Let the Consolidation Begin

Expectations of a vexatious business environment brought about by implementation of the federal Deficit Reduction Act of 2005 (DRA) prompted imaging centers operator Howard Berger, MD, to adopt a survival strategy premised on the notion that bigger is better. Thus, his company—RadNet Inc (formerly Primedex Health Systems Inc), Los Angeles—last year acquired Radiologix Inc, Dallas, in a $208-million deal that instantly lifted Berger’s chain of 60 California freestanding imaging centers from the status of medium-sized regional player to that of heavyweight national leader.

“We believe we are now the largest owner of imaging centers in the United States,” says Berger, who serves as chairman, president, and CEO of RadNet. “This acquisition was something we had been considering for quite a while, but not until the Deficit Reduction Act came along did we really get serious about it. The DRA was a transforming event. It was a driver for making this transaction happen.”

Full Spectrum Imaging

Even without the DRA to propel the purchase (Berger estimates the two companies together would have lost a total of $16 to $17 million in revenues the first year of the new law), RadNet had plenty of good reasons to acquire Radiologix. Actually, there were 69 such reasons spread among seven states.

“First,” Berger says, “Radiologix had 18 centers here in California, 16 of which were in the northern half of the state where our RadNet presence was small. When we put their 18 with our 60, it gave us a very solid presence up and down the entire state. Second, of Radiologix’s 51 additional imaging centers, 31 are in Maryland and 12 are in New York. This geographic concentration tracked very closely with our own RadNet strategy of having many centers in a limited number of selected markets, rather than having a few centers each in a multitude of diverse markets.”

Postmerger, RadNet is an impressively sizable enterprise. However, Berger reveals that plans are in the works to make it larger still, mainly through further acquisitions. “I don’t see much in the way of de novo growth for us, since there are plenty of existing centers out there right now, and some markets are saturated,” he explains. “In the short term, we’ll be looking for organic growth to expand the reach of our centers by adding modalities. The core markets we’re in—New York, Maryland, and California—represent excellent opportunities to continue our organic growth. But after that, our next focus will perhaps be on acquiring centers in and around the markets where we are now strongest. Particularly exciting to us is the idea of acquisitions in the Maryland market, which we’d like to expand into a greater Mid-Atlantic presence. In New York, we think the opportunities for acquisitions are in the upstate area. And we’d like to acquire more centers in California.

“We also will look at opportunities to enter other markets where we currently have either no presence or a very limited one,” Berger continues. “But we would make such a move only if the acquisition opportunity was a good fit with our basic philosophy of going only into markets where we can be the dominant player.”

(As a side note, Berger divulges that a few Radiologix centers might be put on the block—not due to any sort of subpar performance, but because their organizational or marketplace idiosyncrasies make them too great a challenge when it comes to harmonizing with RadNet’s goals. “We have a handful of centers that are not part of our core strategy, and so we may look at divesting them,” he says.)

During the time when the acquisition of Radiologix was under consideration, Berger says it helped matters that Radiologix—like RadNet itself—was geared to operating multimodality sites. “Very few Radiologix facilities were stand-alone MRI centers,” he says. “Now that our two companies are one, fully 93 centers are multimodality sites, offering various combinations of x-ray, fluoroscopy, MRI, CT, PET/CT, ultrasound, nuclear medicine, mammography, and interventional radiology. Thirty-six of our centers are single-modality sites, offering either x-ray or MRI services. The majority of these single-modality sites, consistent with our regional network strategy, are located near the multimodality sites to help accommodate overflow of mainly routine imaging in targeted demographic areas. We’ve always recognized the potential of low-profitability routine imaging to serve as a driver for higher-profitability advanced imaging.”

Changes to Come

Acquiring Radiologix in 2006 (the process of which commenced in April and was completed on November 15) had additional unique advantages. One of them was the relative ease with which RadNet would be able to consolidate management-level functions, a task that is made possible by the many similarities between Radiologix’s operational formulas and those of RadNet. Moreover, some Radiologix formulas were better crafted. “Radiologix was a little more adroit with its handling of reimbursements,” Berger offers as an example. “For that reason, our RadNet centers will be adopting elements of the Radiologix approach to billings and collections. By the same token, Radiologix centers will be adopting a number of RadNet practices, such as our way of handling purchasing and contracting. Our goal has been to incorporate the best of both companies into a single, global model—accordingly, we will be looking to take best practices from the management and clinical sides and weave those together.”

At the centers themselves, however, there will likely be few changes in the way administrators conduct business. “We traditionally have given—and will continue to give—our local managers authority to run their individual centers to meet the demands of their immediate market conditions,” Berger says. “Of course, each facility manager also is responsible for meeting our global standards for patient service, referring physician relationships, payor relationships, and the maintenance of profitability. What changes we do implement at the local level will be predominantly of a technological nature. For instance, the Radiologix centers were not as steeped in digital modalities as they could have been, so we will address that with aggressive entry into digital x-ray and digital mammography at those sites.”

RadNet imaging centers are grouped into local networks based on population density and payor diversity. This practice will continue, Berger reports. As for branding, that is not yet settled; it is possible, though, that all the centers may feature RadNet as part of their name (a new, unifying corporate logo is slated to begin appearing on stationery, signage, and other identity materials by mid-year), but Berger hints that the existing names of the centers will remain the same. “Most customers know us not as RadNet but by the name of the center or its radiology group,” he says. “Each local group of centers has its own unique name or names. For example, the six centers that make up our Palm Springs, Calif, group go by the name of Desert Advanced Imaging. In the neighboring Inland Empire area of San Bernardino and Riverside counties, 10 imaging centers have names like Grove Diagnostic Imaging, Temecula Valley Imaging, and San Gabriel Valley MRI Center.”

Adroit Use of Technology

Most of the RadNet/Radiologix centers rely on PACS, RIS, and advanced computer networks, but with each market group operating its own set of systems.

“Informatics is the backbone of this industry; these days, anybody who is serious about being a paid provider of imaging services must embrace information technology,” Berger says. “It is not possible to succeed, let alone to survive, without informatics. That’s why informatics is a major focus for our company.”

Not long before being acquired, Radiologix initiated updates to its PACS and RIS systems; these are just now being completed. “Our intention is to make sure all of the centers have state-of-the-art information management technology,” Berger shares, noting that RadNet as a business model is well suited to the increasingly “virtual” nature of radiology. “The informatics capabilities of our centers are such now that each specialist no longer need be present at the site where the exams are performed—in fact, they are now reading images originating from several sites, which allows their talents to be used in a far more productive manner than if they were to be looking at images coming from only one location.”

Likewise, RadNet is positioned to capitalize on expansions of imaging technology applications, such as MRI spectroscopy, MRI angiography, PET/CT, and—for noninvasive treatment of tumors—focused ultrasound paired with MRI. “Additional improvements in imaging technologies, contrast agents, and scan capabilities will continue because they are cost-effective and time-efficient,” he says. “In addition, we believe the growing popularity of elective full-body scans will result in further increases in the use of imaging services.”

Nonetheless, RadNet—which now performs more than 2.5 million diagnostic radiology and imaging procedures annually—has developed its own program to counter overutilization. “Overutilization is rampant in imaging, but that’s not a problem here at RadNet,” Berger says. “Fifteen years ago, we began offering radiology benefit management services. These have been an enormous help to us, because we’ve assumed for 30 prominent medical groups and IPAs [independent practice associations] in California the full risk of providing imaging services to them under exclusive capitated contracts—we’re talking about more than 750,000 covered lives. In effect, we are the gatekeeper that looks at each request for an advanced imaging study and determines the appropriateness of that request.”

Berger expects the benefit management services available from RadNet will prove to be an invaluable growth resource for the company because it could lead to relationships with payors in other markets. “We’ll be looking for selected opportunities where the benefit of utilization management is recognized and valued by the payor,” he says. “Such payors could very well be looking for strategic relationships with organizations like ours for the reason that those payors are more concerned with not what they spend per procedures but with how many of the procedures they’re doing. They need a means of getting a handle on both the risk and utilization, and we’re able to provide this assistance.”

Confidence Going Forth

If anything, the future just 5 years ahead is difficult to accurately predict, with too many variables and too many uncertainties. Nonetheless, Berger expresses confidence about RadNet’s prospects in general, even with the imaging industry caught in the throes of roiling change.

“There has been this almost inexorable decline in reimbursement over the years, in large part because this is not a free-market system,” he says. “So, here we are, right in the middle of a period of major transition. It’s a bit painful, but it’s long overdue, and, when it is completed, our industry will be in a much better position. If our industry is going to be healthy long-term and be the essential resource that it is, we’re going to need a more prominent seat at the bargaining table. That will happen if we can get payors to recognize how valuable radiology’s contribution is to the overall welfare of their beneficiaries. One way that can happen is by getting their attention with size. That’s what we’re attempting at RadNet. We believe bigger is better. We think our strategy of going national is the right one for the times, because it will give us the opportunity to provide for the imaging business as a whole a stronger voice in the outcome of reimbursement discussions and the whole direction of the imaging business. But it’s also the right strategy because it transforms RadNet into a company large enough to support significant favorable changes in our operating model that will help our bottom line.”

Rich Smith is a contributing writer for Axis Imaging News. For more information, contact .

A Brief History

Howard Berger, MD, president and CEO of RadNet Inc, Los Angeles, co-founded the company in 1980 with six other physician partners. Initially, RadNet’s mission was to provide billing and administrative services to local radiology groups. Then, in 1981, RadNet opened its first imaging center—next door to Cedars-Sinai Medical Center.

Berger, a board-certified nuclear medicine subspecialist and internal medicine physician who trained at the University of Illinois Medical School, bought out four of his partners in 1990, leaving himself and Michael Krane, MD, director of utilization management, as the sole owners of RadNet.

Two years later, RadNet was acquired by Primedex Health Systems Inc, a publicly traded company engaged at the time in providing management, administrative, and financial services to Los Angeles-area medical clinics catering to workers’ compensation claimants. In 1993, California altered its workers’ compensation rules, making that business untenable for Primedex. The company then exited that arena and, beginning in 1994, devoted itself exclusively to operating freestanding imaging centers, mostly in Southern California. Some of those centers were de novo projects, and others were added through acquisition of established facilities owned by Tower Imaging and Diagnostic Imaging Systems—the former bought in 1994 and the latter in 1996.

The Primedex name was abandoned in 2006 in favor of a return to the RadNet moniker. That same year, the company acquired Dallas-based Radiologix.

The purchase of Radiologix brings RadNet into new relationships with a small number of hospitals and health systems by dint of joint-ventured imaging center arrangements. These were partnerships into which Radiologix had entered well before RadNet came courting. In each of these joint ventures, Radiologix agreed to serve as operator of the resultant freestanding imaging centers. Berger says RadNet hopes to carry this practice forward and build on it.

“We’re looking to expand on these existing relationships,” he reveals. “I’ve met with all the joint-venture partners. They are enthusiastic about opportunities for expansion as well as ways we can continue to leverage our substantial assets in those markets. Future partners we might take on for these and other joint ventures would be limited to health care entities—those steeped in the operations and service side of the business—which would mean mainly hospitals, but not vendors or investment companies because I’m not sure how these types of players would be benefited by that model. We would especially be interested in entertaining opportunities to expand our joint venture activities in Maryland and possibly stretch those to cover the entire Mid-Atlantic region.”

The Clinical Assets

With the purchase of Radiologix, RadNet added to its own radiology practice several practices dating from Radiologix’s early days as a physician practice management company, bringing the total number of RadNet radiologists to about 350. Whereas Radiologix had become increasingly disinterested and uncomfortable with the clinical component of the company, Berger perceives the physician component as an important asset around which he intends to build the company’s future.

“I’m confident about that because of our background and experience in this business,” Berger says. “I’ve been in the practice of imaging for more than 30 years. The company in its history and by its formation, and ultimately by its management, is rooted in radiologists and people who are very knowledgeable about and specialized in imaging. We bring a certain knowledge of the business that probably didn’t exist within Radiologix and, for that matter, may not exist in any of our competitors at the level we have been able to develop. We can speak to the radiology groups in terms of clinical issues as well as business issues on a level that was missing in Radiologix prior to this transaction.

“In virtually all the radiology groups in our major markets,” he continues, “there is a very high degree of enthusiasm toward and confidence in the leadership of the company to now really grow this business and position it better than they’ve ever been able to do. Our model provides a much more attractive opportunity for radiology professionals.”

Although RadNet has spent a significant part of its life as a public company, it never fell prey to the pressures that Wall Street’s appetite for growth can exert on an enterprise. “Companies are not challenged by outside influences so much as they are by their own desire for performance and accomplishment,” says Berger. “They also are challenged by things like capital structure and the industry-specific issues they face from time to time.”

Those were among the factors that caused Radiologix to lose momentum in recent years, according to Berger. Also hurting the company were several poorly judged acquisitions that caused Radiologix to end up with centers spread too thin to make an impact in several of its lesser markets.

—R. Smith