Medical Resources turns corner with focus on managed care

Company pursues imaging center acquisitions

Imaging services firm Medical Resources is proving that thereis life after managed care for the imaging center industry. TheClifton, NJ, firm decided to target managed-care contracts earlyon and has seen its efforts rewarded with strong revenue and earningsgrowth in recent quarters.

Medical Resources did not arrive at its current position withoutsome soul-searching. The firm saw a proposed merger with NMR ofAmerica fall through in 1993 due to differences in the companies'management philosophies (SCAN 11/3/93). Last year, Medical Resourcesunderwent a restructuring and let go longtime president and CEOErnest DeSalvo, replacing him with William Farrell, who carriesthe title co-president and COO.

Farrell began an effort to streamline the company and cut costs,slashing over $1 million in expenses in 1994. This year, withits reorganization behind it, Medical Resources has focused onsigning contracts with managed-care organizations while at thesame time growing its business through acquisition. Several recentpurchases include a Hackensack, NJ, center bought in June for$1.8 million and the acquisition of two imaging centers in FortMyers, FL.

Medical Resources now owns a total of 11 imaging centers, sevenin the New Jersey/New York metro area and four in Florida. Thecompany is actively seeking additional acquisitions and this summerit secured a line of credit for $4.3 million that it will useto fund its growth.

"We plan to acquire at least three more imaging centersby the end of this year and at least two more a quarter thereafter,"Farrell said.

Medical Resources has been interested in managed care for thepast several years. Farrell estimates that the firm has inkedagreements with over 32 managed-care payors, most of them long-termdeals that lock up a good portion of the patient population ina region for the company's centers.

The company's involvement in managed care was heightened lastyear when Medical Resources was asked to come up with a proposalto develop a radiology network for a major insurer, accordingto Farrell. The insurer eventually decided to put its own networktogether, but Medical Resources found that it had done much ofthe legwork required to land managed-care deals. It formed a newsubsidiary, Network Management Services (NMS), to handle its effortsin developing radiology delivery networks for large insurers inthe New York and New Jersey areas. It has already contracted withHealth Insurance Plan of New Jersey, a major insurer in the region,to manage a capitated network.

NMS administrates outpatient radiology services for payors, includingfunctions such as network development, credentialing, utilizationreview and billing and collection. NMS is also willing to enterinto fee-for-service and risk-sharing agreements, Farrell said.

Medical Resources has also made an effort to diversify outsideits core imaging center business, with mixed results. The companylast year bought StarMed Staffing, a health-care recruiting andplacement service, and in February purchased Maternity Resources,a manufacturer and retailer of maternity wear. While the maternitybusiness has been profitable, Medical Resources has found thatit has few synergies with medical imaging and is a source of confusionfor market analysts. The company is in negotiations to sell thebusiness, Farrell said. It plans to retain StarMed.

The firm's acquisitions have helped Medical Resources to itsmost profitable quarter in its history. The company posted netincome of $1.1 million for the third quarter (end-September),an increase of 78% compared to $601,000 in the same period lastyear. Revenue jumped 70%, to $16.8 million in the most recentquarter compared to $9.9 million in the third quarter of 1994.

While some imaging services firms have joined Medical Resourcesin reporting improved financial results in recent months, theindustry is not out of the woods yet, according to Farrell. Imagingcenter companies must tackle the managed-care dilemma head-onif they want to prosper.

"There is still definitely some more pain left, especiallyfor the companies that haven't positioned themselves as we have,by developing relationships with managed-care organizations,"Farrell said.