Imaging Transaction Trends: Out With Acquisitions, In With Strategic Partnerships

Over the past 18 months the number of imaging center transactions has slowed from the feverish pace observed from 2010 to 2013. During this time reimbursement cuts compounded by equipment replacement needs resulted in significant financial strain for a large number of independent freestanding single-site imaging centers. As a result, health systems and large multi-site operators were able to acquire struggling independent centers at depressed EBITDA multiples or, in certain cases, for the value of the tangible assets.

As these independent centers consolidated, the number of single center transactions slowed. However, VMG has observed an increase in large multi-center imaging transactions between health systems and large multi-site operators. Due to the size of the entities involved, the structure of the transactions has shifted from outright acquisition to the creation of strategic partnerships. Increasingly, multi-site operators and health systems have begun forming regional imaging networks by combining existing outpatient centers into new joint ventures with shared ownership between the two parties.

Factors Driving Partnership Formation

A number of factors led to the increase in the formation of these large multi-center joint ventures.

Freestanding operators are looking to improve negotiating leverage with commercial payors to offset continued Medicare reimbursement cuts. In addition, an increasing number of referral sources for freestanding centers are being employed by local health systems. At the same time, increasing consumer price sensitivity, driven by the proliferation of high deductible health plans, has forced health systems to develop more cost-effective imaging services.

An imaging joint venture provides solutions to both parties. The centers within the joint venture remain independent diagnostic testing facilities (IDTFs) and thus offer a lower price point as compared to hospital-based imaging centers. Meanwhile, the joint venture is able to leverage its relationship with the health system to negotiate better commercial rates as compared to typical IDTF centers.

Benefits of a Partnership Structure

The joint venture structure offers a number of benefits to health systems and freestanding operators.

Creating an Imaging Partnership

While an imaging partnership can provide many benefits to both health systems and freestanding providers, the partnership must be carefully structured to ensure its success.

The first step in the formation of the partnership is a valuation of the contributions from each party. Typically the freestanding operators will contribute all of their centers within a defined geographic region to the venture. Health systems will contribute their freestanding imaging centers and, in certain cases, off-campus provider-based imaging departments. Cash contributions are then used to reach the desired ownership structure for commercial contracting purposes.

It is important to note that the imaging centers contributed by the health system, regardless of IDTF or hospital department licensure status, are likely to have significantly higher commercial reimbursement than the IDTF centers contributed by the freestanding operators. Therefore, the valuation must take into consideration the risk associated with maintaining this higher level of reimbursement.

Next, the parties must decide who will provide professional radiology and management services to the joint venture. Typically professional reads are contracted to the radiology groups that provided the services prior to the formation of the new partnership. However, the terms of legacy professional-services contracts must be reviewed to ensure they are consistently structured (e.g., payment per read vs. percent of collections) and set at fair market value.

Management services are typically provided by the freestanding operator in exchange for a management fee, which can be structured as fixed or variable, and typically includes bonus payments for meeting established quality benchmarks.

Number of Partnerships Likely to Increase

The number of these imaging joint ventures is likely to increase due to a number of future regulatory changes.

The Protecting Access to Medicare Act (PAMA) requires that CT scanners meet the equipment standards set by the National Electrical Manufactures Association by 2016 or face reimbursement cuts. In addition, PAMA requires that imaging centers implement clinical decision support systems for clinicians ordering advanced imaging services beginning in 2017.

A joint venture would decrease the capital burden associated with meeting the requirements of these regulatory changes.

On the hospital side, there have been increased efforts from commercial and government payors to establish site-neutral payments for radiology services. In the 2015 Medicare Physician Fee Schedule proposed rule, CMS announced its intention to establish a new PO modifier to identify services provided in off-campus, provider-based departments. Usage of the modifier, which becomes mandatory in 2016, will allow CMS to better assess the impact of the site of service payment differentials on overall program spending. Increased focus on site-of-service payment differentials from commercial and government payors will accelerate the need for health systems to develop cost-effective imaging services.

Projected reimbursement constraints and increased regulatory requirements will continue to pressure freestanding and hospital based imaging centers.

However, by embracing innovative partnership structures, freestanding operators and health systems can give themselves a competitive advantage in an increasingly challenging environment.