Imaging giant RadNet sees capitated contracts as ‘shining spot’ amid pandemic-induced slowdown

Like most in the field, outpatient imaging giant RadNet suffered sizable drops in visits during the dog days of the public health crisis. But one particular segment has proven pandemic proof, a company official said Monday.

The Los Angeles-based provider’s revenues are up 8%-10%, year over year, under its capitated arrangements, in which RadNet is paid a fixed amount to manage a set population’s diagnostic care. Chief Financial Officer Mark Stolper said the uptick mostly stemmed from modest price increases, but he is excited for the chance to ink more of these contracts elsewhere. Currently, capitation represents about $135 million, or 12%, of RadNet’s annual revenues.

“It was a shining spot of our business during COVID,” Stolper told attendees at the Bank of America Securities 2020 Virtual Leveraged Finance Conference on Nov. 30. “To the extent that we can grow that faster than our fee-for-service business, we would snap our fingers and do that in a second,” he added later.

RadNet’s capitated agreements cover about 1.7 million lives, with the vast majority in its home state of California. The company has contracted with 40 medical groups, which are collecting a per-member, per-month fee for managing  HMO beneficiaries’ care. Since they’re paid based on enrollment rather than productivity, RadNet’s capitation contracts have “performed beautifully” during the pandemic. That’s because enrollment numbers have stayed steady, with employees remaining part of benefit plans, regardless of whether they were furloughed.

Stolper highlighted several other benefits from such contracts. Among them, they’ve recorded very little bad debt; the revenue streams and cash flow are predictable; facilities stay full while fixed costs are consistently covered; and they’ve seen lots of “pull through” business, too. As these contracted physician groups funnel HMO patients to RadNet, they’re also sending additional fee-for-service patients on Medicare, Medicaid, and commercial insurance.

“It’s really a great book of business,” Stolper said. “Healthcare is moving toward risk-based contracting between payers and providers. As that continues to take hold in our markets, I think the opportunity for us to capitate more in the future will expand.”

One possible avenue for growth is the burgeoning Phoenix market, where RadNet just acquired eight imaging centers and inked a joint venture deal with Dignity Health. The “powerhouse” hospital system owns eight hospitals in the area, is affiliated with the Barrow Neurological Institute, and owns a capitated medical group that serves 100,000 individuals. Plus, Dignity owns another 50% interest in two other medical groups that together manage 600,000 more lives.

Stolper foresees a “robust and aggressive” acquisition and buildout plan ahead in Arizona that could eventually stretch to upward of 50 new imaging centers in the next two years. All told, RadNet currently operates 334 outpatient centers.

“[Dignity has] influence over a significant amount of imaging that today, for the most part, is being sent to competitors of ours in that marketplace,” he said. “There’s a lot of opportunity,” he added later.