Market Domination:How Hospitals can Recapture the

Outpatient Imaging Market

Presentation By:

W. Cannon KingE.V.P. Business DevelopmentOutpatient Imaging Affiliates

cannon.king@oiarad.com

Presentation Overview

• Industry Highlights and Trends

• Building an Imaging Services Strategy

• Buy or Build?- De Novo Strategies- Acquisition Strategies

• Market Development Structures

Radiology Industry: Significant Growth• $100 billion industry• 7-8% of total healthcare spending.• Double digit growth in MR, CT, PETCT;

– Better informed patients.– Aging population.– Product innovation – MR, CT, PET/CT.– In office imaging

Inpatient Setting

Source: U.S. Bancorp Piper Jaffray Equity Research 1980 & IMV 2007 MRI Benchmark Report.

1980 2007

Significant Market Shift To Non-Hospital Based Imaging

Inpatient Setting

MRI Procedure Volume

IMV Medical Information (in millions)

Procedure Mix:

• The use of MRI in the management of breast cancer has doubled since 2003, from 314,000 to 645,000 procedures- Now account for 2% of MRIs

• MR angiography comprises 9% of the total procedure mix.

Spine, 26%

Brain, 25%

Low er extremities, 11%

Vascular (MRA), 9%

Upper extremities, 9%

Pelvic and abdominal, 8%

Head and neck, 6%

Breast, 2%Chest, 2%

Other Cardiac, 1%

Interventional and Misc, 0.4%

Inpatient Setting

MRI Procedure Mix 2007

IMV Medical Information (all sites)

Factors Driving OutpatientImaging Center Growth:

• Outpatient centers are better positioned to meet service expectations of patients and physicians;– More accessible– Focused – No ER, inpatients, etc…

• Continuing shift from hospital based imaging to outpatient providers;– If you don’t have an outpatient access point

you are limited in your ability to service outpatients

Remains a highly fragmented market

Adapted from the Diagnostic Imaging Center Market Report: 2006 Edition; Top 25 Diagnostic Imaging Center Chains.

Imaging Centers Chains HeadquartersImaging Centers

% of Total

Radnet Management Inc Los Angeles, CA 167 2.8%

Novant/MedQuest Associates, Inc Alpharetta, GA 97 1.6%

Alliance Imaging Anaheim, CA 88 1.5%

HCA Nashville, TN 79 1.3%

InSight Health Services Corporation Lake Forest, CA 79 1.3%

Medical Resources Inc Bloomfields, NJ 52 0.9%

Diagnostic Health Corp (Fmrly HealthSouth) Birmingham, AL 43 0.7%

Doshi Diagnostic Imaging Services Hicksville, NY 43 0.7%

Center for Diagnostic Imaging Minneapolis, MN 38 0.6%

PresGar Medical Imaging Tampa, FL 38 0.6%

Total 724 12.2%

*Includes only fixed sites; mobile imaging units not included

• Medicare reimbursement cuts – Deficit Reduction Act – Primarily effected

outpatient centers• Downward reimbursement pressure from

commercial payors– Closing networks– Intermediaries growing rapidly (HealthHelp,

AIM, CareCore) • Continuing in-office development of

imaging services by referring physicians

Negative Trends

Number of outpatient centers outpacing procedure growth

3000 3068

3366

4159

4773

5450

5760

212 216

271

291

267261

244

175

195

215

235

255

275

295

315

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

1999 2000 2001 2002 2003 2004 2005

Imaging Centers

Procedures per week

Source: August 2005 “Diagnostic Imaging Center Market Report by Verispan

– The significant organic growth in utilization of these modalities is being diluted due to the even more rapid development of centers.

– Combined with DRA in 2007 you have:– Less volume per center– Lower rates per scan

Over Supply of Centers?

• Market analysis rarely identifies underserved markets– Must be positioned to take or recapture market share

• Many centers nationally are barely surviving – Medicare cuts doomed many

• New center development requires careful analysis of the market

• What do the parties bring to the table to ensure success?

• Must get more out of equipment and staff– Consider value gear versus leading edge

Effects of Oversupply and Decreasing Reimbursement

• Payors are catching on to self- referral– Intermediaries especially– Question is, will they get any real traction?

• Lease deal loopholes are being addressed by CMS

• PET continues to experience rapid growth• PET added as DHS

• Financing companies are tightening up –raising barriers to entry

• Underlying fundamentals remain strong– No end in sight to the growth

Positive Trends

• Weakened outpatient providers create an excellent opportunity for local hospitals

• Health Systems are already taking full advantage:- Hermann Memorial Health System in

Houston recently acquired River Oaks, the largest outpatient center network in Houston

- Novant with the afore mentioned Medquest acquisition

- HCA has acquired a number of centers- Norton Healthcare in Louisville

Positive Trends

Imaging Services Strategy

• What is meant by dominate? • Think in terms of an Imaging Strategy rather

than an imaging center• What goals do you have for the market?• Where does the Health System want to be in five

years• One center or a network of geographically

dispersed centers• How do your radiologists fit into the plans?

Develop an Imaging Services Strategy

Building the Strategy

Market PresenceReputation

Physician loyaltyLeverage with the payors

Professional ServicesQuality

TimelinessSub-specialty Expertise

Customer ServiceCustomer centered culture

Ease of schedulingMarketing relationships

RIS /PACS

• Are you in a position to leverage your market relationships and reputation?- Promote affiliated radiologists subspecialty expertise

• Are there opportunities to acquire one or more centers- Can’t assume centers will close, they will only fight

harder and further create a negative environment while trying to survive.

• From a payor perspective does the hospital have negotiating leverage?

Building the Strategy

• Need to position center (or centers) to compete for off- campus business- Heightens the need for a service oriented culture

which often conflicts with historical hospital culture- RIS/PACS systems and integration can be a key

distinguishing factor for your center• Moving hospital outpatients out of hospital can

help unclog the radiology department- Improve length of stay statistics

• Those who can afford to receive services will not wait for services. Those who cannot will wait. - Opportunity to improve payor mix

Building the Strategy

• Imaging is a “sticky service”- Can be an entry point to the system for

downstream services• Doing nothing is conceding the outpatient

market to competitors - Both technical fees and professional fees

Building the Strategy

Buy or Build –Basic Tools for

Assessing a Market

• Determine the service area• Demographic analysis –

– Number, Age, growth, affluence of target population• Competitive Analysis

– Map the competitive locations • Identify potentially underserved areas

– Assess quality of service and equipment (vendors know)– Backlog/service analysis – secret shopper calls

• Do you have backlogs for services? (asset/liability) • Payor Analysis – Reimbursement is key - what can the

center expect to be reimbursed?– Are payors willing to add sites?

Developing a CenterBasic Market Analysis

• Market sizing via utilization per 1,000 statistics

Basic Market Analysis

Modality Scans Projected Scans Projected Total NumberPer/1000 Scans Per/1000 Scans of Scans

MR 113 5,661 59 19,775 25,436CT 286 14,329 70.5 23,629 37,957US 665 33,317 145 48,598 81,915PF 1749 87,625 569 190,706 278,331Mammo 195 9,770 48.75 16,339 26,109DEXA 47 2,355 11.75 3,938 6,293Flouro 53 2,655 13.25 4,441 7,096Total 155,711 307,426 463,136

Estimated Scans within 15 Mile Radius - 385K PopulationMedicare (12.9%) Commercial

• Market sizing via utilization per 1,000 statistics

Basic Market Analysis

5 mile 15 miles 5 mile 15 milesCommercial Population 83,125 328,125 83,125 328,125 Medicare Population 11,875 46,875 11,875 46,875

Utilization per 1,000 populationCommercial exams per 1,000 population 59 59 71 71 Medicare exams per 1,000 population 113 113 286 286

Commercial exams 4,912 19,391 5,860 23,133 Medicare exams 1,342 5,297 3,396 13,406

Total Expected Utilization 6,254 24,688 9,257 36,539

Average Scans per Unit 3,145 3,145 5,000 5,000

Units to cover current population 2.0 7.8 1.9 7.3 Units in the area 2.0 5.0 1.0 5.0

Units needed (0.0) 2.8 0.9 2.3

CT MR

Market Analysis –National Average 85% OP/15% IP

15% Inpatient

85% Outpatient

National Inpatient vs. Outpatient MRI Scans regardless of Site of Service

Source: 2004 MRI IMV Benchmark Report

8,000 Inpatient Outpatient Total2005 MRI Scans 2,800 5,200 8,000 Percentage 35% 65% 100%

National Average Inpatient to Outpatient 15% 85%

Extrapolate total volume from Inpatient 2,800 15,867 18,667 Number of Outpatient Exams 5,200 Number of MRI scans being lost to competitors (10,667)

Inpatient OutpatientNational Average 15% 85% 0Hospital 1 25% 75% 5,333Hospital 2 35% 65% 10,667Hospital 3 45% 55% 16,000

Loss indicated with 8,000 MRI

scans

Hospital MRI Exams: Actual Results vs. Market Opportunity

Ultimately the support of area physicians is the most important factor in success or failure of a center

• Survey the key physicians in the area regarding:– Where are they sending currently and why?– Perception of the hospital’s services

• What does it do well what does it not do well?

– Perception of the competition• What do they do well what do they not do well?

– The affiliated radiologists– What location would best service their patients?– Do they have equipment preferences?

• Open vs. Closed MRI

Market Analysis –Referring Physicians

All of this information assists in building a center• Proforma and business plan• Projected volume• Reimbursement• Expenses

– Equipment configuration, space lease and build-out, pro fees, staffing needs, insurance and etc…

Build the expected model and then a sensitivity analysis based on higher and lower expectations of key assumptions

Market Analysis –Financial Modeling

Buy or Build -Acquisition

Opportunities

• Most markets have been overbuilt with centers • Stand alone imaging centers are severely

handicapped in regard to payor negotiations• The fixed cost nature of the expenses makes it

hard to turn down even the worst payor contracts• Even large networks of centers in big markets

have trouble gaining meaningful leverage• Health Systems, however, generally, have far

more leverage with the payors • Negotiating for larger basket of services

Acquisition Opportunities

• Could look for recently or soon to be closed centers.• Work with the lenders• The lenders don’t want the equipment and

leaseholds are very expensive

Acquisition Opportunities

• Book Value

• Discounted cash flow

• Multiple of Earnings

Valuation Methods

• Basic Due Diligence:• Detailed financial analysis – How close is the

cash collected to the Net Rev. being accrued?• Legal Analysis – space leases, notes,

referring physician financial relationships, etc…

• What are the necessary capital expenditures?• What is the makeup of the referral base?

• Verify the information you are receiving!• Your offer should be primarily based off this

analysis

Determine the historical value

Business Planning Due Diligence:• Compare the average reimbursement per scan• What is the perception of the hospital in the

market the center is located • Stock or Asset purchase?

- Generally hospital would desire an Asset purchase

• Build Proforma based on new assumptions

• This analysis illustrates the ROI the project could have going forward

Determine value going forward

• April 2007 – HealthSouth Imaging Division was acquired by the Gores Group for $47.5MM for 54 centers, 2.5 (?) multiple

• November 2007 - MedQuest was acquired by Novant for 12 times trailing 12 month EBITDA

• So it is somewhere between 2.5 and 12!?

Acquisition Multiples

Acquisition Multiples

Sources: CapitalQ, Stanford Group, Press Releases and New Articles

Acquisition Example

Imaging CenterTechnical Revenue 3,061,800$

Operating and SG&A Expenses 2,500,000$

EBITDA 561,800$

Purchase Multiple 4

Purchase Price 2,247,200$

Note: Subtract debt

Effect of Better Payer Contracts

Imaging Center Hospital 15% Hospital 30%MR 480$ 552$ 624$ CT 265$ 305$ 345$ Ultrasound 98$ 113$ 127$ X-ray 37$ 43$ 48$ DEXA 95$ 109$ 124$ Mammo/CAD 95$ 109$ 124$

MR 12 12 12 CT 10 10 10 Ultrasound 15 15 15 X-ray 10 10 10 DEXA 5 5 5 Mammo 15 15 15

Annual Technical Rev 3,061,800$ 3,521,070$ 3,980,340$

Exams per Day

Technical Revenue per Scan

Effective Multiple

Imaging Center Hospital 15% Hospital 30%Technical Revenue 3,061,800$ 3,521,070$ 3,980,340$

Operating and SG&A Expenses 2,500,000$ 2,500,000$ 2,500,000$

EBITDA 561,800$ 1,021,070$ 1,480,340$

Purchase Multiple 4

Purchase Price 2,247,200$ 2,247,200$ 2,247,200$

Effective Forward Muptiple 4 2.2 1.5

• Payers might steer business away from centers due to new higher contracted rates

• Previously neutral third party centers, once aligned with a market health system might alienate some of the referring physicians in the market

• Be careful not to run it like the hospital• Scheduling needs to stay easy• Must stay customer service focused• Consider incentive programs for every

employee

Acquisition Risks

• Third party companies can assist in evaluating the acquisition

• Can provide capital to assist in getting the deal done

• Offer management and marketing expertise once transaction completed

• Should provide for a service oriented culture to help sustain and grow business

If you don’t have the expertise, hire it!

MarketDevelopment Options

• Go it alone or • Joint venture with the radiology group and or a

third party company

Market Development Models:

• Usually a newly formed LLC• LLC would secure its own provider number

and payor contracts- Can piggy back hospital’s in some instances

• Partner’s ownership, Board composition, and participation in income and cash distributions pro rata to investment;

• Sometimes brand limitations or licensing requirements

• Non- competes

Typical Legal Structure if Involved in JV:

• Geographically dispersed network of centers• Leverage with payors

• Once too big to ignore - ask for exclusivity, rate increases, etc…

• Broadens service offerings• Strengthen health system • Winnow down the competition• Tighten relationships with radiologists

Goals

Questions?

Presentation By:

W. Cannon King, E.V.P. Business DevelopmentOutpatient Imaging Affiliates

cannon.king@oiarad.com