The business model of a typical diagnostic imaging center is designed to offer a comprehensive array of noninvasive imaging studies to determine a representation of internal anatomy and functions. A center may offer the imaging services of a single modality, such as Magnetic Resonance Imaging (MRI), or offer a comprehensive suite of multiple modalities. These modality offerings may span from more advanced imaging procedures such as MRI, Computed Topography (CT), and Positron Emission Tomography (PET), or more routine scans such as X-rays, Ultrasounds, Mammography, Fluoroscopy, and Bone Densitometry.
Diagnostic imaging continues to be an important aspect of the healthcare delivery model. Growth is driven by a variety of factors, from an aging population, to a growing percent of the population being insured, to a continuing focus by health plans of encouraging preventative health services and early detection of illness.
Valuation Approaches for Diagnostic Imaging Centers
The three approaches to consider when valuing a diagnostic imaging center include the income, market, and cost approaches. Depending on the unique circumstances attributable to the diagnostic imaging center being appraised, it may be appropriate to apply one or multiple approaches. The basic descriptions for each include:
- Income Approach: The main premise of the income approach involves converting anticipated future economic benefits into a single present value amount using a risk-adjusted rate of return, most commonly through the use of a multi-period discounted cash flow model. For a profitable diagnostic imaging center that is a going concern, this approach will typically be applied.
- Market Approach: The application of the market approach in valuing a diagnostic imaging center typically involves reviewing the transaction prices of centers similar to the subject entity. Additionally, as a sanity check, the analysis of valuation multiples of public companies will be considered when valuing a center.
- Cost Approach: This method is also known as the ‘asset’ approach, which involves valuing a diagnostic imaging center’s furniture, fixtures, and equipment, and also giving consideration to any intangible assets (e.g., certificate of need) that may need to be valued. This approach is primarily considered when valuing de novo centers or centers that are experiencing financial distress.
When appraising a diagnostic imaging center, it is important to take into consideration the numerous industry-specific factors that affect a given center’s current and future operating performance. Like any business, many general factors affect the business operations, such as local economic and demographic trends, however several important industry considerations may be overlooked by an appraiser that does not specialize in healthcare valuation. While considerations specific to diagnostic imaging centers are numerous, three of these considerations we have outlined in further detail below.
Medicare patients are typically a large component of a diagnostic imaging center’s patient base. Each year, the Centers for Medicare & Medicaid Services (CMS) releases a new Physician Fee Schedule (PFS), outlining rates of reimbursement for Medicare patients. The rates outlined in this schedule will typically effect commercial insurance carrier reimbursement as well, as many of these carriers will remit payment for patient services that is based on a certain percent of what Medicare would reimburse for the same CPT Code. Thus, changes in the rates determined in this fee schedule can have a material effect on a center’s revenue in the forthcoming year. HAI has observed large decreases in reimbursement for the technical component of certain modalities in years past, including reimbursement decreases well in excess of 20 percent for certain CPT Codes in a single year. It is important for an appraiser to perform the proper reimbursement analyses as not to improperly overstate or understate future revenue of the subject diagnostic imaging center.
Similar to CMS’ decision on setting Medicare reimbursement rates through its PFS each year, statutory law can have a material impact on the operating performance of a diagnostic imaging center. For example, Section 635 of H.R.8 – American Taxpayer Relief Act of 2012, increased the equipment utilization rate for advanced imaging services from 75 percent to 90 percent beginning in 2014. This law resulted in a dramatic decrease in revenue for freestanding diagnostic imaging centers which had MRI and CT scans account for a material amount of its total scan volume. While this is just one example, we at HealthCare Appraisers have observed that new federal laws affecting the healthcare industry are consistently being contemplated and signed into law.
At the state level, several states require certificates of need (CONs) to operate certain modalities at a diagnostic imaging center. The process to apply and receive an approval can be expensive and time-consuming. Additionally, certain states may have reached market saturation, creating essentially a de facto moratorium on any new CON approvals. Thus, a transaction involving a center that holds a CON typically results in increased value relative to a center that operates in a state without a CON law.
As a result of regulation, it is essential that an appraiser is well informed on the healthcare statutory environment when completing the valuation of a diagnostic imaging center.
The capital equipment utilized in a diagnostic imaging center is expensive, with a single piece of equipment and related build-out costs able to surpass a million dollars for certain modalities. Whether equipment is procured through an operating lease, capital lease, or purchase, these expenditures have a material impact on the cash flows a center generates, and must be properly considered in an appraisal. Given the large dollar considerations involved, even small changes in assumptions such as the useful life and residual value at disposition can materially affect cash flows, and in turn, the determination of business value. At HealthCare Appraisers, our business valuation professionals work closely with colleagues that specialize in the appraisal of machinery and equipment when the need for appraiser judgment in capital equipment related decisions arise.
Professional Read Fees
When appraising a diagnostic imaging center, it is important to consider whether the professional fees paid to a radiologist in connection with his or her interpretation of a scan are consistent with FMV. For instance, radiologists providing the professional interpretations at a diagnostic imaging center may also be the owners of the subject center. In scenarios such as these, HAI frequently observes that the professional interpretation related expense is either higher or lower than FMV. This is due to the fact that the physician will receive the profits of the center either in the form of professional read fee compensation, or distributions, and is therefore not usually concerned with which of these categories the dollars flow through. HAI completes thousands of physician compensation appraisals each year, giving us the expertise to make any necessary adjustments to this expense when determining the normalized operating cash flows of a subject diagnostic imaging center.
As we have discussed, there are many unique items to consider when preparing the valuation of a diagnostic imaging center. These items require a depth of knowledge that a general appraiser may overlook. As a full-service valuation firm focusing on the healthcare industry, the valuation professionals at HealthCare Appraisers possess the experience and knowledge that you can trust with your appraisal needs. Our team of professionals includes not only business appraisers, but personal property, real property, and compensation appraisers, as well as former healthcare industry executives and administrators, resulting in a depth of knowledge capable of preparing all components that may arise in the appraisal of a diagnostic imaging center.