Reform will speed shift to freestanding centers

November 17, 1993

As U.S. health-care reform builds pressure for cost-effectiveand efficient provision of medical services, surgery will followmedical imaging into the outpatient, ambulatory center environment.Although capital will continue to flow into imaging center

As U.S. health-care reform builds pressure for cost-effectiveand efficient provision of medical services, surgery will followmedical imaging into the outpatient, ambulatory center environment.Although capital will continue to flow into imaging center acquisitions,establishment of some new sites and equipment upgrades, much futuremedical center activity in the U.S. will take place in the therapeuticarena.

"Over half of (U.S.) surgical procedures will be outpatientby 1995. Eventually, over 85% of surgical procedures may be donein an outpatient environment," said Alan N. Frankel, presidentof Copelco Leasing of Pennsauken, NJ.

Copelco, a 22-year-old health-care lessor, still earns thelargest portion of its revenue from the provision of medical imagingequipment to hospitals, primarily in the ultrasound and nuclearmedicine modalities. A second, smaller leasing business offersultrasound and other general medical equipment to the private-officephysician market.

In March, however, the firm opened up a third business, CopelcoHealthcare Finance, to capitalize on the movement of medical servicesinto the freestanding center environment. CHF will finance a varietyof health-care services in addition to medical imaging, includingoncology, surgery, rehabilitation and physical therapy, Frankelsaid.

Copelco will continue to provide mostly asset-backed financingto medical centers. However, the size of the center deals willbe larger than hospital and private-office leasing and involvemore types of financing, he said.

"We are not venture capitalists seeking an equity investment,"Frankel said. "We don't get involved in real estate, butwe will provide working capital and (financing for) leaseholdimprovements."

Over the long run, health-care consolidation will result infewer but larger equipment transactions with lower financing rates,he said. Copelco's financing business is currently holding upwell despite--or perhaps because of--health-care reform pressure.

"We have not felt the same downturn that a lot of manufacturershave talked about," Frankel told SCAN. "There has beenconsolidation in our (financing) industry over the past year ortwo. I don't know if it is a function of there being fewer players,but our volume has held pretty well."

Lower interest rates are a factor behind increased leasingvolume. Copelco financed a new MRI system for one site in combinationwith the refinancing of its existing MR scanner, he said. Lowerfinancing rates help justify the cost of existing and new imagingsystems.

Some leasing activity results from users reacting proactivelyto reform pressures, he said.

For example, Copelco helped finance a linear accelerator facilityin Washington, operated by a joint venture of two neighboringhospitals and an oncology practice, Frankel said. The practiceoriginally approached both hospitals in a bid to replace its agingaccelerator. One said yes, but the other balked.

"The state attorney general got wind of the deal and said,`Nobody is getting anything unless you do this together,'"he said. "The three put together a joint venture and willopen by December."

TWO TRENDS PREDOMINATE in the medical imaging center industry,said Robert S. Goodman, managing director of CHF:

  • many physician owners continue to hold off center salesin the hope of better market conditions; and

  • those centers that are acquired are being bought byradiology groups and corporate entities.

"There may be some denial going on," Goodman said."People are hoping for better acquisition multiples thanwe see."

Interest in imaging centers is building among hospital-basedcorporations, he said.

"Some hospital groups are getting into the imaging (center)area," Goodman said. "We haven't seen enough yet tosay whether they are doing this on a venture basis with theirown radiologists, or if their radiologists will have reading contractswithout ownership."

Health-care reform and the growing role of managed-care purchasingof imaging services will force imaging centers to expand theircapabilities and seek alliances for the provision of capitatedand other packaged services, he said.

However, niche service strengths will also be an importantcompetitive factor in medical imaging, providing this expertiseis combined with a solid general imaging capability, Goodman said.

CHF financed one start-up MRI center operated by a neuroradiologistwith additional expertise in orthopedic imaging.

"He can develop a niche base in orthopedics, but alsohas the ability to appeal to all referral sources with respectto MR," Goodman said.

Copelco has the resources to fund growth in its center financingbusiness, according to Frankel. Formerly a subsidiary of Mediq,the firm was purchased by Japanese conglomerate Hitocho two anda half years ago. It is directly owned by Enprotech, a U.S. subsidiaryof Hitocho.

Copelco's total assets are projected to reach nearly $1 billionin a year or so, Frankel said. The lessor operates and raise fundsindependently from its parent.