There is little question, and ample evidence, that merger-and-acquisition activity in the diagnostic imaging business sector has increased since the Deficit Reduction Act (DRA) in 2005, and since Medicare Physician Fee Schedule changes and IDTF Standards changes in 2006 and 2007. Many in the prognostication business have been forecasting some sort of shakeout in the freestanding imaging center sector as a result of the DRA and the implementation of certain regulatory changes affecting IDTFs, as well as certain payor-driven initiatives related to diagnostic imaging services. Specifically, what forms the shakeouts might take has been the subject of diverse opinions and equally diverse actual occurrences. Some have predicted, with a fair amount of accuracy, that the diagnostic imaging services sector has been, and continues to be, ripe for consolidation. What we should expect over the next several years will depend on recent history and on several factors that will come into play, based on certain assumptions and emerging trends in the industry. Before the DRA and other forces now in play, mergers of radiology groups, as well as mergers and acquisitions of imaging centers and imaging center operator companies, were primarily responses to new technologies or specific market conditions within their respective footprints. Fleishon¹ wrote an elegant article on this subject earlier this year. Following a period of comparatively slow merger-and-acquisition activity in 2006 and into the second quarter of 2007, activity increased dramatically in the third quarter of 2007 and has continued into the first half of 2008. For example, Novant Health acquired MQ Associates (MedQuest); RadNet acquired Radiologix Inc, Papastavros Associates Medical Imaging, Valley Imaging Center Inc, Rolling Oaks Radiology, and six imaging centers from InSight Health Services; Gores Group acquired Health South imaging division, creating Diagnostic Health Corp; Alliance Imaging acquired New England Health Enterprises Trust and New England Imaging Management, LLC; Alliance Oncology, LLC, acquired Bethesda Resources, Inc; CML HealthCare Income Fund acquired American Radiology Services; and DigiRad acquired Ultrascan’s mobile ultrasound business. In addition, we are seeing several regional and local imaging center operators across the country acquire certain independent imaging centers and divesting single-modality or marginally profitable imaging centers to a broad range of local buyers and investors. Clearly, the forecast of a trend of consolidation in the industry is playing out as some players learn to digest the realities of the DRA and other reimbursement challenges, leverage their operational infrastructure to improve profitability, and gain access to capital to invest further in strategic and tactical imaging technology to expand market share (and enter new markets with relatively strong reimbursement and unmet demand). Although the catalysts for the transactions listed above and for less well-known acquisitions and mergers are not known with specificity, it is clear that each transaction came about for different reasons. For some, the acquisition added market share, contributed to a new market-penetration strategy, added financial strength, added technology discriminators, or accelerated entry into new services not in the core portfolio. Still others were opportunities for sellers to access capital, gain access to certain competencies not yet mature in their organizations, gain strength from a national brand, gain access to additional purchasing power, or gain management and marketing experience and expertise. The good old days of saying, “Open it and they will come,” are clearly behind us. Same-store sales is returning to the forefront as an operating philosophy, mandate, and practice. Hospitals and Health Systems An interesting trend that we are noting is a resurgence of hospitals as outpatient imaging providers at off-campus settings. After decades of turf raiding (in some hospitals’ views) by independent imaging centers in the hospitals’ backyards, we are seeing the construction and implementation of a fully integrated imaging strategy throughout the continuum of care (inpatient, outpatient, and outreach) by many hospitals and health systems. We could label the Novant Health acquisition of MedQuest as just such a strategy, but we would probably be selling them short on the totality of their thinking. A recent article2 describes a trend among hospitals in recognizing the margin contribution of diagnostic imaging and the extent to which diagnostic imaging draws patients into the system and attracts specialists to the institution as referring physicians. Today, many hospitals are taking back the outpatient imaging business through acquisition of competing sites, adding new sites of service with strategically targeted imaging technologies, or increasing their efforts to develop joint-venture outpatient imaging centers with radiologists and other specialists. Those who have embraced this strategy have simultaneously recognized that they do not possess the core competencies to manage these unique facilities as effectively as experienced imaging center operators (imaging center companies or radiologists with outpatient imaging center experience). Freestanding imaging centers require a totally different skill set—patient service, referring-physician management, marketing, and operations management. Accordingly, we are seeing hospitals acquire, or team up with, others to ensure the success of these ventures. We anticipate that this trend will sweep through the hospital sector over the next several years as more and more hospitals embrace diagnostic imaging as a strategic weapon and core service line, rather than as a commodity or central service as in the past. Teleradiology Services Companies A more recent participant in merger-and-acquisition activity is the teleradiology sector. Last year, we saw Franklin & Seidelman acquire Apex Radiology. We have also witnessed other national and regional teleradiology companies acquiring radiology groups and smaller teleradiology service providers in certain regions of the country. In addition, we are noting some teleradiology companies adding or acquiring specialty modality divisions for mammography and other subspecialty services. This is a sector that we expect to experience more consolidation over time as the market becomes more saturated and radiology groups develop their own internal services throughout the service areas that they dominate. Radiology Group Practice Radiology group mergers are back on the rise. Mergers of groups in certain markets have been a rather constant for decades. Typically, mergers took place between local groups of eight or fewer radiologists, and later, between groups of 12 to 15 or fewer. Today, we are witnessing groups of 30 or more merging with other groups of 25 to 30 or more in certain markets. Concurrently, we have also seen a few groups reverse their mergers. The mergers just did not stick, for a variety of reasons. Classic antitrust considerations need to be addressed, but with more and more imaging constituents in the market (imaging centers, teleradiology companies, and medical specialty imagers), this issue is not as clear cut as it used to be, when radiologists were the only imaging medical specialty. Speaking with the architects and principals of recent or in-process mergers, we find a rather consistent theme of catalysts. To a group, the prime motivators described are subspecialty radiologist sharing to gain depth and breadth to meet the needs of their hospitals and medical staff; added FTEs, in lieu of recruitment strategies, to meet growing volume; creation of common clinical standards of care for the community; market differentiation and penetration; consolidation of imaging centers, access to capital for expansion, access to certain imaging center operational expertise, and IT infrastructure; and the growing perception of medical staffs that if a radiology group is not growing, it is contracting, and therefore vulnerable. In the past, the obstacles to merging different cultures, compensation mechanisms, and diverse partner needs and desires (to say nothing of egos) precluded many groups from considering a merger with another group. Quite frankly, life was pretty good, and the thought of so much change was very hard, so why bother? Today, the primary catalysts and needs of many groups of 12 or more far outweigh the obstacles of the past. Clearly, though, merging two robust radiology groups is a daunting task. Many groups that have merged or are merging cite the same challenges: sorting out management and governance (how decisions are made, and by whom, after the merger); sorting out the enormous IT challenges; defining and embracing of the group culture by all partners and associates in order to behave as a group versus two entities with a shared name; merging groups with and without residency programs; letting go of local historical staffing models; introducing new faces to referring physicians and hospital leadership; and mingling administrative staff, along with deciding who stays and who goes if redundancy exists. The same groups offer some core advice to those in the decision cycle. First, focus on how decisions will be made. This can be a deal killer. Second, put a separate team on evaluating and coming up with a plan for IT integration while the businesspeople, attorneys, and physician leaders work out the rest. Third, stress communication, communication, communication: top-down, lateral, and bottom-up styles. Mergers of radiology groups are occurring with greater frequency at the local level today, and we anticipate a continuation of mergers at this level for the next several years. Mergers of large, local radiology groups are migrating to become statewide and/or regional geography mergers within two to five years. Mergers at a national level do not seem to be on the near horizon. Summary The forecast consolidation of the diagnostic imaging services sector appears to be gaining momentum. Across the spectrum, we are witnessing mergers and acquisitions of imaging center operators (fixed site and mobile), hospital and health system imaging center sites of service, teleradiology service providers, and radiology groups (with and without freestanding imaging centers). Demand for diagnostic imaging services is not going down; in fact, more and more new technologies and applications for noninvasive diagnostic care are emerging every year. Utilization management will, eventually, weed out the unnecessary utilization of imaging (perceived or real) in the market as more regulatory constraints are imposed by federal and state regulators and by commercial health plans through policy and coverage determinations. Reimbursement for diagnostic imaging services will continue to attract pricing pressure from all payors, including the consumer. All of these factors, and many more, will drive consolidation of the industry well beyond what we have witnessed over the past year or two. What form will it take? Only time will tell. It is certain that entities that have learned the attributes of cost management, service excellence, purchasing power, market power, and work distribution will have an upper hand in each sector of the diagnostic imaging market. Those with experience (battle scars and learning) and newly acquired expertise in merging will not be reluctant to do it again and again. I am firmly convinced that we are heading into a period in which you are either going to be a consolidator or be consolidated. Both can be equally valued positions. The questions for all constituents of this service sector are: What are you doing to maximize your value today? What are you doing to maximize your position in the market? What are your needs and desires? What are your strategic options? What are you doing about them today? What do you think our competitor is doing today? Click here for white paper (PDF)