Imaging center firms prepare for coming service industry shakeout

June 2, 1993

Imaging service companies have a hard row to hoe staying aliveand profitable in a rapidly changing U.S. health care deliverysystem. But those center and mobile providers that are smart andquick enough to outlast the shakeout and build connections tothe

Imaging service companies have a hard row to hoe staying aliveand profitable in a rapidly changing U.S. health care deliverysystem. But those center and mobile providers that are smart andquick enough to outlast the shakeout and build connections tothe new service regime will likely reap a bountiful harvest.

"There is going to be a great opportunity for (companies)that stay strong," said Joseph G. Dasti, president and CEOof NMR of America. "In every young growth industry, thereis always a consolidation phase. That is when the major dollarsare made by investors. They can take advantage of the chaos createdby consolidation."

NMR saw the writing on the wall when it had its first unprofitablequarter in four years during the second quarter (end-September)of fiscal 1993. The Morristown, NJ, center firm cut staff andincreased efficiency at headquarters and its eleven centers. Newhigh-field scanners were placed in several centers to increaseimaging capacity where needed. A profit of $307,000 was realizedin the fourth quarter of 1993, although NMR lost $370,000 forthe full year.

The company made it through this restructuring with about $2million in cash and a manageable amount of debt, Dasti said. Itis now positioned as a sound candidate for combination with othercenter firms as the industry consolidation accelerates.

NMR was outbid on some independent physician-owned centersit had hoped to pick up last year in the wake of federal safe-harborrestrictions. In the current environment of lower MR procedureprice and volume, prices paid for centers a year ago would beextremely hard to break even on today, he said.

"We got lucky. We didn't buy anything, but we really tried,"Dasti told SCAN. "We recognized that the industry had sloweddown right after (our) second quarter. We moved a lot sooner thanother companies that are just now starting to restructure."

ImageAmerica of Brentwood, TN, is another center company thathas transformed itself in recent years. Formerly MedInc, the firmhad led a charge to defend the center industry against restrictionson referring-physician ownership.

Following a merger with RB Diagnostics of Boston two yearsago (SCAN 12/12/90), however, the company changed its name, movedaway from defending self-referral and focused on updating itsscanners and strengthening its marketing.

"There was an entire management overhaul," said PatrickT. Ryan, ImageAmerica president and CEO. "One of the majorreasons for the merger was to bring in the RB management and refocusthe company on providing aggressive service and marketing."

ImageAmerica closed a small mobile MRI business before thatsegment of the services industry turned sharply down. The companyfocused on installing high-field magnets, primarily from GE andSiemens.

ImageAmerica went public in October, shortly before announcingrecord revenues and income for 1992 (end-December). The firm increasedrevenue and income again in the first quarter of 1993.

But revenue rose for ImageAmerica because the firm was bringingon new centers. Per-center revenue declined slightly, Ryan said.

"MR utilization is going to go through a dip for a periodof time as the whole system sorts itself out," he said. "Overthe long run, however, it will still be an important technology,particularly with the addition of angiography and cardiac packages.Once the (delivery) system is cleaned up--when we are rid of poortechnologies and (marginal) ventures--the benefactors will bethose (center firms) that are still around and focused on providinghigh-quality services."

Cash from the IPO and a $15 million credit facility with NationsBanksigned in December has positioned ImageAmerica as one of the fewmulticenter firms acquiring independents. Two Aurora, CO, MRIcenters were purchased last month, raising the firm's total imagingcenter network to 14.

About 30% of ImageAmerica's business remains in office-basedshared service focusing on ultrasound and other lower cost modalitiesbrought over from RB Diagnostics. Future growth for the firm,however, will focus on expanding center networks targeted at managedcare contracts, Ryan said.

"Success over the next five years will be dependent uponour ability to build networks within the communities in whichwe do business," he said. "These networks will includehospital facilities, other outpatient service providers and physicianIPAs (independent practice associations) that will be able togo to managed care providers and industry clients and offer comprehensiveservices."

ONE OF THE LARGEST and most successful imaging center effortsin the U.S. is Health Images of Atlanta. The firm builds its ownMRI scanners and operates 40 centers in the U.S. and the U.K.HI, however, is also feeling the MRI pinch. Revenues and profitswere down in its first quarter (end-March).

Robert D. Carl, who was chairman, president and CEO of HI,gave up two of his titles last month, but will continue on aschairman, focusing on strategic development issues. William A.Wilson, COO, was named interim president and CEO.

"The softening of demand for imaging services may persistfor the short run as the dynamics of health care delivery continueto change," Carl said in reporting the first quarter results."Health Images remains well positioned to prosper under healthcare reform where managed care plans are encouraged, physicianself-referral is eliminated, and competition is based on pricingand quality of service."

Brighter results were seen at HealthCare Imaging of Middletown,NJ. The firm has six imaging centers in operation with one soonto open. It also runs three mobile MRI and one mobile lithotripsyunit.

Business from new HIS centers opened over the year helped raisetotal revenue 50% in the first quarter (end-March), from $2.3million in 1992 to $3.6 million this year. Profit was up slightly,from $206,000 in the first quarter of 1992 to $217,000.

Per-center revenue generally stayed even or rose during thequarter, according to Calvin M. Sprung, vice president of finance.While the firm has concentrated on new center development, itis now in the market for center acquisitions.

IMAGING CENTER FIRMS WITH A STRONG STAKE in California have feltthe brunt of changes expected to sweep across the country. A risingmarket share of managed care in the state has been helped by highdensity of MR scanners.

Health maintenance organizations, the most extreme form ofmanaged care, were invented in California. HMOs are based on acapitated system, which offers physician groups a set fee perpatient per month to provide the necessary care for that patient.Using outcomes analysis to gauge when MRI and other imaging proceduresare necessary, HMOs limit the traditional system of providingimaging services at the discretion of the physicians.

What started out in the West is gaining a foothold throughoutthe U.S., said Nathan Kaufman, president of the Kaufman Groupof San Diego and former head of the center business of San Diego-basedMedical Imaging Centers of America.

"Virtually every hospital in this country is in the processof setting up a capitated delivery system in anticipation thatcapitation will represent somewhere between 25% and 50% of thebusiness in metropolitan areas within five years," he toldSCAN.

The decision last month by Blue Cross of California to cutreimbursement rates to radiologists and other specialists paidby its preferred provider organization was a sign of the times.California's Blue Cross group offers subscribers a menu of HMO,PPO or traditional indemnity insurance services.

Given the proven success of capitation in reducing health careexpenditures, it is likely that any national medical cost-controlreforms will rely heavily on this payment method, Kaufman said.

"There is only one system in health care now that hasdemonstrated reasonably good outcomes, reasonably good patientsatisfaction and has reduced costs by 35%," he said. "Andthat is capitation. Any (reform) that favors cost reduction hasto focus on capitation."

Reimbursement of radiology services under indemnity insuranceplans amounts to around $8 per patient per month. This rate declinesto $5 under a PPO and falls to about $3 under a pure capitatedsystem, Kaufman said.

On the positive side, capitated programs can boost volume substantiallyfor imaging service providers. Unfortunately, this increase involume comes at the expense of providers not tied into a managedcare network.

The growing strength of HMOs has fueled a decline in reimbursementfor MRI services of about 20%, said Antone J. Lazos, MICA chairmanand CEO. This has been combined with a drop of almost the samemagnitude in procedure demand.

"In my entire business career, I have never seen suchan abrupt change," he told SCAN.

This decline in MRI revenues is not likely to be temporary,Lazos said.

"I do not expect this market to grow out of the problem.The base of providing services is going to shrink to take careof the contracting market," he said.

Imaging centers still offer better prospects than fee-per-scanMRI sites at hospitals. MICA moved heavily into the fee-for-servicebusiness in the late 1980s and was hit hard during the past twoyears when hospitals opted out of contracts.

"Once the risk was gone, they (hospitals) saw that theycould afford a system, and when the contract was up, they wouldn'trenew. They would buy their own," Lazos said.

Fee-for-service problems were exacerbated by aggressive marketingof new systems by equipment vendors and a general drop in systemsprices, he said. Service vendors have little control over referralsunder fee-for-service contracts and are basically at the mercyof the hospital. Centers, on the other hand, are able to marketand build a referral business on their own.

MICA moved this year to dramatically reduce costs and shiftaway from fee-per-scan contracts. The firm's Chicago office, whichcontrolled the per-click business, was closed and functions relocatedto San Diego. Administrative staff was cut and upper-level managementtook a 10% pay cut. Reduced interest payments were also realizedthrough a renegotiation with creditors.

While MICA had a loss of $1.9 million for the first quarterof 1993, this was reduced slightly from the same quarter a yearago.

"We are shrinking our cost base to deal with the shrinkingmarket," Lazos said. "We hope to be a survivor so that,when the rules of the game become known, we can move forward ina logical manner."

Center chains are more likely to survive the shakeout thanindependents, he said.

"The mom-and-pop, single imaging centers have an uphillfight. It is going to take regional networks of centers to beeffective in the new environment," Lazos said. "I seemore alliances being formed between hospitals and outpatient facilities.Outpatient (imaging services) still provide more cost-effectivescans and better service."

American Health Services of Newport Beach, CA, which is alsostruggling financially (SCAN 5/5/93), hopes to last through theindustry shakeout as well.

"The emphasis now is on survival and then, I hope, prosperity,"said E. Larry Atkins, president and CEO. "One thing thatdoes give me some confidence is that most of our sites acrossthe country are affiliated with very good hospitals."

But hospital affiliations can have drawbacks when the centerfirm functions in a subcontractor role for imaging services. Ifthe hospital is successful in linking itself with a revamped healthcare delivery system, then the center firm is also successful.

"If they (the hospital partners) are for some reason excludedor they don't prevail in contractual negotiations, we will ridewith them also," Atkins said.

The imaging center industry, Atkins noted, is faced with acrucial question as it waits for the details of the Clinton administration'sattempt to revamp health care distribution and establish largepurchasing cooperatives: Will there be a role for unbundled imagingservices?

Large health care purchasing cooperatives may not want to dealwith medical imaging as a separate purchase item but might preferinstead to buy bundled services through an integrated health organization,he said.

"A freestanding center may have state-of-the-art equipment,good prices and high productivity," Atkins said. "Butif you are not part of the integrated health organization, whereare you?"