of outpatient imaging services.”
Impact on Value
The shifting sands of the transactional environment will inevitably lead to changes in imaging value, Jeter says. Based on observations of the 2009–2012 marketplace, practices might be overestimating the potential value of their outpatient imaging centers. “There’s a difference between fair market value, which is what a typical buyer would pay, and (in the health-care world) strategic value, which is the value to the specific hospital in question,” he explains. “The seller needs to understand that at no point in the process can the hospital’s pricing be factored into the valuation. In any other industry, you’d be able to do that, but not in the strange world of health care.”
In addition, freestanding facilities that are still operating independently might be doing so with increasingly dated equipment. “The strategic decision of whether an independent radiology group with an independent imaging center should buy a $2 million piece of equipment has been tough,” Jeter notes. “It’s becoming time, now, to upgrade or replace that equipment, and you want to be able to tell patients—who are voting with their feet—that you have the best equipment available.”
The increasing financial burden faced by patients also raises the question of the impact that health-care reform will have on imaging-center value. As hospitals and health systems evolve into more consolidated integrated-delivery/accountable-care models, where do freestanding imaging services fit? “After the hospital buys a large physician group that was previously referring patients to a freestanding imaging center, the hospital comes and educates the physicians that the referrals need to go to the hospital group,” Jeter says, “but it only takes a couple of extremely angry patients—with bills for $2,400 MRI exams—to make even employed physicians change their ways.”
All of these factors mean that for the time being, it might be more beneficial for a freestanding imaging center to remain unaffiliated with a hospital, reversing the trend of the previous few years. “It’s been a tough business, but the business isn’t going away, and it’s not going to be totally transformed by health-care reform,” Jeter concludes. “At the end of the day, the population needs your services, and as the dynamics of patient payment change from other people’s money to out-of-pocket payment, you’re going to do well.”
Cat Vasko is editor of ImagingBiz.com and associate editor of Radiology Business Journal.