Firm to have 31 centers if pending deals close U.S. Diagnostic Labs may not be a household name in the imagingcenter industry yet, but that could change if the company is ableto realize its ambitious aspirations. The West Palm Beach, FL,firm
U.S. Diagnostic Labs may not be a household name in the imagingcenter industry yet, but that could change if the company is ableto realize its ambitious aspirations. The West Palm Beach, FL,firm has deals pending that could enlarge its network to 31 centers,and the company hopes to expand its operations to eventually ownup to 5% of the almost 2200 imaging centers in the U.S.
That goal may seem farfetched in view of the fact that the largestimaging center chain, Health Images of Atlanta, owns 48 imagingcenters in the U.S., or less than 3% of the total number of centersin the country. U.S. Diagnostic Labs, however, has an aggressivemanagement philosophy and the financial backing to get it at leastpartway to its goal, thanks to $57.5 million in debentures floatedin March.
U.S. Diagnostic Labs was formed in June 1993 by chairman and CEOJeffrey Goffman and executive vice president Keith Greenberg.The two were looking to make an investment in healthcare and chosethe imaging center industry, despite the fact that it was a marketin turmoil. The two were later joined by president Dr. RobertBurke, a neuroradiologist.
Goffman and Greenberg saw the imaging center industry's predicamentas an opportunity. Congress was in the process of passing legislation,commonly known as Stark II for its author Rep. Pete Stark (D-CA),that banned physicians from referring Medicare and Medicaid patientsto imaging facilities in which they had a financial interest (SCAN8/25/93). The legislation prompted consolidation in the imagingcenter industry, and U.S. Diagnostic Labs decided it would beone of the consolidators, especially since there were so few imagingcenter companies healthy enough to make a large number of acquisitions.
"We knew there was an opportunity," Goffman said. "
Because of the Stark amendment, there was going to be vast divestiture,and we felt that the best opportunity was going to be in imaging."
In its first year, USDL raised $6.5 million and acquired two outpatientcenters. It went public in October 1994, with a secondary offeringlast August. The debenture offering in March further added toits acquisition war chest. USDL now owns 18 outpatient imagingcenters in nine states, and is also beginning to acquire radiationtherapy centers.
This month, the company announced that it has signed an agreementto purchase U.S. Imaging, which operates four imaging centersin the Houston metropolitan area and two centers in San Antonio.The acquisition is expected to add $11.5 million in revenues and$3.2 million in pretax profits to USDL and bring to 24 the totalnumber of centers in its network. USDL also has five letters ofintent outstanding that are expected to close in the next 30 days.Those deals will add seven centers, bringing the company's totalto 31, according to Greenberg.
USDL reported first-quarter financial results this month thatshowed revenues increasing 152% to $12.1 million from $4.8 millionin the first quarter of 1995. First-quarter net income also leaped,to $1.5 million from $598,000 in the same period a year ago. USDL'sacquisition spree is behind most of the revenue growth.
Focus on profitability. In targeting acquisitions, U.S. DiagnosticLabs has focused on finding profitable centers, rather than acquiringfacilities at fire-sale prices that may not be viable. It hasbought centers from self-referring physicians, radiologists, andentrepreneurs, and has paid no more than 4.5 times historicalearniongs for an acquisition.
"We have never bought anything that has not been profitable,"Goffman said. "
We look for profits and we look to enhance them via our physicianmanagement expertise."
The company does not necessarily look for geographic concentration:Its centers range from California to New Mexico, Louisiana, WestVirginia, Florida, and other states. In many areas, a U.S. DiagnosticLabs facility is the only outpatient imaging center for miles,while in some more populous locations, such as Houston and Jacksonville,FL, USDL tries to build a geographic concentration of centers.
Like any smart imaging center operator in the era of managed care,USDL tries to ink as many contracts as possible in areas wheremanaged care has made inroads. In such cases, geographic concentrationcan be important, especially as consolidation in the industrycontinues, according to Goffman.
"There is going to be a lot of consolidation, and the companyor companies that can create a concentration in those marketswhere managed care is prevalent are going to be able to contractwith the managed-care providers and obtain the bulk of the radiologycomponent," Goffman said.
USDL creates efficiencies in newly acquired centers by centralizingmanagement and administration functions. When replacing olderMRI scanners, USDL has found open MRI to be a good buy, and hasrecently purchased three Hitachi Airis scanners. Equipment purchasingis also consolidated in an effort to get deeper discounts.
Goffman believes that most of the deals involving referring physiciansdivesting their interests due to Stark II are gone. Most of theremaining opportunities involve radiologists who own individualcenters and see the need to align with a strong financial partner.Greenberg notes that about 60% of the imaging facilities in theU.S. have radiologists as significant equity owners.
Such an ownership structure creates fertile ground for acquisitions,as radiologists seek to exit the increasingly competitive market.USDL believes it could own up to 5% of U.S. imaging centers inthe next two years, which would give it 110 centers, over twicethe number owned by Health Images. It believes it will exceedits goal of achieving $100 million in pro forma revenues in 1996.
Not surprisingly, USDL is optimistic about the long-term futureof the imaging center market. Most of the excess capacity in themarket has been wrung out, reimbursement rates have stabilizedand are even increasing in some modalities, and new technologyis increasing applications, especially in CT and MRI, Goffmansaid.
Hospitals are also looking to exit or contract out their imagingservices, and USDL is examining joint venture arrangements withhospitals in which USDL would supply the technology, the hospitalswould supply patients, and the two would split the revenues. Thereis also the potential of managing a hospital's radiology department,Goffman said.
"Hospitals can't compete (in imaging)," he said. "
They cost shift and they can't provide an equal service at anequivalent rate. A lot of the outpatient dollars will come outof the hospitals."