Are You Considering Selling Your
Imaging Center or Practice? Or
Merging With Your Healthcare
System? Part 1 of 2
Richard S. Cooper, Esq.
McDonald Hopkins LLC
600 Superior Avenue, E., Suite 2100
Cleveland, OH 44114
(216) 348-5438
rcooper@mcdonaldhopkins.com
mcdonaldhopkins.com
Kirk A. Rebane, ASA CFA
Haverford Healthcare Advisors
43 Leopard Road, Suite 102
Paoli, PA 19301
(601) 407-4024
krebane@haverfordcapital.com
haverfordhealthcare.com
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Learning Objectives
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• Outline a plan to develop a strategic framework to
identify high potential arrangements, and use set
processes to execute the integration strategy
• Explain the various impacts of health reform and
ACOs on radiology and imaging providers and their
catalyst for transactions
• Articulate strategic advantages and opportunities
that can flow from the relationships forged through
such transactions
• Develop a strategic framework to evaluate the
merits of alternative buyers/partners, transactions
and structures
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General Business Issues
that Drive a Radiology
Organization to Consider a
Sale or Merger
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• Improving market share to better leverage payor
contracts
• Benefitting from economies of scale
• Increasing access to capital and technology
• Expansion of service lines
• Improved recruiting
• Ability to sub-specialize
• Ability to afford sales and marketing
• Ability to cross-train personnel
• Access to new customers and business
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Macro Industry Drivers of
Transactional Trends
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• Factors contributing to the record levels of
healthcare industry M&A activity and valuations:
– Aging of the population: In 2009, there were 39.6 million
people over age 65, representing 15% of the U.S.
population and 1/3rd of healthcare consumption. By 2030,
those over 65 years old will increase to 72 million.
– Diagnostic imaging remains an extremely valuable service
that represents a very small percentage of healthcare
expenditures, but influences a very large percentage of
physician decisions.
– Despite years of consolidation, the diagnostic imaging
industry remains highly fragmented.
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– Economic recovery: Transactions that had been delayed
by the recession have created a pent-up demand for
acquisitions by buyers and an over-supply of willing
sellers. The credit markets are continuing to thaw.
– Sellers will be motivated to sell prior to tax rate increases;
capital gains tax rates revert from 15% back to 20% on
January 1, 2013. In addition, the 2010 healthcare reform
legislation included an additional 3.8% Medicare Tax
surcharge on investment income, so the capital gains rate
will actually be 23.8%.
– Big pharma, other large healthcare companies and foreign
companies are entering/re-entering the domestic
healthcare industry by paying top dollar for acquisitions.
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– New technologies are creating new markets.
– Private equity is attracted by the industry’s
strong fundamentals and the non-cyclical
nature of the industry. 12% of private equity
deals completed in 2011 were investments in
healthcare.
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– Healthcare reform has created the need – whether real or
perceived – for consolidation of providers and service lines
into healthcare systems.
– Radiologists who are increasingly challenged by their
private practice’s financial situation are turning to their
hospitals in search of clinical integration, operational
combinations and even employment.
– Not-for-profit hospitals have been experiencing extreme
pressure on operating and non-operating cash flows, and
have faced increasingly restrictive and expensive taxexempt debt. Many hospitals continue to operate with
negative margins.
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– Proposed budget cuts total more than $125 billion to $360
billion from Medicare, Medicaid and other health programs
over the next ten years, forcing hospitals to continue to
look for new sources of revenue.
– Traditional operational strategies to improve liquidity and
generate capital, including revenue cycle improvements,
expense reduction programs, operational efficiency efforts,
and deference of capital expenditures, have been fully
implemented in many cases – there is no more cash to
squeeze out for many hospitals. In addition, deferred
capital investment in plant and IT will need to be satisfied
at some point – some cost cuts are unsustainable.
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– Not-for-profit hospitals that are not looking at expansion as
the solution to healthcare reform instead are increasingly
looking to capitalize on the hidden value in their non-core
assets, such as the imaging center operations, with an
objective of raising much-needed cash.
– The allocation process for scarce capital resources
(including cash capital, management resources capital and
space capital) can result in the classification of imaging
operations as non-core.
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– Hospitals are seeking to monetize non-core and/or
underperforming assets and service lines throughout joint
ventures or outright sales
• Generates immediate and substantial cash proceeds for a
healthcare system
• Can reduce a health system’s ongoing cost for ancillary services
• Allows for the redeployment of capital – both financial and human
capital – into more optimal strategic areas for the system
• Ensures the ancillary’s offerings will be at the technological cutting
edge
• Enables the avoidance of capital investment in the ancillary
• Preserves employment in the community, often critical to a mission
statement
• Maintains or improves current service levels
• Lets management focus on core assets/business of the institution
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– From a buyer’s perspective, former hospital assets or
service lines can be attractive for several reasons:
• Third party specialty operators can often operate businesses more
efficiently and profitably, with no degradation in quality, than a
hospital
• Third party specialty operators often have lower cost structures,
primarily due to wages and benefits
• Third party specialty operators often have a clinical expertise, and
can demonstrate better clinical outcomes at lower costs than
hospitals
• Hospital-oriented assets or service lines often benefit from a
continuing referral stream of business
• The third party acquirer can still benefit from trading on the goodwill
and name of the hospital, proactively through co-marketing and cobranding
– Therefore, we anticipate that healthcare industry deal
activity and valuations will remain at their current high
levels for the foreseeable future
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The Impact of Healthcare
Reform on Radiology and
Imaging Transactions and
Joint Ventures
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• Regardless of the ultimate fate of the Affordable
Care Act, healthcare reform is becoming a powerful
catalyst for consolidation and integration in the
healthcare industry.
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• Healthcare reform will impact consolidation in
several key areas:
– Decreasing revenues: Payment rates will decrease,
indirectly encouraging consolidation by forcing healthcare
participants to find new ways to decrease costs and
increase negotiating clout with both suppliers and payors
– Increasing costs: The cost of doing business will increase
as healthcare entities spend more on compliance,
technology and physician employment
– The ACO-type of model will encourage network formation
and greater clinical integration by rewarding integrated
healthcare systems that can reduce costs and improve
quality
– Independent healthcare entities may have restricted
access to payor contracts and patient populations
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• At least for now, the ranks of the insured are
expected to rise dramatically as the political
uncertainty over healthcare reform slowly changes.
Focus on population management will drive
providers to consolidate in order to integrate
services, generate economies of scale and minimize
leakage out of the system.
• The rise of ACOs due to healthcare reform are
causing healthcare systems to acquire ancillaries
and physician practices in an attempt to broaden
and fill-out service line offerings and to ultimately
create one-stop-shopping providers.
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• Historical reimbursement cuts, expected lower
reimbursements in the future and tighter control over
utilization have weakened the financial performance
of many current industry providers. Finding a partner
or a suitor may be the only way to salvage the
business.
• Early detection can reduce downstream healthcare
costs. Therefore, diagnostic companies such as
imaging centers are seen as valuable components
of an overall healthcare organization’s strategic
plan.
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• Providers must demonstrate to both government payors
and commercial payors that they can provide highquality care at a lower cost. There is a paradigm shift
toward outcome measurement and evidence-based
medicine. Such efforts will require not only a diverse
array of service offerings within an organization, but also
the financial strength and breadth of management to
analyze and demonstrate outcomes.
• Larger organizations that have greater critical mass will
be able to compete more effectively in this environment
– Larger entities can spread fixed costs over a broader
revenue base
– Larger entities will have better access to affordable capital
– Larger entities will be better able to develop sophisticated
systems that can measure quality and allow for sharing of
best practices
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Successful Transaction
Requirements
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• Successful organizations understand their options,
have developed a strategic framework to identify
high potential arrangements and use set processes
to execute the integration strategy
– Take an inventory of non-core and/or underperforming
assets and service lines
– Determine the strategic implications of disposing of, or
entering into a joint venture on, the identified assets and/or
service lines
– For those assets and/or service lines that survive the
strategic test, conduct a preliminary valuation in order to
quantify the monetization opportunity
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• From a seller’s perspective, it is important to:
– Find the partner or buyer which is best able to meet your
organization’s strategic objectives
– Maximize the value and purchase terms of a transaction
– Minimize organizational disruption during the sale process
– Structure a process that facilitates regulatory approval
– Consummate a transaction which leaves a service line
consistent with your mission statement
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• From a buyer’s perspective, it is important to:
– Find the target best able to achieve your organization’s
strategic objectives
– Obtain the best possible price and deal terms
– Consummate a transaction which results in an
organization consistent with your mission statement
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• The selling process should include:
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An assessment of all strategic options
Transaction planning and strategy development
Development of acceptable confidentiality agreement
Development of confidential information memorandum
Development of acceptable buyer list
Information exchange coordination and process
Proposal evaluation and negotiation
Due diligence coordination efforts
Negotiation of definitive purchase agreements and
ancillary agreements
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• The buying process should include:
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Development of acquisition target criteria
Transaction planning and strategy development
Development of acceptable confidentiality agreement
Target identification
Assessment of strategic and financial implications to your
organization with respect to each identified target
Financing analysis
Valuation and transaction structuring
Development and negotiation of offer
Due diligence coordination efforts
Negotiation of definitive purchase agreements and
ancillary agreements
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Transactions Overview
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Type of transaction
Options
Description
Full Liquidity
Future Control
Capital raise
Raise money to
expand
No
Yes
Recapitalization
Sale of partial
percent
Some
Some
Sale with equity
Sale to larger
company and
reinvest
Significant
Minimal
Sale of 100
percent
Sale of company
Yes
No
Strategic
partnering –
usually no “takeout” event
No
Joint venture
Depends on
ownership
percentage and28
terms
Type of buyer
Type of Buyer
Financial
Strategic
Management
Future
Involvement
Deal Terms
Confidentiality
Financing
Other
•Consulting or
employment
required
•Equity
reinvestment
typical
•Price may be
limited by
available funds
•Rigid structure
•Less of a
concern unless
similar portfolio
companies
•Cash flow
•Focused
•More certain to
close
•Increased
capital can aid
growth and
competitiveness
•Preserve name
and legacy
•Employment not
required or shorter
period
•May value higher
based on
synergies
•Tougher terms
•Greater concern
•Revenue
•Focused
•Less certain to
close
•Greater
disruption to
business via
“transition”
•Greater
economies of
scale & benefits
•Employment not
required
•Flexible on terms
and structure
•Less of a
concern
•Limited
financing
•Less certain to
close
•Least disruptive
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Asset vs. stock
Type of Deal
Asset
Purchase
Stock
Purchase
Buyer
Perspective
Seller
Perspective
Other
Considerations
•Only assume
specific liabilities
•Write-up value of
assets & get tax
deduction
•Requires wind-up
of business
•Greater tax on
proceeds
•Transfer of licenses
may be prohibited
•Use of 338(h)(10)
election
•Greater liability
risks may lead to
lower value
•Better tax treatment •Easier to execute
•Better liability
•Requires greater
protection
buyer due diligence
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Auction vs. targeted sale
Process
Auction
Targeted
Pros
Cons
Other
Considerations
•Better value
•Better terms
•Loss of
confidentiality
•Disruption to
business
•Use of advisors
and their skills
•Synergies
•Less leverage
•Financing
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ASRT Code:
VAD0052056
AAPC Code:
26338HKFCB
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