Capturing Value Within the Horizon Using Accounting-Based Valuation

Published by NACVA QuickRead This article examines two alternative approaches to the Discounted Cash Flow (DCF) Method when seeking to capture the majority of total value within the horizon. A closer look is given to the Residual Enterprise Income (REI) Method as well as the Abnormal Enterprise Income Growth Method (AGR) in comparison to the DCF Method, and a determination is made as to which method is most effective. The Discounted Cash Flow (DCF) Method is a standard Income Approach when valuing a healthcare business as a going concern. However, one of the common pitfalls in the DCF Method is the disproportionate amount of the enterprise value indication produced beyond the projection horizon (i.e. terminal or continuing value), often times well over 50 percent of total value. Valuation is meant to capture the future payoffs based on what we know now, so why not root as much of the value as possible based on the accounting numbers of the business that we know today? Why rely so much on terminal value that is derived from beyond the projection horizon, when a majority of the total value can be captured within the horizon? Which leads to the next question: how can the majority of the total value be captured within the horizon? The answer lies in two alternative approaches to the DCF Method: the Residual Enterprise Income (REI) Method and the Abnormal Enterprise Income Growth (AGR) Method. Both of these methods are rooted in accounting-based valuation methodology. A comparison of the three methods will show how more of the value can be captured within the projection horizon based on real, present accounting numbers. “Why rely so much on terminal value that is derived from beyond the projection horizon, when a majority of the total value can be captured within the horizon?” Click here to continue to the full article.

Imaging’s 2014 Merger/Acquisition Outlook: Responding to Reform

Published by ImagingBiz Marked by plenty of merger/acquisition activity, 2013 was a more tumultuous year in the imaging industry than anticipated, according to Todd Sorensen, CVA, a partner with health-care valuation and advisory company VMG Health. Experts anticipated that transaction activity would slow following the bull market of 2012, but the downshift didn’t arrive on schedule. “On the radiology-group side, the activity has continued apace; on the imaging-center side, it hasn’t slowed as much as we had anticipated at this time last year,” he says. Though unusually numerous transactions continue to occur, the nature of those transactions is finally shifting as providers respond to health-care reform and its ramifications. “Hospitals have been eager to take advantage of the differential in imaging reimbursement on the commercial managed-care side, and that play drove a lot of transactions in 2012 and 2013,” Sorensen says. He adds, “While we continue to see the rate differential drive transactions, we increasingly see more progressive hospital systems considering joint-venture opportunities. Many of the industry participants I’ve spoken with believe that whatever happens with the government’s initiatives (such as exchanges and accountable-care organization), providers and private payors are going to pursue bundled pricing and risk-sharing arrangements aggressively .” Click to continue to the full article.

Imaging Industry 2014 Merger/Acquisition Outlook: Responding to Reform

Published by ImagingBiz Marked by plenty of merger/acquisition activity, 2013 was a more tumultuous year for imaging center transactions than anticipated, according to Todd Sorensen, CVA, a partner with health-care valuation and advisory company VMG Health. Experts anticipated that transaction activity would slow following the bull market of 2012, but the downshift didn’t arrive on schedule. “On the radiology-group side, the activity has continued apace; on the imaging-center side, it hasn’t slowed as much as we had anticipated at this time last year,” he says. Though unusually numerous transactions continue to occur, the nature of those transactions is finally shifting as providers respond to health-care reform and its ramifications. “Hospitals have been eager to take advantage of the differential in imaging reimbursement on the commercial managed-care side, and that play drove a lot of transactions in 2012 and 2013,” Sorensen says. He adds, “While we continue to see the rate differential drive transactions, we increasingly see more progressive hospital systems considering joint-venture opportunities. Many of the industry participants I’ve spoken with believe that whatever happens with the government’s initiatives (such as exchanges and accountable-care organization), providers and private payors are going to pursue bundled pricing and risk-sharing arrangements aggressively .” Click here to continue to the full article on the imaging industry.

Benchmarks in 2013 Imaging-center Finances and Operations

Publisehed by ImagingBiz Our company is fortunate to have the opportunity to work with a large number of single and multisite imaging centers each year. This affords us the opportunity to observe and benchmark the financial and operating trends of a statistically significant sample size of imaging centers across the nation. This imaging benchmarking analysis includes financial and operating performance measurements for 25 freestanding imaging centers (mostly single-site centers, with a few multisite centers) located throughout the United States. It is likely to come as little surprise that the pervasive trend in recent financial performance has been negative. Reimbursement pressure and competitive forces within many markets have led to the compression of profit margins, over the past few years. Overview of 2013 Benchmarks Before analyzing performance, we felt it important to illustrate the aggregate characteristics of the imaging centers included in our imaging benchmarking study. The mix of modalities for any given center can certainly have an impact on overall economics. In Figures 1 and 2, we provide the characteristics—in terms of volume and net revenue (by modality, as well as by overall payor mix)—of our benchmarking sample. The dominant modalities that account for the majority of overall net revenue are MRI, mammography, and CT. The top individual payors among the benchmark imaging centers are Blue Cross Blue Shield (28%), Medicare (28%), and UnitedHealth (5%). Click here to continue to the full article.

Uncovering Value by Divesting Non-Core Assets: A Strategic and Financial Impact

In the wake of health reform, several health systems actively pursuing acquisitions have accumulated portfolios of non-core assets. These non-core assets fall into two categories: long-term care investments (skilled nursing facilities, assisted living facilities, and rehabilitation units) and ancillary outpatient businesses (ASCs, imaging centers, and cancer centers). Since the challenges and value drivers of non-core assets often differ greatly from the health system’s core line of business, these non-core assets may adversely affect a health system’s bottom line and therefore be viewed by a system’s stakeholders as non-performing investments. While these assets often lower a system’s bottom line without the benefit of added referral sources, recently favorable market conditions may yield hidden value in these service lines. Specialized long-term care and ancillary operators have the ability and expertise to operate non-core assets at higher efficiency and profitability than health systems, while also increasing the quality of care and outcomes. Niche operational expertise and knowledge of the competitive landscape within the industry allow specialized operators to unlock hidden value and potential synergies through the ownership of these assets. In short, valuable enterprises can be disguised as non-performing non-core assets. Example of Non-Core Value Creation In 2013, VMG Health was engaged to help a health system divest itself of a non-core SNF. This SNF had historically experienced financial losses, and the health system had low expectations for the divesting price. VMG Health prepared an informational offering document and solicited market offers for the SNF. The market interest in the under-performing SNF exceeded the health system’s expectations. Multiple bidders emerged and the SNF was sold for a very attractive price. Click here to continue to the full article.

Five Risk Factors Affecting Multiples in Imaging-center Acquisitions

Published by ImagingBiz

The ongoing success of the imaging-center industry has resulted in the proliferation of operating and management companies; this, in turn, has resulted in the increased acquisition of controlling interests in the imaging centers by the operators. By gaining a controlling interest, the operating company is able to bring substantial experience and negotiating clout to the venture, typically enhancing value. The success of these partnerships, combined with this increased demand, has resulted in the willingness of these operating and management companies not only to acquire controlling interests in imaging centers, but to do so at a premium.

Through our experience in the industry, we have observed that imaging-center operators typically pay a multiple of approximately four to five times a normalized level of EBITDA for a controlling interest. As would be expected, these multiples vary according to the specific facts and circumstances surrounding the transaction. The marketplace typically relies much more heavily upon EBITDA value indications (as opposed to net revenue) because a center’s EBITDA serves as a more accurate proxy for future cash flows than does revenue.

There are five primary categories of risk factors that can drive the fair market value of an imaging center toward the lower or higher end of the range of acquisition multiples. They are market, operational, equipment, referring-physician, and reimbursement risk factors.

Market Risk Factors

There are certain market risk factors that make an imaging center more or less valuable to a willing buyer. Favorable market risk factors include the existence of a certificate of need, favorable patient demographics, and high historical population growth. Certain states require a certificate of need for the ownership and operation of diagnostic-imaging equipment; the process of obtaining one can be very time consuming, creating a barrier to entry for competitors in certain markets. Favorable patient demographics and high historical population growth tend to result in a more favorable reimbursement environment, as well as higher projections for volume growth, which (in turn) increase the value of a center.

Click here to continue to the full article on imaging center acquisitions.

Fair Market Value Versus Investment Value in Imaging: Understanding Standards

Published by ImagingBiz The standard of value must be established in performing a valuation of any imaging business. The standard of value defines the hypothetical conditions under which a valuation will be performed. These hypothetical conditions affect many of the underlying assumptions that an appraiser or valuator would employ in establishing a value opinion. In current valuation methodology, three standards of value usually apply: fair market value, investment value, and fair value. Fair market value and investment value are the two standards most often used for transactional purposes, while fair value is most often employed for accounting and financial-reporting purposes. In the distinction between fair market value and investment value (as they apply to imaging transactions), issues such as physician ownership, health-system synergies, and Stark regulations can complicate the understanding of value.

imaging Fair Market Value

Fair market value is defined as the price at which property would be exchanged between a typical willing buyer and a typical willing seller when each party has reasonable knowledge of the relevant facts and neither party is under compulsion to buy or sell. Essentially, fair market value is the value of a business as determined using the current and expected future state of operations (in the absence of a transaction). This assumes that a typical buyer or seller could not add value by providing significant operational benefits. In the imaging marketplace, typical buyers and sellers include (but are not limited to) ordinary investors, physicians, and health systems. If all typical buyers or sellers would provide operational benefits, a valuator or appraiser would be able to adjust the worth of current operations accordingly. Common benefits that a typical buyer or seller would provide (that a valuator might consider) include instances where the center has incompetent management, a below-average billing/collections function, abnormally high overhead, and excess staffing levels, compared with the marketplace. The assumption is that any typical buyer or seller would make rational managerial decisions and correct these operational deficiencies. What a valuator would not be able to consider are any benefits or synergies that a specific buyer, such as a particular health system, might bring to an imaging center after the transaction. Benefits or synergies that specific buyers might contribute include superior contracted reimbursement rates, duplicate-expense reductions, and incremental volume. While large health systems would probably be able to provide these benefits, other typical buyers (such as physicians or individual investors) generally would not. As a result, many synergies and benefits of this nature cannot be considered when the standard of fair market value is employed. Click here to continue to the full article on imaging fair market value and investment value.

Lack of Investment in Imaging Equipment Might Contribute to Accelerated Consolidation

Published by ImagingBiz Few would disagree that it’s increasingly difficult to operate as a freestanding imaging-service provider. Reimbursement continues to face pressure, patients have become more savvy regarding their copayments, and increased competition from hospital operators has caused industry participants to become intensely focused on cost efficiencies. We have entered an environment where economies of scale and focused expertise will correlate with enhanced competitive advantages; consequently, we find evidence of increased partnerships and consolidations. One factor that stands to accelerate the partnership/consolidation trend is often left out of the conversation: The impact of the recession on capital investment in imaging equipment might soon create accelerated market activity, however. Over the past several years, the industry has announced several notable partnerships. Examples of imaging chain–hospital partnerships include those of Alliance HealthCare Services (Newport Beach, California) and Emory Healthcare (Atlanta, Georgia); RadNet (Los Angeles, California) and Barnabas Health (West Orange, New Jersey); and Texas Health Resources (Arlington, Texas) and Envision Imaging (Mansfield, Texas), among others. As a testament to a potentially increased imaging chain–hospital partnership trend, Larry Buckelew, interim CEO of Alliance HealthCare Services, says, “In this environment we’re in, we’re finding hospital partners more interested than they’ve ever been before.” The most notable freestanding transaction occurred in July 2012, when Insight Imaging (Lake Forest, California) acquired the majority stake in Center for Diagnostic Imaging (Minneapolis, Minnesota) for $231 million. While the industry continues to consolidate, smaller freestanding facilities are generally focused on trying to maintain their market share and profits. The response to industry headwinds varies by service market, but evidence points to the potential for the industry to reach a turning point during which partnerships/consolidations accelerate due to the lack of capital investment in equipment in recent years. Click here to continue to the full article.

Trends and Issues in JVs Between Health Systems and Imaging Center Companies

Published by ImagingBiz Written by Kevin McDonough and Colin Park Consistent with the observed trends affecting our national health-care market, the diagnostic-imaging industry has been acutely affected by the forces of consolidation. The number of transactions involving diagnostic-imaging centers has grown consistently over the past five years. Most recently, transactions involving the formation of joint-venture arrangements between health systems and large companies operating multiple freestanding imaging centers have become popular. The underlying driving forces—for both health systems and imaging-center companies, in pursuing such arrangements—are the desires to position their entities better (from economic and quality perspectives) and to protect their existing diagnostic-imaging business from current and future competitive threats. Understanding these factors is critical to anticipating and addressing potential challenges and issues in the pursuit and formation of such joint-venture arrangements. Click to continue to full article.

Creating a Healthy Deal Environment in Hospital–Imaging Transactions

Published by ImagingBiz When contemplating a potential transaction between an imaging center and a hospital, including the appropriate people and committing to transparent communication between the parties are essential to promoting a successful transaction environment. In order to achieve the desired goals of both parties, several key individuals should be active participants during the entire deal cycle, including the administrator and/or key executive from the center, a hospital representative, legal counsel for both parties, and an experienced valuation company.

Center Administrator

The center administrator and/or key executive should expect to be heavily involved throughout the entire transaction process. This involvement usually begins as soon as the two parties start discussing a potential agreement and is unlikely to end until the transaction has been signed and finalized. Initially, administrators should expect to be asked to provide a lot of information regarding the historical operations of the center, from both financial and productivity perspectives. The more transparent and upfront the center’s managers can be regarding any potential historical issues or disparities, the more quickly those concerns can be discussed (and the sooner all parties can become comfortable with the results). In addition to the historical operations of the center, its managers should spend a significant amount of time considering expected future operations. These might range from expected volumes to future reimbursement expectations (and potential changes) to future capital-expenditure requirements to current and potential competition in the local market. Click to continue to the full article.