Ex-Concord executives propel DVI expansion

You wouldn't know by glancing at DVI Health Services' third-quarterfinancial report that business is booming for the scanner lessorand imaging center holding company. DVI's revenue dropped from$8.4 million during the 1992 third quarter (end-March) to $5 millionfor the same period this year. The decline, however, was largelyan accounting phenomenon brought about by a switch in the firm'slease financing strategy.

DVI's actual volume of credit-approved equipment financingtransactions for the third quarter was $45 million. That was aboutas much leasing business as the vendor booked during all of 1992,according to David L. Higgins, president and CEO. About 95% ofDVI's leasing business involves medical imaging systems.

The leasing business pickup marks a significant turnaroundfor the company, which saw new equipment financing decline inthe second quarter due largely to uncertainty regarding Clintonadministration health-care reforms and restrictions on referringphysician ownership of medical facilities, the company said inits second-quarter report.

Most of the boost in leasing business in the third quarterresulted from the acquisition in January of Medical EquipmentFinancing (MEFC), a Horsham, PA, leasing company run by severalformer principals of medical imaging lessor U.S. Concord, Higginssaid.

Michael A. O'Hanlon, former CEO of U.S. Concord, was namedthis month as president of DVI's leasing subsidiary, DVI FinancialServices. He retains the position of executive vice presidentfor DVI Health Services with treasury and capital market functions.

"That (the MEFC acquisition) has had a very positive effecton our volume of (leasing) business, Higgins said. "The (third)quarter was by far the best quarter we have ever had, in partbecause of that acquisition."

Revenue declined for DVI between the third quarters of 1992and 1993 because the firm began financing leases through securitization,Higgins said. Securitization involves selling asset-backed notesto large investors, such as insurance companies, to raise fundsfor equipment purchases for leasing.

Previously, DVI had sold many of its leases to banks and otherthird parties and was required to recognize this revenue at thetime of sale. Income from securitized leases, on the other hand,is recognized over the term of the lease transaction.

"Securitizations amount to loans as opposed to sales,"Higgins told SCAN. "By borrowing the funds, revenue is recognizedover time."

DVI completed a $42 million securitized placement in Apriland reached an agreement earlier this month to place $200 millionmore in securitized notes backed by medical equipment financingreceivables. The notes will be issued in a series of private placementsstarting in July or August.

WHILE A NUMBER OF mobile and fixed-site imaging services companiesare renegotiating scanner leases due to the current downturn inimaging volume and payments, particularly in MRI, DVI has notencountered a significant number of problem leases, Higgins said.He credits this to the fact that most of the firm's leasing businesshas been with individual operators.

"This is a business that is best run by individuals ina particular center as opposed to a corporation trying to operatea large number of (imaging sites) remotely," Higgins said.

DVI did run into problems last year, however, when IPS HealthCare of Irvine, CA, defaulted on $5.6 million in equipment leases,according to a report in The Orange County Register. DVI acquired22% of the small mobile MRI company following the default.

IPS operated six mobile MRI units as of a year ago, accordingto that company's 1992 (end-April) annual report. Three of thesystems, no longer manufactured, were obsolete. Cash-flow problemsbegan for IPS in late 1991. Utilization of the IPS mobile unitshas picked up this year, however, according to Higgins.

Individual imaging sites will have to connect to larger providernetworks as managed-care purchasing grows, but this is more ofa marketing than an operational concern, Higgins said. In fact,DVI is trying to create an imaging network of its own that wouldcombine individual DVI-owned centers, centers run by imaging servicefirms that have DVI equity investment, and DVI-leased sites.

Altogether, DVI has direct relationships with over 100 medicalimaging sites that might be coordinated in an approach to managed-carecustomers, Higgins said.

DVI owns seven centers directly, but usually invests when centersare able to function with minimal help from the parent other thancentralized accounting functions, he said. The financing companyis also a major shareholder in several imaging services firms,including:

• Healthcare Imaging Services of New York (SCAN 6/2/93);

• SMT Health Services of Pittsburgh; and

• Vascular Centers of America in Rome, GA.

VCA operates a vascular ultrasound business.

"It (VCA) does very well. The best part is that they areself-sustaining. We have very little to do with day-to-day management,which is the way we want it. To be involved in direct operationsrequires a significant amount of corporate overhead allocatedto that business."

Sometimes, however, center opportunities do surface with sufficientappeal to draw DVI into a direct role. Another DVI subsidiary,DVI Healthcare Operations, signed an agreement with the Healthand Welfare Fund of Local 705 of the International Brotherhoodof Teamsters in Chicago last February for the development of amultimodality imaging center. The center will provide servicesto union members, dependents and retirees.

"It is a good relationship because it ties directly withthe health-care payer," Higgins said. "We are in theprocess now of developing the facility. To the extent that wecan build on what has been established there and develop otherrelationships, we would be interested."

Another medical business under development by DVI is accountsreceivable management, through the firm's A/R Advantage subsidiary.A/R Advantage began as a service for DVI-operated centers, butexperienced sluggish revenue growth and losses, according to thecompany's 1993 second quarter report.

A/R Advantage hopes to boost growth by using its billing andcollections software system to handle third-party insurance andgovernment collections for outside physician clients. Both publicand private insurance carriers are trying to trim costs by increasingscrutiny of claims, Higgins said. This has boosted the averagepayment cycle from between 90 and 180 days to as much as 270 days.