Imaging industry enters period of uncertainty over rules

May 24, 2000

Some companies founder, while others take off Just when some industry executives see boom times ahead for freestanding diagnostic imaging centers, some imaging companies are struggling to stay in business. New Medicare reimbursement rules

Some companies founder, while others take off

Just when some industry executives see boom times ahead for freestanding diagnostic imaging centers, some imaging companies are struggling to stay in business. New Medicare reimbursement rules slated to go into effect July 1 are likely to be a mixed blessing.

US Diagnostics (USDL), for instance, recently announced a restructuring plan. This means that a company that just four years ago was one of the most aggressive buyers of imaging centers (SCAN 8/28/96) may go out of business.

This month USDL, which has locations in 13 states and owns or operates 79 fixed-site diagnostic centers, announced a net loss for the quarter (end March 31) of $4.7 million, compared to net income of $1.2 million for the same quarter in 1999. The company said on May 10 that it plans to sell all or most of its imaging centers, with stockholder approval, and reinvest the net proceeds into new businesses.

And Medical Resources, a company that three years ago made a bid to buy US Diagnostics (SCAN 4/16/97), last month filed for Chapter 11 bankruptcy protection. It owns 83 imaging centers in the U.S. and hopes to confirm its reorganization plan in 60 to 90 days. The company reported a net loss of $5.2 million for the quarter (end March 31) compared to a net loss of $1.6 million for the same period a year earlier.

If it sounds as though the imaging industry is foundering, take a look at InSight Health Services in Newport Beach, CA. That company operates in 32 states and has 60 fixed sites and 65 mobile units. InSight's revenue was up 17% for its third quarter 2000, while income rose 279% (see related story, page 3).

New ambulatory patient payment classifications by the Health Care Financing Administration for imaging services would seem to give an advantage to freestanding imaging centers, or even hospital-based centers not owned by the hospitals.

The new rules appear likely to cut payments for hospital outpatient radiology procedures (SCAN 5/10/00). Nonhospital providers, however, may be reimbursed the full amount for outpatient radiology services. This could give imaging services a window of opportunity, and could also encourage hospitals and radiology groups to enter joint ventures with those service providers.

"It may happen that the hospitals will tell us to take (imaging services) over, do scheduling and billing, and have us pay them rent," said Richard Zehner, founder and CEO of Alliance Imaging in Anaheim, CA. "If you have a contractual relationship, you can do that, and if that's what the hospitals want, we are set up to do it."

This scenario is what Zehner calls a retail-type business. Alliance may go from being retail to wholesale for the off-site part of business, he said.

"With wholesale customers we bill the hospital one fee and they mark it up and bill the payer," he said.

Alliance operates in 44 states at 1200 sites, Zehner said, most wholly owned. It recently began to offer fixed PET in all these states, with one mobile unit in Southern California and another 10 on order. Alliance started moving into the PET market in September 1999, when it bought Acclaim Medical, a Southern California-based mobile PET services provider.

Industry analysts, as well as USDL itself, think the company may have tried to expand too rapidly in the mid-1990s. USDL quickly added 22 centers to the 53 it had in 1996. By 1997, that number had swelled to more than 120 (SCAN 5/28/97). But then USDL began selling off its centers and the number began to shrink.

"Basically, we're selling off an (indefinite) number of centers and using the proceeds to pay down debt and invest in businesses not related to the imaging business," said USDL's chief financial officer, Andy Shaw.

"We obviously grew too quickly in '96 through acquisitions," Shaw said. "Looking back, we might not have done it so quickly and paid so much for some of them. Then, even if we had gotten bigger, maybe we would have been able to survive the downturn in the industry."

Shaw said most industry people are negative about the future reimbursement environment. He believes another part of the problem is that it's too easy for new companies to take business away from established businesses.

"We've had our day," he said. "Shareholders want a return on value."

The USDL board of directors approved a plan May 10 to sell all or most of the company's imaging centers. There will be a proxy vote June 2, Shaw said, with expected SEC comments and a shareholder meeting sometime in July.

"USDL's stock is at 75¢ (a share). They've been losing money for years, and what do you do? You can't raise money and you need cash to run a business. We bought a number of units from them in the Northeast, which was a good way for them to raise money," Zehner said. "They were a roll-up that didn't work. They bought a lot of centers over a short period of time, and their business model didn't work out. They came out of nowhere and kind of went there, too."

Industry analyst Tony Montagnolo, vice president for technical planning at ECRI, a nonprofit healthcare research agency, said he expects to see growth in all imaging areas.

"But volume expectations are often exaggerated compared to what companies are actually able to achieve," he said.

"Everybody's being pressured on reimbursements, but there is more and more competition. Healthcare is getting to be an outpatient business and there is more competition for that business. Hospitals are more outpatient-friendly and are getting better at it," Montagnolo said.

InSight CEO Steven Plochocki sees the new HCFA regulations in a positive light.

"Many institutions we've been talking with would be willing to outsource," Plochocki said. "We're looking at it as a business opportunity. We believe these are good times."