The Consolidation Beat Goes On: Annual Report on The 20 Largest Outpatient Imaging-center Chains

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 - Consolidation

Reimbursement cuts are being met by cost-cutting initiatives in a still-fragmented outpatient imaging-center market.

The freestanding outpatient imaging-center market continues to consolidate, with outpatient imaging-center companies, health systems, and private radiology practices all playing key roles, according to Radiology Business Journal’s premiere report on the 20 Largest Freestanding Outpatient Imaging-center Chains.

Eight years of relentless cuts to the Medicare Physician Fee Service (MPFS) technical component, narrow-provider networks, rampant pre-authorization, and sophisticated IT requirements contribute to a market ripe for consolidation in which only the strong have survived, say hospital and imaging-center executives and experts interviewed for this report.

Radiology Business Journal previously relied on an outside data provider to compile its annual report on the freestanding outpatient imaging-center market. In 2014, we brought data collection in-house in preparation for a transition to a new data partner in 2015. Data were solicited via email and telephone on the imaging-center companies, hospitals, and radiology practices that appeared in last year’s report1, as well as from imaging-center companies and private radiology practices with known imaging-center assets.

Our research resulted in a marked reduction in the number of integrated delivery networks that made the list, possibly because the previously reported numbers included hospital-based outpatient imaging centers billing under the Hospital Outpatient Prospective Payment System (HOPPS).

Two health systems that appeared on lists provided by our previous data partner—HCA, Nashville, and Community Health System, Franklin, Tenn.—did not comply with our request for their numbers. With 11 outpatient imaging centers billing under the MPFS, Cleveland Clinic narrowly missed being included.

We strongly suspect that the number of freestanding outpatient imaging centers reported by our data provider in past years was overstated. CMS counted 2,421 independent diagnostic testing facilities (IDTFs) out of a total 3,440 that billed for imaging services in 2013. The real total could be higher than 2,421, as some imaging providers likely bill as office-based physician practices, but it is unlikely that the number is close to the 4,641 outpatient imaging centers that we reported last year.

The top five companies

Our list (see Table) of the 20 largest imaging-center chains includes 10 imaging-center companies, six radiology practices, and four health systems. Only non-hospital–based, freestanding outpatient–imaging-centers billing under the MPFS were included in the counts.

 - The 20 Largest Freestanding Outpatient Imaging-center Chains

Larger Image 

Los Angeles-based RadNet tops the list with 251 imaging-center sites in seven states, more than twice its nearest competitor. Center for Diagnostic Imaging (CDI)/Insight, with 111 imaging centers, was the number-two ranked organization on the list. Both imaging-center companies have been active consolidators in the past, but grew only modestly in 2014: RadNet acquired three centers and CDI/Insight acquired two.

Nonetheless, executives from both companies report that they are both in an acquisitions mode. “We are definitely buying,” confirms Mark Stolper,

RadNet’s chief financial officer.

RadNet acquired Lenox Hill Radiology on December 31, 2012, and since then has focused on what Stolper calls tuck-in deals involving mom-and-pop operators. “We are working on both kinds of deals today: tuck-ins and midsized deals,” he reports.

Robert Baumgartner, CEO of CDI/ Insight Imaging, which nearly doubled in size when the two companies merged in 2012, reports that CDI is seeking acquisitions, like RadNet, in markets in which the company already has a presence. “We are seeing the smaller imaging center [operations] being sold,” he says. “It is very difficult for a small operator to be competitive today. When I started 13 years ago, size didn’t matter. Size matters now.”

The requirement for IT services and connectivity—coupled with the regulatory burden—is too great for a one or two-shop operation to be sustainable. “ICD-10 and other federal mandates: they’re time consuming, and they take a lot of energy to comply with,” Baumgartner says.

SimonMed, described on its web site as the largest specialized outpatient physician imaging practice in the country, is the third-ranking company, with 59 imaging centers in five states. Led by radiologist John Simon, MD, the company reported owning 59 centers in 2013, as well.

The third-ranking provider is Med-Quest Associates, Alpharetta, Georgia, a division of Novant Healthcare, Winston-Salem, NC, with 61 freestanding outpatient-imaging centers. Novant Healthcare acquired outpatient imaging company MedQuest Associates in 2007 to create the largest IDN footprint in the freestanding outpatient imaging-center market.

SimonMed, described on its web site as the largest specialized outpatient physician imaging practice in the country, is the fourth-ranking company, with 59 imaging centers in five states. Led by radiologist John Simon, MD, the company reported owning 59 centers in 2013, as well.

Fifth-ranking Dignity Health—also among the five largest health systems in the nation—reported a total of 48 imaging centers in 2014, the same number as in 2013. Dignity has a majority interest in 11 Simon Med Imaging centers located in Arizona, according to a 2012 press release2 on Dignity’s web site.

Growth leaders

Physician-owned entities appear to have led growth in this market during the past year. Aside from Touchstone Imaging, three radiologist-owned entities experienced the greatest growth during the time period of June 31, 2013 to June 31, 2014: Tri State Imaging Group, Southwest Diagnostic Imaging, and Progressive Radiology.

Fifth-ranking Tri State Imaging Group was founded by six radiologists after Pennsylvania’s certificate-of-need law expired in 1997, according to a report in the Philadelphia Business Journal3. Michael A. Carr, Tri State Imaging president, told the paper, “Our game plan is to continue to concentrate on the East Coast. This is still a highly fragmented business. We want to be the East Coast consolidator.”

Touchstone Imaging (No. 8) added 13 centers in the past year, bringing its total to 36. All of the 13 new centers are joint ventures or partnerships in which Touchstone has substantial minority interests, according to Clete Madden, chief operating officer. Touchstone manages and operates all 36 centers.

The 70-radiologist mega-practice Southwest Diagnostic Imaging (SDI), based in Scottsdale and Phoenix, merged with 35-radiologist East Valley Diagnostic Imaging, Mesa, Ariz., in 2013, adding 11 centers to 14 for a total of 25. The 105-radiologist-strong SDI now is the radiology private practice with the largest outpatient imaging-center footprint, ranking 12 ranking practice on the list.

Progressive Radiology, a 17-radiologist practice based in the Washington, D.C.–Maryland market, ranks last on the list (No. 20), but made a big move into the Illinois market with the acquisition of five imaging centers from the entrepreneur-owned company MIDI LLC. Progressive CEO Adam Starr served as MIDI’s CFO from 2002 to 2012.

Starr understood the employees, the equipment and the market. “That is how we picked the state,” he says, explaining the move into the non-contiguous market. “I knew a lot about it: I knew the payor mix, the reimbursement rates, the opportunities, and the growth potential.” MIDI, which once owned 30 centers, has divested all but three centers in Illinois.

In this consolidating market, growth is the lifeblood of imaging-center owners, yet growth in the right places is the name of the game.  RadNet, the largest provider of freestanding outpatient imaging, has quadrupled in size since it embarked on its consolidation course in 2006, but all centers are concentrated in chosen markets.

“In our business, it really doesn’t much matter how many centers you have if you are irrelevant in all of the markets in which you operate,” Stolper says. “In other words, we have 250 centers, and if our footprint was 5 centers in all 50 states, the payors would be able to leverage their relative scale and importance and dictate reimbursement.”

“Fortunately, this is not the case,” he continues. “Our 250 locations are within five densely populated markets in California and the Northeast.  In all of these markets, we are clearly the largest provider of freestanding outpatient-imaging services.  This has enabled us to have a strong seat at the negotiating table and to establish long-term fair and stable pricing.”

In the grand scheme of things, Stolper says that although RadNet is quite significant in these five core markets, the nation’s largest imaging-center company represents an insignificant and approximate 1% of the nation’s total imaging marketplace.

“The imaging business is a massive business, and it’s highly fragmented,” he says. “We’re growing and expanding in the core markets where we operate, but we can’t, and are not interested in attempting to be, relevant everywhere.”

The elephant in the room

Although hospitals do not have a major presence on our list, their influence is greater than it appears, particularly as partners in joint ventures. “I would carve out hospitals, in general, as a major player that drives a lot of our business,” notes Todd Sorensen, an analyst with an imaging-center valuation practice. “There still are a fair number of hospitals out there that have their eyes on the price differential—the site of service differential—and a fair number of hospitals are still doing deals based on that premise. I think they realize that may be very short-term at this point.”

His associate, Elliott Jeter, concurs. “[Hospitals have] a little advantage over the pure, freestanding entrepreneurial companies in that they have, in many cases, better reimbursement,” he says. “They are somewhat shielded from the commercial cuts, but not from the Medicare cuts, of course.”

One factor driving joint-venture transactions between radiology practices and health systems is an interest in cementing long-term relationships with the hospital for the professional component, Sorensen says. These can involve outpatient reads only, or, more typically, hospital coverage. “Everything is on the continuum, all the way up to employment,” he adds. “We’ve done some work in which the radiologists sold their technical component and also their professional component and became employees of the hospital.”

Radiology practices are not the only ones who see the writing on the wall: Imaging-center companies are seeking health-system alignment as well. “In some markets, we are independent, in others, we are aligned with hospital systems,” CDI’s Baumgartner says. “We are seeing more hospital systems reach out to us. As they look at their outpatient-imaging strategy relative to their ACO, they realize that they need to have an outpatient presence in order to be a successful ACO.”

Health systems, however, appear to be moving cautiously into the freestanding outpatient market. When Tenet acquired Vanguard in 2010-2011, Vanguard’s overall outpatient-care presence was cited a factor in the acquisition. A number of outpatient- “ s in various markets were part of that deal.

“We converted some of those to HOPD [Hospital Outpatient Departments], and a portion of those we left as IDTFs,” reports Dale Skrnich, senior director, outpatient services at Tenet Healthcare. “Today, with our current footprint, our position is that we are not currently buying, but we are evaluating strategic opportunities in markets where we have hospitals and in markets where we think an outpatient imaging strategy could be beneficial.”

Reimbursement realities

Reimbursement cuts have impacted strategy tremendously, Skrnich says. “I think it has for everyone,” he says. In 2007, when Skrnich joined Tenet, IDNs saw an opportunity to regain volumes lost to the outpatient imaging sector during the years that reimbursement favored freestanding-outpatient players, but the reimbursement realties may have had a cooling effect.

“Over the past four or five years, it has been tough in that every single year, you knew it was coming, you just didn’t know what the overall impact would be,” Skrnich says. “CMS has continually and aggressively gone after the Medicare Physician Fee Schedule and that in large part is what is causing the whole shift in imaging-center ownership and consolidation.”

Regulatory issues also have influenced the health system’s freestanding outpatient imaging strategy. “In the state of Florida, where we have a large footprint, and in the state of California, where we have a large footprint, IDTFs cannot take straight Medicaid or Medi-Cal patients,” he notes. “[The provider] has to be licensed as a physician practice or an HOPD. As we looked at some of these acquisitions in California, specifically the ones we purchased from radiologists, we had to immediately assume that 5, 6 percent of the business was going away, day one, because we were going to convert it to an IDTF.”

The response to these cuts by freestanding outpatient-imaging providers has been sustained cost-cutting. “In order for us to be able to absorb these reimbursement cuts, we launched a $30 million cost savings initiative in the fourth quarter of 2013,” Stolper says. “For us to create long-term sustainability, we look at every aspect of our business as opportunities to become more efficient and provide our services at the lowest cost.”

For instance, RadNet purchased a radiology-software company that provides RIS and PACS to lower IT costs and a teleradiology business to lower the cost of some professional interpretations. The company has renegotiated contracts with physician groups, outsourced certain financial functions abroad, and implemented voice-recognition systems to eliminate transcription costs.

“There are a variety of things on which we’ve been executing in order to drive our cost as low as possible and to mitigate these reimbursement pressures,” Stolper says. “As we continue to do that, then the opportunity to acquire smaller operators will continue to be a significant part of our growth story.”

In search of volume

One key strategy in optimizing imaging-center assets is to keep equipment as busy as possible. Half a dozen years ago in Chicago, Baumgartner told an industry audience that everyone would have to do a lot more volume at a lot less rate. “That’s what’s happened,” he says. “We are seeing the industry consolidation continue: In every market, there will be fewer providers doing more studies for less rate, and it’s just pure economics. You can’t make it anymore with a marginally efficient imaging center. You have to have enough volume going through to survive.”

Many of the sources Radiology Business Journal interviewed reported modest increases in volume.  “It’s been mixed over the last 12 to 18 months, but lately, generally, slightly up,” Baumgartner says, though he does not attribute the increases to patients who purchased insurance on state and federal health insurance exchanges. “I would say that we’ve seen a slight increase in the number of government-funded patients.”

RadNet’s Stolper also reports a positive volume trend in the past six months, and believes healthcare reform has driven incremental procedural volumes. “About 110 of our 250 centers are located in California,” Stolper says, noting that nationwide, 8 million gained insurance through the exchanges in the initial enrollment period, and 1.4 million of those were insured through Covered California and the state’s managed-care Medicaid programs.

“We’ve seen some significant increases in volume here in California,” he reports. ”This, combined with our cost savings initiatives, has helped drive significant earnings growth in 2014. As a result, RadNet’s stock price has increased significantly in the first half of the year.”

Predictions and outlook

Our sources envision a vastly different outpatient imaging-center market in the future than the one we’ve seen to date. Kevin McDonough, an associate of Sorensen’s and Jeter’s in the valuation firm, predicts a continued increase in the involvement of hospitals and health systems in the freestanding imaging-center space. “Overall, non-hospital provider-based outpatient imaging is definitely here to stay, as that low-cost setting will be in demand from both payors and patients,” he says. “I think you will have more health systems owning outright or joint-venturing with these outpatient imaging centers.”

One thing that would move that prediction along is if the price differential between freestanding and hospital-based outpatient imaging disappears, predicts Tenet’s Skrnich. “As an entrepreneur in my 18 years prior, my strategy was to go and put up an imaging center across the street from the hospital and compete, because I knew I could beat them on price,” he says. “It would definitely create some shift in the market as to how we approach this business. Then, what it really would boil down to is more of a retail customer–service-delivery vs. a pricing game.”

Healthcare reform also puts hospital’s in the driver’s seat, Baumgartner says. “The biggest impact of healthcare reform has been the concentration of big systems,” he notes. “Several years ago, in preparation for the ACA, hospitals started buying physician groups and creating oligopolies in the market. It is going to be much more difficult to be an independent, trying to retain enough volume from these big systems to be viable. It has impacted our strategy in that we look to partner with these large systems.”

Further consolidation will result in fewer outpatient imaging centers in the market in five years and fewer operators who own them, Stolper predicts.  “I think there is going to be rationalization of capacity, which means more of the small mom-and-pops are going to go out of business or be acquired by some of the large players,” he says, ongoing reimbursement pressure is a fact of life.

“There also will be more opportunity for capitation contracts,” he believes. “One of the big tenets of healthcare reform is the ability of providers to manage large patient volumes at low cost and to be able to take risk and manage that risk.”

Because RadNet’s imaging center holdings are largely multimodality rather than single-modality centers, Stolper believes the company is well positioned to sub-capitate imaging for entities that are managing large patient populations. “About 80 percent of what we do by volume is the routine imaging, not the advanced imaging,” he says. “The routine imaging is what the normal patient population needs about 80 percent of the time. If healthcare reform goes the way we think it is going to go, I think we are well positioned to be successful in that marketplace.”

Ultimately, Baumgartner predicts that consolidation will result in a dramatic reduction in independent outpatient–imaging-center providers. “Our outlook for the outpatient-imaging market is that there will be outpatient imaging done, and we think that it will be done by people who have a large enough presence in the market to be relevant and large hospital systems,” he says. “It will be done by large systems and one or two large outpatient competitors to those systems. The small operators are in trouble.”

Overall, Sorensen’s outlook for the sector is positive. “The demographics are great and the cost of the equipment has not been inflationary,” he says. “In fact, you could argue that the cost of equipment has been deflationary over the past 10 years. I’m actually fairly bullish on outpatient imaging.”

His colleague, Jeter, agrees: “We’ve seen volume trends that are very positive on the outpatient side, with challenging reimbursement dynamics. Over the last six or seven years, the weak players are no longer there, capacity has been taken out of the market, players that were involved in funny business have been taken out, and a lot of the imaging equipment inside physician practices has been either sold or discontinued.

“What remains are the high-quality players on the Part B side. As the economy improves and volume improves globally, I think these businesses are well positioned to do well in the future. Because they’ve made it, they are, by definition, the strong players.”

References

Proval C. Imaging-center growth hits the wall in 2013; volumes plummeted in 2011. Radiology Business Journal. http://www.radiologybusiness.com/topics/business/imaging-center-growth-h.... Published September 1, 2013. Accessed August 18, 2014.

Dignity health posts 2012 financial results. Dignity Health Web site. http://www.dignityhealth.org/Dignity_Health_Information/Press_Center/229295. Accessed: August 18, 2014.

George J. Jenkintown MRI and imaging center operator in growth mode. Philadelphia Business Journal. http://www.bizjournals.com/philadelphia/blog/health-care/2013/12/jenkint.... Published December 17, 2013. Accessed August 18, 2014.