valuation considerations for diagnostic imaging centers

Valuation Considerations for Diagnostic Imaging Centers

© 2012 Business Valuation Resources, LLC

[email protected]© 2012 Business Valuation Resources, LLC

Unique Valuation Considerations for Diagnostic Imaging Centers:

Lessons Learned on The Front Lines

BVR Healthcare Webinar

December 11, 2012Douglas G. SmithManaging Partner

Integrated Medical PartnersStrategic Positioning & Consulting


Valuation ConsiderationsI. The Unique Structure Of Diagnostic Imaging Services Requiring

Analysis – the world of diagnostic imaging is not staticII. Long-standing, Current, Recently Enacted, and Pending Regulatory

Impacts Specific To Diagnostic Imaging Entities In Certain Settings and the Analysis Required To Accurately Understand Their Real and Potential Impacts to Valuations When Forecasting Future Revenue Streams – UPDATED

III. The Primary Unique Influences On Diagnostic Imaging Entity Revenue Streams; Factors For Consideration and Analysis of Historical Performance; Principal Considerations In Forecasting Future Streams Of Revenue In Specific Settings and Markets -UPDATED

IV. Existing and Emerging Third Party Payor Trends and Considerations When Forecasting Diagnostic Imaging Reimbursement – more and more, commercial payors are playing “me too Medicare”

V. The Primary Influences and Considerations Required When Analyzing and Forecasting Diagnostic Imaging Infrastructure Expense. UPDATED

VI. Potential Landmines And Valuation Considerations That Can Come Back To Haunt You - UPDATED




I. Entity Structure Considerations Provider Entity - Hospital Owned Freestanding Imaging Center

(OPPS Fee Structure – Hospital Contracts)

Radiology Group Owned "Office" Imaging Center MPFS, GROUP CONTRACTS

Radiology Group/Hospital Owned Clinic Imaging Center MPFS, ENTITY CONTRACTS

Radiology Group/Hospital Independent Diagnostic Testing Facility (IDTF)

MPFS, ENTITY CONTRACTS, IDTF RULES

Radiology Group/Physician Group/Hospital Freestanding Imaging Center (IDTF)

MPFS, IDTF RULES, SELF REFERRAL RESTRICTIONS

Physician Office Imaging Entity MPFS, GROUP CONTRACTS, SELF REFERRAL RESTRICTIONS, OUTSIDE BUSINESS

RESTRICTIONS

Corporate Imaging Center (IDTF) MPFS, ENTITY CONTRACTS

Mobile Diagnostic Imaging Services MPFS, OPPS, ENTITY CONTRACTS

Specialty Hospital Imaging Center MPFS ENTITY CONTRACTS,

OWA (other weird arrangements)

COMMON CONSIDERATIONS – UNIQUE CONSIDERATIONS

Obtain a copy of the Operating Agreement –

It will be instructive


Diagnostic Imaging SectorStatus, Trends & Outlook Considerations

4




21st Century Healthcare Delivery

CONSOLIDATION WILL HASCOME TO THE HEALTHCARE SECTOR!


Top Outpatient Imaging Trends for the Coming 5 Years

1. More and more hospitals are attempting to eliminate “competitive sites of service” in market – Often, Joint Ventures are considered competitors, unless “partners” are “trusted partners” throughout the continuum of care

2. More and more, radiologists are turning to hospitals for partnering opportunities - if any there

3. Contraction and Consolidation is in full swing




Imaging Center Trends

Top 20 Imaging Centers Growth/Contraction Trends

Source: ImagingBiz.com


Hospitals and Integrated Health System Imaging Center Trends

Number of imaging centers affiliated with integrated health networks, 2002–2011.

Source: ImagingBiz.com




Intense Competition Will Continue in Most Markets

As reimbursement tightens in the freestanding setting, competition for imaging volume is becoming intense

Largely fixed-cost enterprises, imaging centers are no longer able to profit by filling only 40% or 50% of machine capacity

Many markets are already saturated with freestanding imaging and hospitals and health systems are aggressively adding their own freestanding centers, buying out Joint Venture Partners or buying out competitors.

While much of the competition will be from traditional providers –hospitals, health systems, radiology groups, multi-specialty group practices, and entrepreneurs - “disruptive” innovations and business models will challenge providers as well


Expected Winners and Losers in the Post-”Reform” Market

Imaging Centers positioned for success: Hospital-owned imaging centers – Sophisticated on-

campus facilities as well as high volume freestanding centers with access to provider-based reimbursement –however, once converted they may not be competitive in the market in the long term.

Multi-specialty physician-owned centers with sufficient captive volume – FOR THE MOMENT

Large chains with a winning management model Large IDTF Operators “bulking up” for the next step




Expected Winners and Losers in the Post-”Reform” Market

Imaging Centers in a precarious position: Single-specialty, single modality imaging

centers – almost extinct Low-volume centers in saturated urban

markets or small, rural markets Entrepreneur-owned imaging centers;

particularly single-modality Entrepreneurs will deploy their capital in more

profitable ventures Hospital owned, Provider-Based Imaging

Centers with “out of market” pricing


The Basic Blocking & Tacklingof Diagnostic Imaging Metrics

Unique Considerations When Valuing Diagnostic Imaging Entities




KEYFactors of Influence

Note: Obtaining “Data and Information” from some entities will be a significant challenge. Be prepared to either do a lot of “processing” (scope creep) or hold firm on client providing valid material in a “usable” format.


Key Factors of InfluenceIn Determination of Value

Revenue Streams Service/Modality Mix Payor Mix Referral Patterns

Cost Elements Fixed Costs Variable Costs

Competitive Landscape Current and Planned Regulatory/Payment Trends Ownership and Management Interviews and

Perspectives (THE SEAT AT THE TABLE)

Historical Prospective

STORIES




Key Factors Revenue and Cost

Revenues Volume by Modality – Increasing or Declining?

Net Collections – Increasing or Declining?

Referral Patterns – Changing?

Which year(s) to include in the valuation?

Where did the revenues come from? Ongoing revenues? If owner(s) stays

If owner(s) leaves

One-time revenues?



Costs Head Check Compare to Similar Entities Adjust to reasonable cost structure if necessary

Look for subsidies that will end (continue)

Look for excess physician-related costs that are in reality disguised compensation

Make adjustments through excess earnings calculation





Costs (continued) If volume forecast to “grow” – at what point does

volume exceed throughput capacity and require additional capital?

If volume forecast to “grow” – at what point does volume exceed personnel capacity to meet the needs and require more people?

Did you include future replacement/upgrades in forecast? At what value?



Radiology Specific Factors Impacts of future Diagnostic Imaging Reimbursement Specific Modality Reimbursement Realities in the

Specific Market CMS “Rules” and Policy Influences Congressional Policy/Law

Identify Referral Sources and Patient related payor mix structure

Impacts/determination of “discount/cap rate” Adjustment for “reimbursement risk” Adjustment for “landscape risks” Impact on discounted future cash flow




Primary Influences on FUTURE Revenue Streams at Diagnostic Imaging Entities

Imaging Center

In Office ImagingTrends in Community

Pre-AuthorizationPolicies of Payors

DRA 2005/20135102a, 5102b

2010/2011/2012/2013 MPFS Changes Mobile Unit ServicesTrends In Community

Alignment of CenterWith Hospital (s) In Community

Hospital Outpatient Centers/Outreach Centers

Corporate/ChainImaging Entities Trends

Payor ContractingBias- Site of Service

Referring PhysicianUtilization Trends


NEW GOVERNMENT POLICY“Piling On” 2010 - 2013

TC EQUIP UTILIZATION BASIS

Phase In 50% - 62.5% - 75% - ?

IRS 3% “WITHHOLD”

FTC RED FLAGREQUIREMENTS

“HITECH ACT”Health Information Technology

for Economic and Clinical Health Act

REIMBURSEMENT&

OVERHEAD IMPLICATIONS

IMAGING SERVICESSPECIFIC MPFS

“STIMULUS BILL”PPACA

PROVISIONS

CMS PRE AUTHORIZATION

PROGRAM




PAYMENT BASIS:DIAGNOSTIC IMAGING SERVICES

Diagnostic imaging services, unlike medicine, are billed to third party payors as 1. Globalservices (technical component and professional component together); 2. Technical Component services; 3. Professional Component only services; or, for certain payors, a mix of Global, Technical and Professional services. (EXHIBIT 1)

GLOBAL FEE

PROFESSIONALCOMPONENT

TECHNICALCOMPONENT

WRVU PE RVU MALP RVU PE RVU MALP RVU

GEOGRAPHIC PRACTICE COST INDEX MULTIPLIER

W PE – LOCAL GPCI MALP – LOCAL GPCI

PC PAYMENT = (WRVU X GPCIw) +(PE RVU X GPCI pe) + (MALP RVU X GPCI MALP)) x CFTC PAYMENT = ((PE RVU X GPCI pe) + (MALP RVU X GPCI malp)) x CF

GLOBAL PAYMENT = PC + TC

The TC has been

“hammered” since 2005


2013 MPFS CALCULATION2013 Non-Facility Pricing Amount =

Work GPCI* Work RVU+

(Transitioned Non-Facility PE RVU * PE GPCI) +

(Malpractice RVU * Malpractice GPCI)X

Conversion Factor (with Budget Neutrality Factor Applied)

2011- $33.9764 2012 = $34.0376 2013 = $34.0376 –OR- $24.6773

THIS IS A FORMULA YOUR OTHER PAYORS ARE USING AS WELL AN UNINTENDED CONSEQUENCE BY CMS

PC ACTUAL 2013 GPCI ADJ RBRVS VS 2012 = -3% to -4%TC ACTUAL 2013 GPCI ADJ RBRVS VS 2012 = -4% to – 8%

% PC to Global

has Changed

You Need to

Know the Facts




2013 Medicare Physician Fee Schedule

Published July 2012

Includes technical component reimbursement cuts to IDTFs (-8%) and physician offices/clinics (-4% to – 6%)

The impact varies significantly by modality: Primary drivers are:

2013 Work Component Reductions to GPCI Medical Imaging Equipment Pricing Allocation Change from 50% (utilization

assumption) to 62% to 75% - drops Technical Payment Bundled Payments for CT – Chest Abdomen Pelvis, MRI, MRA Multiple Procedure Discount (Same Pt/ Same Sitting) – 2013 All Modalities

PC and TC

ALL Localities received Changes in Work GPCI in 2013 Physician Supervision Rules Changes – OP Department of Hospitals ACO Demonstration Projects Increase In 2013 “Incentive Programs” Expanded in 2013 – Stick Coming After Carrot


Final 2013 Medicare Physician Fee Schedule

Multiple Procedure Discount Increase 11 Families from 25% to 50% reduction – NOW MOVING TO PC AS WELL

as TC. Medical Imaging Equipment Utilization Factor

Increase from 50% TO 62.5% to 75% IN 2013 (White House wants this at 90%)

OPPS Payment Changes effecting the “Lower of MPFS/OPPS Determination for TC Payments

RVU Changes, PE RVU Changes, Malpractice RVU Changes (PC/TC/Global)

Budget Neutrality Adjustment Application to CF Commercial Insurance are “following” CMS

Changes




2012 VERSUS 2005


Regulatory and Industry Actions to Consider In Valuing Diagnostic Imaging Entities

Utilization Management Policies (Commercial Payors) Pre-Authorization Policies

Advanced Imaging Modalities CT

CTA, CCTA MRI

MRA PET & PET/CT

IDTF Classification Compliance with IDTF Rules

Slot Lease and Per Unit Lease Arrangement Legislation and recent actions

Under Arrangement Legislation Anti-Mark-up Legislation Accreditation of Diagnostic Imaging Entities. OIG and CMS Utilization Audits and Investigations CON Laws (State by State)




III. Revenue History Analysis Considerations

Retrospective (3 years – 6 month intervals to assess seasonality impacts, if any)

Volume By Modality (Total and Per Day) By Payor, By Modality By Referring Physician, By Modality (top 25)

Charges and Receipts Trends By Modality By Payor, By Modality By Referring Physician, By Modality (top 25)

Charges & Payments per Procedure Trend By Modality By Payor

Accounts Receivable Aging (2008, 2009, 2010, 2011 YTD)

Special attention to “Self Pay” Patient Responsible

Watch For:Payor Mix Shift, Modality Shift, Referring Volume Shift

Technical Component

Only

You NEED a CPT Frequency

Report


“STANDARD” ANALYSIS TOOLS AVAILABLE

Financial Statements By Site of Service (GOOD LUCK ON THIS ONE)

RIS Reports (By Site of Service)

Volume by Modality By Site of Service

By CPT

Revenue Cycle Management Reports(By Site of Service)

Payments by Modality By CPT

Payments By Payor by Modality By CPT

Clinical Indications by CPT Denied Services

By Category of Denial By Modality By Payor

Current Year Budget - Actual - Variance

Prior Years (at least three)Budget - Actual - Variance

Current Year Variance to Last Year

Prior Years Trend Line

Root Cause Variance Investigations

Technical Component Only




ADDITIONAL ANALYTICAL TOOLSYOU NEED

BY SITE OF SERVICE OUTPATIENT SITES OF

SERVICE OTHER SITES OF SERVICE

BY PAYOR OUTPATIENT SITES OF


BY MODALITY OUTPATIENT SITES OF


BY REFERRING PHYSICIAN OUTPATIENT SITES OF


VOLUME OUTPATIENT SITES OF


REVENUE PER UNIT OF SERVICE OUTPATIENT SITES OF


FIXED COSTS PER UNIT OF SERVICE OUTPATIENT SITES OF


VARIABLE COSTS PER UNIT OF SERVICE OUTPATIENT SITES OF


PROFIT/LOSS PER UNIT OF SERVICETechnical Component Only


OTHER CRITICAL METRICS

REVENUE BY UNIT OF SERVICE BY SITE OF SERVICE BY MODALITY

COST PER UNIT OF SERVICE BY SITE OF SERVICE BY MODALITY

NET PROFIT/LOSS PER UNIT OF SERVICE BY SITE OF SERVICE BY MODALITY

IT IS IMPORTANT TO CAPTURE AND ANALYZE BOTH FIXED COST AND VARIABLE COST CONTRIBUTIONS BY MODALITY & BY SITE OF SERVICE - BY LINE ITEM

Technical Component Only

You NEED a CPT Frequency

Report




ADDITIONAL INVESTIGATIONS

ALL UP COST PER UNIT OF SERVICE PER FTE (SALARY, BENEFITS, OT)

TECHNICIANSNURSING & OTHER CLINICALADMINISTRATIVE

DIRECTINDIRECT

UTILIZATION TRENDS BY ORDERING PHYSICIANBY MODALITYBY SITE OF SERVICEBY MAJOR PAYOR

REVENUE CYCLE MANAGEMENT COSTS (BILLING AND

COLLECTION)

Days in AR Trends (three years) Content in AR Trends (Payor Mix Shift)

Self Pay Category

Technical Com

ponent Only


Revenue Forecasting Considerations

Volume Assumptions By Modality (total and Per Day) Calculate Total Market Demand (Utilization Per

Thousand Population in Service Area) Per Year - over Forecast Period

Calculate Total Market Supply Calculate Current Market Share Calculate Available Market Determine Assumptions for Market Share

Growth/Decline Competitive Landscape Entity Leverage in Market – Specific Contributors

At What Point Does the Entity Require

New or Replacement Equipment?




Revenue Forecasting Considerations

Revenue Per Procedure Assumptions By Modality By Payor Category Throughout Period of Forecast (reimbursement does not go up unless there

is a significant rationale for Payor Mix Shift based upon evidence available at the time of the forecast)

Test Forecast against History for Consistency does the forecast make sense given the history and facts?

Test Volume assumptions against throughput capacity of imaging equipment and staffing to determine: What, if any, additional provisions in the forecast need to be

made for additional medical imaging equipment, maintenance and repair contracts and additional technician and administrative staff to accommodate additional volume forecast.

IF AN ACQUISITION – WILL BUYER PAYOR PORTFOLIO MATCH SELLER PAYOR PORTFOLIO????

You NEED a CPT Frequency Report


FMV of Existing Medical Imaging Equipment

Medical Equipment Lease Cost

Medical Imaging Maintenance and Repair Costs

Occupancy Costs

Technician Staffing and Compensation

Administrative Staffing and Compensation

Medical Equipment Depreciation Schedules and status

FMV of non-medical imaging assets

Medical Pharmaceutical Cost Per Unit of Service

IV. Primary Influences on Expense at Diagnostic Imaging Entities

Fixed Costs

Variable Costs

Diagnostic Imaging is a Fixed Cost Driven Service

Tech

nica

l Com

pone

nt O

nly




Medical Imaging Equipment Technology Relevance to Competitive Community Standard

Additional Capacity Forecasts – Medical Imaging Equipment, Space, Personnel, Supply Costs – Useful Life is not the same as Depreciation Life

Technician Licensing Status/Requirements PACS Status and Links to outside images RIS Status Management Fees Medical Director Fees Accounts Receivable Management (Billing) Fees Marketing Expense Status and Forecast Accreditation Status and investments required Compliance Program Implementation HIPAA Program Implementation OSHA Compliance Implementation

Primary Influences on Expense at Diagnostic Imaging Entities


V. COMMERCIAL THIRD PARTY PAYOR TRENDS AND CONSIDERATIONS

SITE OF SERVICE BIAS PHYSICIAN/HOSPITAL OWNED IDTF SINGLE MODALITY VS MULTI-MODALITY IN-OFFICE

Fixed Fee Schedule Advanced Imaging

MRI, MRI CT, CTA, CCTA?? PET, PET/CT

Bundled Codes – More Coming? DENIED SERVICES TRENDS AND BASIS Non-Covered Services PRE-AUTHORIZATION REQUIREMENTS

WHO PERFORMS? HISTORICAL SUCCESS




VI. Potential Landmines And Valuation Considerations That An Come Back To Haunt You

Reimbursement for the technical component, on a per-unit-of-service basis, can either indicate substantial value, or certain impending financial death for the entity being valued. A diagnostic imaging entity has several key moving parts impacting

revenue streams, which examined individually, may not indicate the true trajectory of the business. But taken altogether will definitely paint a brightly colored picture of the entity and its future capacity to generate excess revenue for the owner.

Likewise, if recent history results in a per-unit-payment dollar amount, then any forecasts of improvement must be directly linked to quantitative explanations for any forecast increases in per-unit-of-service per modality.

Volume projections will, by definition, be based upon the facts of recent history – BUT – also emerging landscape. If the entity has experienced an erosion of volume in key

reimbursing modalities, one will need an impressive and quantitative rationale for a step function increase in volume in the forecast.

If certain members of the medical staff have become employees of a hospital, what impact will this make on historical referrals from these physicians?


Potential Landmines And Valuation Considerations That Can Come Back To Haunt You

If a particular geographic area population is flat or declining, does the natural increase in a certain imaging modality per population fit the forecast? One also needs to test the service area declared by the entity. A quick look at a historical patient population by zip code can either confirm or

question the assertion of the “reach” of the entity. It is generally a good idea to at least perform a “back of the envelope” head check on these metrics.

Both consultant and appraiser are often challenged on the forecast revenue per unit of service per modality – especially for entities with heavy CT and MRI content. The only way revenue per unit of service ever goes up over time is either: a major payor mix shift to more highly paying third party payors versus historical

payor mix data, or if the managed care portfolio has been recently renegotiated Are there more specialist physician high users of imaging services coming into

the area? Are certain known high medical specialty users of imaging services fleeing the

area? Do the population metrics support or deny the growth assumptions in the

forecast?




Concluding Remarks1. Get into the details. Make a detailed examination of past

performance: By Modality, By Payor, By site of service

2. Understand the specifics of certain modalities such as CT and MRI as well as other unique modalities. How many studies with contrast are performed? How many studies without contrast are performed? How many Screening versus Diagnostic Mammograms are performed – not how many total

Mammograms are performed? How many Mammography CAD (computer assisted detection) studies are performed?

3. Does reimbursement and payor mix suggest the entity is capturing their fair share of better paying health plans, or have they been relegated the low-pay and “self-pay-no-pay population?

4. Does the data make sense given the patient population demographics and referring physician demographics?

5. Examine referral patterns just as you examine them for other medical practices. Who is coming, who is going and why?

6. What events on the horizon do we need to accommodate in the forecast build-up as known facts, and how many events on the horizon do we accommodate as risk factors?

7. Who is buying and who is selling? Is this a “shotgun” sale?


Questions?

valuation considerations for diagnostic imaging centers

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