Center sales trickle despite growing threat

To sell or not to sell? If you are a referring-physician imagingcenter owner and have concluded that you will have to sell outsometime, do you sell now or hold on for a better price--or untiluncertainty over government restrictions clears up?

Doctor partnerships that hold out too long risk having to acceptfire-sale prices if or when a total federal ban on referring-physicianownership of medical imaging centers is instituted. Unless a significantnumber of unforeseen buyers enter the market, 800 or so doctor-ownedcenters in the U.S. will be chasing relatively few buyers withinsufficient funds, said Terrance M. Gill, president of UnitedHealthcare of Del Mar, CA.

Gill, founder of the nonprofit MR Cooperative and for-profitMedical Ventures imaging center firm, established United Healthcarelast month after leaving his position as president of MedicalVentures. Gill's new firm will broker buyers and sellers of physician-ownedimaging centers. United Healthcare already assists about a half-dozenpublicly held imaging center companies in their efforts to acquiremore centers, he said.

"If you take a look at the balance sheets of all the publiclyheld companies in the imaging center business, they probably havecash and credit lines of about $200 million," Gill told SCAN."The collective earnings of the (800 physician-owned) centersmay be half a billion dollars. If they sell out at four timesearnings, their collective purchase price would be $2 billion.Either sellers are going to have to take a lot of stock and promissorynotes or there are going to have to be many more buyers enteringthe business."

Or the forces of supply and demand will push down the pricesof independent, physician-owned centers. A fire-sale precedentwas set three years ago when Rep. Fortney "Pete" Stark(D-CA) pushed through Congress legislation banning referring-physicianownership of clinical laboratories (SCAN 12/13/89). Imaging centerswere excluded from the first Stark bill at the last minute, butthe Congressman hopes to extend the ban to medical imaging innew legislation (SCAN 2/26/92).

"The prices for clinical labs after Stark passed his billstarted at five to seven times earnings. In six months, they weredown to two times earnings. The doctors who followed what happenedwith clinical labs are quite concerned that the same thing isgoing to happen with imaging centers," Gill said.

With individual states setting their own restrictions and theDepartment of Health and Human Services implementing existingsafe harbor regulations on referring-physician ownership, doctorshave plenty to think about as they wait for Stark's axe to fall.

The Inspector General's office of HHS is apparently preparinga questionnaire to be sent out to all imaging centers with physicianowners, Gill said. HHS will ask the physician owners to indicatewhether they refer to their facility and, if so, to provide furtherinformation and supporting documentation.

"The supporting documentation they are going to ask forwill clearly indicate who is and is not in compliance (with safeharbors)," he said. "If you are not in compliance, whichis the case for most doctor-owned centers, you are giving themchapter and verse as to how you are not in compliance. The nexteasy step is (for HHS) to call up those centers and say they wouldlike to come out and visit."

Not many centers are being sold now despite the threat of governmentcensure.

"Plenty of people are holding off as long as they canbecause they have excellent cash flow on a monthly basis and itis not absolutely, incontrovertibly clear that they have to sellout," Gill said.

If referring-physicians are forced to sell, radiology groupsmight step in and provide additional demand for centers, whichcould keep prices from a free-fall dive, he said.

Hospitals are naturally interested in nearby imaging centers,although they are strapped for capital. Hospitals also still tendto fear technological obsolescence of large capital imaging equipment,which was one original impetus behind creation of freestandingimaging centers.

Since hospitals don't normally seek as high a rate of returnon investments as imaging center companies, they might be willingto pay higher multiples over pre-tax earnings (cash flow)--ifthey had the resources and desire to enter the market.

A few hospitals and other buyers have spent five times earningsfor imaging centers, Gill said. But talk of these deals has beenexaggerated in the retelling into multiples of six, seven or eighttimes earnings.

"There is a lot of looking on the part of the sellers,"he said. "They are trying to play one buyer off of another.Some (imaging centers) still think they can sell out for six orseven times cash flow. Nobody is willing to pay them that, butthey have heard stories that people are paying that."