AHS buys MRI leases with GE help

American Health Services took advantage of low interest ratesto restructure its equipment financing relationship with GE MedicalSystems this month. The imaging services firms converted 16 GEMRI units from operating leases to owned systems.

GE provided AHS with financing for purchase of the leases as wellas an additional line of credit to fund growth of the smallerfirm's fixed-site imaging business.

As part of the arrangement, GE will receive stock purchase warrantsthat, if exercised, would give the imaging equipment vendor about12.5% of AHS stock. The financing is subject to approval by PhilipsCredit, AHS's major lender.

AHS struggled financially over the past year, following the bankruptcyof a major shareholder. Philips restructured its loans to theNewport Beach, CA, imaging services firm and provided additionalcredit last spring (SCAN 5/8/91).

"We have completed our turnaround and identified sourcesof funds. We are clearly on an acquisition path, and the extracash that comes as a result of this transaction is earmarked forthat," said E. Lawrence Atkins, president and CEO.

The terms of GE's operating leases were good, but savings on interestwere sufficient to justify purchase of the units. This does notmean AHS would choose ownership over leasing in the future, hesaid.

Most AHS systems are installed in fixed-site facilities, adjacentto health-care providers that are partners in the ventures. Theservice firm retains all risk related to the imaging equipmentin the facilities, Atkins said. In choosing to convert its GEsystems from lease to ownership, AHS assumes greater risk in theevent of technical failure or obsolescence.

"Time will tell how favorable this decision will be. It wasa financially driven transaction that had to do primarily with(gaining access to) lower interest rates. It also created cashfor us at an opportune time," he said.

AHS has evaluated several center acquisition prospects in theaftermath of the federal safe harbor regulations restricting referring-physicianownership of medical facilities, issued in July. Although noneof these deals was closed, the firm's stronger financial positionwill enable it to explore more center purchases in the future,he said.

Following the sale of four mobile MRI routes to Maxum Health thismonth (see preceding article), AHS retains only two mobile systems,located in the Los Angeles area. These routes will eventuallybe converted to fixed-site service, he said.

"We are virtually out of the mobile business now," Atkinstold SCAN. "It didn't make sense to be in that business.We either had to get a lot bigger (as a mobile provider) or getout."

PURCHASING IMAGING CENTERS is not an easy task. Not only are theasking price multiples over cash flow higher than most buyersare willing to pay, but the valuation of centers is difficult,given uncertain future revenues, he said.

"If you take physicians out of a partnership, how do youvalue the business going forward? With any other business, youdon't have to assume a radical change in revenue as a result ofthe buyout itself. Here, the owners are also customers. It isa tough dynamic to quantify," Atkins said.

Since most imaging centers are highly leveraged with debt, trimming10% from revenue could result in a 50% decline in the bottom line,he said.

"You have to be hypersensitive about deterioration in forecastedrevenue. If only a few physicians significantly change their referralpatterns, it is enough to distort the value," he said.

Although most ASH imaging ventures operate in partnership witha community health provider, the firm will consider acquiringindependent centers, with an eye to eventually finding a hospitalpartner, Atkins said.

The firm's strategy of working with hospitals may prove wise ifMedicare issues a proposal this spring to rebundle payments forinpatient and outpatient services (SCAN 2/12/92).

Hospitals generally refer few patients to imaging centers relativeto the number of physician referrals, and they are usually passiveabout where the doctors send their patients, he said. They couldbecome more aggressive if reimbursement for outpatient imagingis channeled through the hospital.

"If the hospitals are ultimately the payers, I suspect theywill start asking to sit down with (referring doctors) and tryto reach an agreement (as to the center for referral)," Atkinssaid.

BRIEFLY NOTED:

• NMR of America signed a letter of intent this month topurchase a 65% interest in North Fulton MRI, near Atlanta. TheMorristown, NJ, imaging services firm is targeting the southeastU.S. for expansion of its imaging center chain, according to JosephG. Dasti, president and CEO.

NMR of America hopes to participate in a trend towards industryconsolidation. The firm is evaluating 35 potential center acquisitions,Dasti said.

The company is also increasing its equity positions in existingcenters. Most recently, NMR of America raised its stake in twoof its center joint ventures from 44% to 60% and from 43% to 70%.Federal safe harbor rules regulating referring-physician investmentin medical centers require that equity owned by referring partnersnot exceed 40%.

• DVI Health Services of Irvine, CA, is targeting the outpatientimaging services field. DVI purchased a controlling interest intwo imaging center operations last month. The firm created twonew companies to take over the existing imaging businesses andpurchased 60% of those companies.

Vascular Centers of America of Rome, GA, will incorporate NorthwestGeorgia Neurovascular Associates. DVI-TMC Imaging will offer MRIservices in conjunction with TMC Radiology of Tempe, AZ.

DVI already owns 28% of a five-unit New York/New Jersey mobileMRI provider and has agreed to purchase 40% of a Pennsylvaniamobile firm, said David L. Higgins, president and CEO.