Diagnostic Health finds investor for support of center acquisitions

Chain targets $100 million revenue by 1996

Imaging center firm Diagnostic Health of Birmingham, AL, has founda unnamed financial partner willing to invest at least $30 millionin its effort to build a $100 million imaging services companyby 1996. This potential source of private equity offers DiagnosticHealth what most of its publicly owned, multicenter competitorsdo not have: access to sufficient funds to fuel the purchase ofnew centers in a buyers' market.

"There are people who want to sell centers and peoplewho would like to buy centers," said Russell H. Maddox, chairmanand CEO of Diagnostic Health. "The problem is that the public(center) companies are shut off from funds. They are shut offbecause they can't go back into the market for another round offinancing while their stock is depressed. With a lack of buyers,doctors (who own centers) are going to be at a tremendous disadvantage."

Diagnostic Health opted not to become a publicly held companyitself last year after determining that it could not obtain ahigh enough share price (SCAN 5/5/93). The firm's stock pricepotential was dampened because of a lack of enthusiasm for theexisting stock of comparable multicenter companies, Maddox toldSCAN.

While uncertainty regarding U.S. health-care reform has impactedhealth-care stocks generally, imaging center firms have been particularlyout of favor with the financial markets. Share prices hover aroundthree to four times earnings for public companies providing medicalimaging services, while other types of health-care companies tradeat as much as 20 times earnings, he said.

The largest imaging center firm, Health Images of Atlanta,indicated its intention this year to concentrate on building businesswithin its current network of 44 centers, four of which are locatedin the U.K. (SCAN 2/16/94). Health Images owns and operates predominantlyMRI-only centers. Diagnostic Health, in contrast, plans a multimodalityfocus for its expansion efforts, Maddox said.

Reimbursement rates for MRI procedures are declining significantly,he said. Providers must build volume and throughput in order tooperate profitably in this new environment.

Centers offering a full range of multimodality imaging serviceshave a better chance of latching on to high-volume managed-careaccounts, Maddox said. HMOs, PPOs and other managed-care organizationsseek contracts providing full-line imaging services on a high-volume,discounted basis.

A center company that swims against the current today by buildingup its network will not only obtain the best prices. It will bewell placed to sign these volume accounts and reap the benefitsfrom improved market conditions as excess service capacity iswinnowed out of the system.

"We are going to see centers that will close," Maddoxsaid. "There is much old equipment. Doctors can't sell (theirservices using the older scanners). Much of the competition willbe eliminated strictly by the closing of centers. We have alreadyseen some of that."

Diagnostic Health last month purchased its seventh center,Tara Magnetic Imaging of Riverdale, GA. With its anticipated injectionof cash from the private equity investment, the firm plans tobuy six to eight additional centers this year and 12 in 1995.A critical mass of about 25 centers should provide the companywith the means to reach its $100 million revenue objective by1996, he said.

Centers acquired by Diagnostic Health to date are located inTexas, Tennessee, Georgia and Alabama. The firm's expansion effortwill concentrate on the East Coast and southern states from Virginiawest to Texas, he said.

"We don't plan to go to the far west at this time,"Maddox said. "Keeping our centers close together providesgreater economies of management."

Tara Magnetic Imaging was the first center purchased by DiagnosticHealth that was not 100% owned by the center chain. The companyis open to joint ventures with radiology groups and hospitals,he said. In the case of Tara, ownership was split between a referring-physicianpartnership and a radiology group. The radiologists expresseda desire to continue their ownership position.

One factor that favored acquisition of Tara was that the centerhad never accepted Medicare business. It is not likely to be taintedwith accusations of overutilization and fraudulent self-referralunder the previous owners, Maddox said.