Contrary to the recent technical reimbursement cuts this year, which have negatively impacted diagnostic imaging operators, professional reimbursement for the same CPT codes have experienced a stable to slight decline; although, in some instances there was an increase. Modalities such as Computed Tomography (“CT”) and Magnetic Resonance Imaging (“MRI”) experienced technical reimbursement declines between 1 percent and 45 percent. For many freestanding imaging operators relying heavily on governmental payors, without an increase in volume and/or expense reductions, the technical reimbursement declines directly impact the operating earnings of the business. 

With consideration of the Centers for Medicare and Medicaid Services’ (“CMS”) 2015 Medicare Physician Fee Schedule (“MPFS”) Proposed Rule, the continuous upward trend of professional reimbursement could adversely impact operators. For operators who bill globally and contract for professional read agreements (“PRA”) to an outside or invested radiology group, the rate at which radiologists are compensated may have a material impact in the value of a freestanding imaging center. As the imaging market continues to consolidate, largely due to reimbursement pressure, radiologists could seek opportunities to ensure their professional compensation trends with CMS, which will likely place increased pressure on the operating earnings under a freestanding environment. To help illustrate the historical trend of professional fees relative to global fees, below are charts detailing fees for a sampling of the top CPT codes for MRI, CT, mammography, and ultrasound of the following:

1.       Professional and technical reimbursement as a percentage of global reimbursement from 2010 to 2015.

2.       The average professional and technical reimbursement rate from 2010 to 2015.

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*Based on national payment rates for the top 5 CPT codes.

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*Based on national payment rates for the top 5 CPT codes.

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*Based on national payment rates for the top 2 CPT codes.

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*Based on national payment rates for the top 5 CPT codes.

From a historical view point, PRAs have primarily been set from 15 percent to 20 percent, depending on the modality mix and term structure in place. However, as the charts above outline, MRI, CT, and Ultrasound professional reimbursement from CMS continues to trend as a larger percentage of the global fee. Anecdotally, if a newly negotiated PRA aligns with CMS’ shift, freestanding operators could be forced to share a larger portion of the operating earnings with the radiologists.

To illustrate the potential influence of a higher allocation of professional fees, VMG Health, LLC charted a scatter plot of eleven recent imaging center transactions dispersed across the United States. In green are the current professional fees at the centers as a percentage of revenue and in red are the estimated professional fees as a percentage of revenue if the centers were to utilize the percentages listed in the 2014 MPFS. The average current professional fee as a percentage of global revenue for the selected freestanding imaging centers is approximately 16.5 percent. If these centers were to align with the percentages listed in the 2014 MPFS, the professional fees could, on average, increase 10 percent.

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As the freestanding imaging industry continues to evolve given recent trends in reimbursement, it is prudent for both buyers and sellers to understand the impact the professional component has on the operations of these facilities. Ultimately, the value of a freestanding imaging center can be highly influenced by the structure of the PRAs. The most prevalent example of pending changes to PRAs focuses on the invested radiology group in a freestanding center. In a proposed transaction, if the target imaging center is owned by a radiology group and post transaction the buyer will enter into a PRA with the seller (radiology group), the contracted terms of the PRA should be included in the projected cash flows. Failure to accurately project post transaction compensation may lead to an incorrect determination of value. The prior examples highlight that, regardless of the historical PRA associated with the radiologist, if negotiated differently, the future earnings to an acquirer may be materially different.