Extending capital proves service key

September 8, 1993

Health-care angst and stalled purchasing don't make the best conditionsfor starting a medical imaging business. Depending on your focus,however, times could be worse. As hospitals keep their imagingsystems running longer, they need help in the areas of

Health-care angst and stalled purchasing don't make the best conditionsfor starting a medical imaging business. Depending on your focus,however, times could be worse. As hospitals keep their imagingsystems running longer, they need help in the areas of service,repair, parts and upgrades.

Start-up cardiac cath service firm Serviscope has shaped itsmessage to meet the growing hospital drive to conserve capitalequipment dollars while maintaining procedure revenue. Serviscopeexpects to move its bottom line into the black for the first timeduring this fourth quarter of fiscal 1993 (end-September), accordingto Donald J. Southard, president and CEO of the Wallingford, CT,venture-capital-backed company.

Annual revenue at Serviscope should jump from $4 million in1992 to $14 million this year. Although its business generatesenough cash to support growth, the firm might consider seekingpublic funds once it has a few profitable quarters under the belt,he said. Southard, a former imaging equipment executive at OEMsPhilips and Toshiba, joined independent Serviscope two years ago(SCAN 12/25/91).

Serviscope developed a maintenance niche targeted largely (30%)at cardiac catheterization labs--with a focus on Philips equipment--andrelated imaging systems (50%), such as vascular labs, R&F,and radiographic equipment. About 15% of Serviscope's maintenancebusiness is in CT (31 systems) and MRI (23 systems), Southardsaid.

The company has expanded its servicing business nationwide,covering 24 of the 30 metropolitan areas in the U.S. that representover 90% of the targeted installed base, he said. Serviscope hasa total of 40 service locations around the country. Total companycustomers have risen from 283 in 1992 to 630 this year. The companyexpanded its work force from 75 employees last year to 110.

Few independent service organizations compete head on withServiscope for cath lab business, allowing the firm to stake outa pricing position between the ISOs and OEMs. Serviscope triesto keep its service prices about 10% below the OEMs, Southardsaid.

Growth of managed care and hospital group purchasing is impactingequipment service, he said. For instance, 20 northern Californiahospitals have grouped together to put a large service contractout for bid. Eleven hospitals in Minneapolis have also aggregatedtheir service business.

Group purchasing could give an advantage to large service companieswith a wide geographic reach while offering lower prices thanthe OEMs, he said.

"Hospitals are going to get together and demand betterpricing than they have been getting," Southard said.

About 70% of Serviscope's revenue comes from the core equipmentmaintenance business, he said. However, the company has branchedinto several related areas that play to hospitals' interest inprolonging the useful life of their equipment and reducing capitalexpenditures. These include:

  • refurbishing equipment;

  • providing upgrades, such as digital capabilities forcath labs;

  • parts, training and consulting (provided also to theservice industry); and

  • ownership and operation of cath labs on a contractualbasis.

"There is a big push (among hospitals) to conserve capitaldollars," Southard told SCAN. "We are on the same sideof the desk as our customers. It is our business to have themkeep their equipment as long as possible. (Hospitals) are veryinterested in reducing their capital outlay as opposed to simplyreducing the expense of their service contract."

AN IMAGING SERVICES SUBSIDIARY, American Diagnostics and Management(ADAM), was created last year to support Serviscope's effort tobuild a chain of wholly owned cardiac cath centers. Allan Danto,formerly with Medical Imaging Centers of America, was hired tohead up ADAM as president.

ADAM has initiated operation of two cath labs--at SouthmoreMedical Center in Houston and the Ambulatory Center of HialeahHospital in Hialeah, FL. Two or three more centers are expectedto start this year. The firm has budgeted for six new cath labsin 1994, Southard said.

ADAM will offer a range of service options, from rental ofa cath lab to a fully outsourced center, Southard said. Both existingcenters are fully owned and staffed by the company. The companyfocuses on outpatient diagnostic catheterization rather than angioplasty.

To equip the ADAM centers, Serviscope buys used equipment andthen refurbishes, installs and maintains the systems. Expensesare covered out of procedure reimbursement. Revenues are sharedwith the client hospital.

While diagnostic catheterization reimbursement has declined--froma minimum level of about $2100 to $1500--payment still exceedsthat for MRI and other imaging procedures. The company expectsto keep its cost structure down in parallel with reimbursement,reducing expenses through use of its equipment expertise and productresources.

ADAM cath labs typically function on one hospital campus, providingoutpatient service for a particular institution. However, thecompany is negotiating a cooperative site to service two localhospitals jointly, Southard said.

ADAM has also signed a long-term contract with a Tampa cardiologygroup--Maniscalco, Glover, Toole & Algona--for provision ofoutpatient diagnostic catheterization services in the Tampa andSt. Petersburg areas.

Hospital clients can take in revenue rather than refer outto a cath lab, he said. They also increase the menu of servicesoffered to managed-care groups.

"There are about 2000 (U.S.) hospitals that don't havecath labs," Southard said. "In order to be a playerin this environment of managed care, you have to be able to takea patient all the way through the gauntlet of diagnosis, fromstress tests through diagnostic cath."