While there have been significant changes in the imaging market over the past 20 years, we continue to witness sea changes within the sector, increasing pressure on operators, administrators, and physicians. Within Saint Thomas Health Services (STHS), Nashville, Tennessee, inpatient and outpatient imaging services are available predominantly in three large system hospitals: Baptist Hospital and Saint Thomas Hospital in Nashville and Middle Tennessee Medical Center (MTMC) in Murfreesboro.
The hospitals’ campus-based imaging services are not physically or organizationally distinct for outpatients, but serve both inpatients and outpatients. STHS does, however, have some ownership experience in two freestanding outpatient imaging center joint ventures in the primary market of MTMC.
Freestanding imaging centers (including those owned by competing health systems, physicians, and proprietary companies) are prevalent in the Nashville and Murfreesboro markets. From fiscal year (FY) 2007 to FY 2009, outpatient volumes for MRI and CT at the three large STHS hospitals declined by 19% and 3%, respectively, creating motivation to increase market share. Long-term strategic considerations, including health-care reform, technology, and other factors, also concentrated our attention on outpatient imaging opportunities.
Beginning in 2009, plans were developed by the STHS strategic-development team led by Wesley O. Littrell, president and CEO of Saint Thomas Affiliates and chief strategy officer for STHS. This series of plans involved STHS and various potential equity partners.
Plan A: As part of a five-year strategic assessment in FY 2009, STHS proposed the development of a network of medical villages that would consolidate outpatient imaging and other ambulatory services near the campus of its Nashville hospitals, with a similar village to be implemented adjacent to its replacement hospital at MTMC (which was under construction). Both projects, with the potential to generate strong returns on investment, were capital intensive; consequently, they were not approved due to competition with other system projects.
Plan B: In late spring 2009, STHS entered into discussions with a corporate partner regarding a joint venture in which the partner would acquire four local imaging centers. In addition, the partner would contribute sufficient cash to develop the original medical-village initiative, and STHS would contribute future hospital outpatient imaging volume for equity in the venture. The two existing, joint-venture imaging centers near MTMC would be contributed and physically consolidated into the village in that market. While this plan was creative and sound in concept, the partner was unable to acquire the local imaging centers and required extraordinary control and management rights in the potential venture, which led to a termination of those negotiations.
Plan C: STHS reached out to both of the radiology groups that provided inpatient coverage to the system’s hospitals and to Premier Radiology (Nashville)—a direct competitor operating three large freestanding centers in this market—regarding their interest in discussing a joint-venture network of imaging centers. A four-party confidentiality agreement was signed, and all parties commissioned separate fair-market valuations of their respective imaging enterprises, which would be consolidated in the potential venture. The valuation process involved numerous and frequent meetings between STHS and the radiology groups from September through November 2009.
Part of the challenge, for hospital executives, in funding the growth of outpatient business is that such capital investments are usually made at the expense of the traditional and genuine hospital needs. Plans B and C represented a decision to pursue creative options to fund outpatient imaging growth for the system. A process that started with identifying three venture-capital companies ultimately yielded the lesson that having the money was only one piece of the equation—a large piece, but not the only one of significance.
Identifying and selecting the right partners were pivotal for this venture. The system reached out to a competitor (Premier Radiology) based on its outstanding reputation for service, its experience in the market, and the success of its existing centers. The cultures of Premier Radiology and MidState Radiology (Murfreesboro)—already an STHS partner—were found to be consistent and based