RadNet has been hindered by staffing shortages and wage inflation, according to a new analysis from Moody’s. But the imaging industry giant said Monday that it’s beginning to see relief in the challenging radiology labor market
The investor service issued its update on April 5, labeling RadNet’s ongoing outlook as “stable.” However, Moody’s cautioned that the publicly traded, Los Angeles-based imaging center operator has been impacted by an industry hiring crunch and AI segment that’s operating in the red.
“The outlook revision to stable from positive reflects the increase in leverage over the last 12 months due to the impact of labor shortages, wage inflation and losses from the artificial intelligence business,” wrote analysts Adam Chaim and Ola Hannoun-Costa. “Moody's expects leverage to gradually decline, but remain above 4.5x [debt/earnings] over the next 12-18 months as some of the headwinds that the company faced in 2022 subside.”
As of December, RadNet’s debt to earnings ratio equaled 4.9x, analysts estimated. High fixed costs, significant capital expenditures and “sizable” interest expenses (after adjusting for the cost of leasing locations) also have constrained RadNet’s operations, Moody’s noted.
The investor service has a policy of not keeping “positive” outlooks on companies beyond 12 months. With a year passing since Moody’s upgraded RadNet to that designation, analysts opted to place the “stable” tag on the imaging group and leave it with the same debt rating rather than issuing an upgrade, said Mark Stolper, executive VP and chief financial officer.
“Given the very strong performance of our business—including a record fourth quarter 2022 in terms of revenue, [earnings] and procedural volumes, which has continued into the first quarter of 2023—we remain confident that RadNet will be eligible for an upgrade of our corporate credit rating in the near future,” he told Radiology Business April 10.
RadNet has been challenged in attracting talent, with the technologist role being a particular pain point. The industry is growing at a rapid pace, but it can be difficult to hire to keep up with the demand, Stolper said. However, the company started to see a loosening in the labor market beginning in the fall.
“We track open positions and the use of overtime very carefully—by center and region. And we noticed that it was growing, really starting in 2021 and into 2022, and it peaked in September,” Stolper said. “We’ve seen a softening of the labor market since then.”
Speculating on reasons for the change, he highlighted recent job cuts at technology firms such as Twitter and Facebook as one possible driver.
“Although you haven’t seen a ton of layoffs on the healthcare side of things, I think it’s generally changed some of the attitudes,” he said. “People are more interested in coming back to work, staying on for longer hours and are a little bit more loyal to their employers. So, it’s maybe more of a psychological impact in the labor market than anything structural.”
RadNet reported back in February that it lost $25 million on its AI segment in 2022. But Stolper reiterated comments from then that they expect to see financial success by next year. The company has acquired three AI firms over the past few years and expected to record losses as it worked to monetize the new services. That journey began in November, when RadNet started implementing its new Enhanced Breast Cancer Diagnostic, or EBCD, offering of AI-augmented breast cancer screening services for an additional out-of-pocket fee of $60.
“We believe that division is actually going to be profitable in 2024, given the trajectory of revenue growth we’re seeing,” he said Monday.
The Moody’s rating action noted other reasons for optimism, including RadNet’s strong competitive position in its primary markets and an ongoing trend of shifting imaging away from hospitals and into lower-cost freestanding centers. It also benefits from multiple revenue streams coming from a range of imaging modalities, along with solid payer diversity. About 55% of RadNet’s collections come from commercial payers that reimburse at a higher rate than Medicare or Medicaid. Its liquidity metrics are solid, too, analysts noted, including upward of $70 million in annual free cash flow, $128 million more in the bank, and another $187 million available to draw from RadNet’s revolving line of credit.
“From a governance perspective, the company is opportunistic with its M&A strategy, occasionally taking higher risks,” analysts wrote, later adding: “The company's ratings could be upgraded if it increases the scale and geographic diversification … Furthermore, a disciplined growth strategy and a stable reimbursement environment are needed for an upgrade.”
RadNet bills itself as the “leading” operator of freestanding, fixed-site diagnostic imaging services. All told, the company has a network of 350-plus centers in markets including California, Maryland, Delaware, New Jersey, New York, Florida and Arizona. Its AI acquisitions, meanwhile, have included Aidence (focused on solutions for pulmonary nodule management and lung cancer screening), Quantib (specializing in prostate cancer and neurodegeneration), and DeepHealth (breast cancer detection).
Marty Stempniak has covered healthcare since 2012, with his byline appearing in the American Hospital Association's member magazine, Modern Healthcare and McKnight's. Prior to that, he wrote about village government and local business for his hometown newspaper in Oak Park, Illinois. He won a Peter Lisagor and Gold EXCEL awards in 2017 for his coverage of the opioid epidemic.