Imaging provider grows revenues despite recessionary challenges

February 11, 2004

Opportunities abound for acquisitions and used equipmentImaging centers have not been having the best of years. A tough economy and a physician community leery of their clinical value have pummeled centers specializing in screening

Opportunities abound for acquisitions and used equipment

Imaging centers have not been having the best of years. A tough economy and a physician community leery of their clinical value have pummeled centers specializing in screening exams that depend on patients willing to pay out of pocket for services. Entrepreneurs hoping to cash in on graying baby boomers and supposedly recession-proof mainstream healthcare have been going belly-up at an alarming rate. Even centers with established referrals and proven management have struggled. There has been one exception, however.

Over the past four years, Insight Health Services has come through with consistently positive results. Revenues at the diversified imaging services company have steadily risen, by about 4% in fiscal 2002 and about 8% in 2003. It has achieved this growth with a business model that balances mobile and fixed operations, acquiring new imaging centers to round out regional representation while using mobile routes to attract and serve customers who may eventually enter joint ventures with the company to establish fixed sites. Facilities are arranged into regional networks.

Insight Health is a microcosm of the imaging community, offering services that include all the major modalities. Company CEO Steve Plochocki is banking on a booming demand for services in the years ahead on the heels of an inevitable reform of the U.S. healthcare system.

"Both political parties realize that healthcare needs to be reformed and both believe that there has to be a multitiered payment system that includes the 43.6 million uninsured Americans," he said. "That would fare well for healthcare in the near term, and so we are trying to build a stronger network to accommodate that."

Insight Health was attractive enough in 2001 that J.W. Childs Equity Partners II and Halifax Capital Partners purchased Insight Health through a leveraged buyout. Since then, the two owners have provided Insight about $75 million to fund acquisitions. This expansion has laid the groundwork for capitalizing on future demand either by increasing economies of scale in existing markets or by opening complementary new markets, leading Insight to its current portfolio of 91 fixed imaging sites and 121 mobile operations across the U.S.

In April 2003, Insight increased its stake in Southern California to 25 imaging centers with the purchase of 13 from Cardinal Health subsidiary Comprehensive Medical Imaging, which Cardinal had acquired through its acquisition of Syncor International. The deal was worth $47 million-$39 million in cash and the remainder in assumed debt.

Four months later, the company picked up 22 mobile facilities from CDL Medical Technologies, which were operating in the mid-Atlantic States. The price tag on this deal was $48.5 million, including about $28.1 million paid to the seller and the assumption of about $20.4 million in debt. Both deals were financed using delayed draw term loans.

Another acquisition may be in the works, but nothing is certain. If it doesn't go through, Plochocki hopes to begin using surplus cash from operations to start paying off the company's $420 million in long-term debt. With just $20 million in cash, the debt burden may seem excessive, but the company's annual revenues of some $250 million make it manageable, he said. Last year, operating activities generated about $62 million.

Debt is an inescapable fact of running a business whose stock-in-trade is million-dollar-plus equipment. Of the 244 pieces of equipment owned by Insight, 74% are MR, 7% CT, and 4% PET scanners. The less costly systems-ultrasound scanners, x-ray equipment, and lithotripters-account for the remaining 15%.

Plochocki may be preparing to shift gears from acquisition to debt repayment, but that will not keep the company from replacing old scanners or buying ones that expand its clinical reach. This year's budget, for example, calls for the addition of eight PET scanners.

He is stretching Insight's dollars by purchasing used equipment from imaging centers that have gone out of business. Plochocki refers to them as twofers, because an MR scanner priced at $1.6 million new costs half that much on the secondary market.

"I think you will see more of this throughout 2004," he said.

Vendors created this situation a couple years go, when they began offering deals to entrepreneurs who could acquire MR and CT scanners for no money down and no payments for 12 months. Selling scanners like furniture backfired, costing vendors money and time, as they are now trying to find new owners for old equipment. Industry sources indicate that the use of such creative financing has ended, but it's been tough on the industry and also on financiers, as underscored by last year's bankruptcy of DVI Financial.

"We predicted a washing out of these imaging centers," Plochocki said. "DVI was the first telltale sign. They financed a lot of these guys."

The demise of would-be imaging entrepreneurs has produced a buyers' market in used imaging equipment. But that has not given Plochocki reason to relax. The key to success is maximizing cash flow from the existing facilities. The company holds firm against efforts aimed at winning discounts for scans.

"We walk away from contracts if they want to cut beyond a certain level," he said. "Our strength is that we have created some pretty good regional networks, not that we have maximum leverage, but we have some leverage with payer groups."

The slight majority of Insight's revenues-53%-comes from patient services paid by the patient or insurance carrier. Only 2% comes from mobile operations, and the remainder comes from fixed sites.

Contract services accounted for about 47% of the total revenues in 2003. These were obtained by billing hospitals directly for mobile or fixed site services provided at its location. The hospital then must collect its funds from the patient. Contract revenues are also obtained from management fees and equipment rentals.

Insight Health does not seek to be the low-cost provider. The companies that do bring down the entire sector, harming themselves as well as others by undercutting payments and trimming margins, Plochocki said. Insight seeks instead to provide a better service. The company established 800 numbers for managed-care operations in different regions so that case managers can call in and determine the earliest availability for a scan in a location suited to the patient. Alternatively, they can go online and, through a service called RadPortal, look at the schedules of individual centers and actually schedule an appointment for patients themselves.

Service is the key to winning and keeping customers, Plochocki said. It is especially important in the imaging service industry, because those actually receiving the service-individual patients-seldom return. That means the referring base has to be handled effectively, efficiently, and with extreme care.

"If we do 20 scans a day in a center, we need 20 brand new people on the schedule tomorrow," he said. "Or we don't have any revenue."