Imaging center market remains largely healthy

August 30, 2000

Despite the financial struggles of several large providers of imaging services in the U.S., the market for outpatient imaging centers and other shared imaging services remains healthy this year. Procedural growth may be slowing slightly, but it is still

Despite the financial struggles of several large providers of imaging services in the U.S., the market for outpatient imaging centers and other shared imaging services remains healthy this year. Procedural growth may be slowing slightly, but it is still on an upswing. And payments are staying fairly stable, according to an informal survey of service providers.

One factor causing problems for several large imaging services companies, however, is that the competitive environment for centers varies considerably from region to region. Some areas, such as South Florida, have seen a rapid growth in the number of providers and may be reaching saturation.

On the other hand, the Health Care Financing Administration's new ambulatory patient classifications for Medicare patients, which became effective August 1, may actually reimburse outpatient facilities at a higher percentage than hospital-based services for certain procedures. This could be a boon for imaging companies that operate such centers.

One company, Radiologix, which owns and operates 124 imaging centers, went private this month when it sold 90% of its stock to an investment firm to raise capital for expansion. The remaining 10% of Radiologix's stock is largely owned by radiologists who contract with the company's imaging centers.

"We had been looking for the right way to capitalize," said Radiologix's chairman and CEO Mark Wagar. "We've had good growth and performance, but the stock market hasn't recognized that. We're not alone; a lot of small healthcare companies have had this problem."

Wagar believes that successful companies in his industry are those that, like Radiologix, cover all modalities, and that have good market concentration.

"The ones that are having trouble typically started 10 years ago or more and were entrepreneurial, with one or a couple of high-end modalities such as CT or MRI," Wagar said. "They thought that because these bring the highest price, it must be easy money. Companies that are successful—such as perhaps Syncor, InSight, and Radiologix—believe we have to cover all the modalities. The referring physician's office doesn't want to have to make five phone calls."

Radiologix concentrates 95% of its business in seven markets, Wagar said, where the company has from 20% to 40% of the imaging market. Other companies may have 70 or 80 centers, but they are spread out around the country.

"Concentration is essential," he said. "You have to be a substantial player to service big networks of physician groups or hospital chains that cover a large geographic area, and you have to have good relationships with payers. If you have only one or two centers in each market, you have no real standing to work from."

Echoing Wagar, Rochelle Martel, chief financial officer of the Comprehensive Medical Imaging (CMI) subsidiary of radiopharmacy firm Syncor of Woodland Hills, CA, said many imaging center chains that focused purely on acquisition-led growth in the 1990s did not build up a sufficient presence in specific markets.

"Companies are very profitable if they have market share," she told SCAN. "If they don't, it is harder to get operating leverage. There are thin margins in this business. You have to be able to leverage all of your resources and get on (hospital) contracts."

Combined with a managed-care-led decline in reimbursement over the last several years, highly competitive market conditions have pushed many marginal centers into the loss column. Some imaging center chains that grew rapidly in the late 1990s through acquisition are now burdened with a number of underperforming facilities.

Medical Resources of Hackensack, NJ, which is in chapter 11 bankruptcy proceedings, is one of those struggling chains. But the company has now sold off its losing centers and is poised to improve performance overall, according to Medical Resources' CEO Geoffrey A. Whynot. Medical Resources saw its net service revenue decline in the second quarter (end June) by close to 10%, and had a net loss of $5 million.

Another imaging services firm in chapter 11 is Diagnostic Health Services of Dallas, a provider of radiology and cardiology outsourcing services and equipment to hospitals and other healthcare facilities.

In addition, U.S. Diagnostic (USDL) of West Palm Beach, FL, a chain with about 84 centers, is restructuring with the intention of exiting the imaging center business.

USDL is close to finalizing a deal to sell 14 of its centers in Florida and California to CMI. USDL's stock price has slid to the extent that the firm was forced to move its listing from the Nasdaq Small Cap Market to the OTC Bulletin Board this month.

Overall, CMI's Martel said, growth in the number of U.S. imaging centers has not been dramatic. There were some 2450 diagnostic outpatient imaging centers in 1997. This number grew about 14% in two years to reach 2801 last year, according to SMG Marketing.

The density of imaging services providers tends to be uneven nationally, said Richard Zehner, founder and CEO of Alliance Imaging in Anaheim, CA. This gives companies with mobile imaging facilities an advantage in reacting to changing regional competition.

"One of the greatest advantages of our equipment is that it is on wheels," Zehner said. "If a market changes, which they do from time to time, we can make our exposure to that market a variable just like the volume. We are constantly looking at our volume and readjusting."

While managed-care groups have been the force behind declining reimbursement for imaging services, they have also begun to shift demand up for diagnostic imaging procedures, according to M. Lee Hulsebus, president and CEO of Miracor Diagnostics of San Diego. Miracor is a two-year-old provider of open MRI services with seven centers, five of which are in Florida.

"There is no question that the major HMOs are much less stringent in their (imaging approval) requirements," he said. "Over the last 12 months, the majority of the groups are no longer requiring a second opinion for an MRI scan. A lot of institutions are also requiring MRI prior to major surgery."

MRI procedural volume is increasing this year, Zehner said, although the growth seems to be slowing some.

"I think this year's volume growth, when it is over, will not be as high as the last few years'," he said. "It will be up by a good amount but not as much as it has been. My guess is we have seen double-digit growth (in procedures) over the last few years, but we may see it in the high single digits (in 2000)."

Reimbursement may also be slowing, but it is likely to pick up again in future years, according to Steven T. Plochocki, president of InSight Health Services of Newport Beach, CA.

"We are seeing reasonable stability in pricing, but we expect it will go down over time," he said. "You can't have a component of healthcare growing this quickly without the payers seeing it on their radar screen and taking a hard look at it in terms of reimbursement."