PPM companies become force for imaging services acquisitions in U.S.

Purchases may reflect trend toward niche-market PPMs

In a fluctuating healthcare market dominated by managed care, stability can be hard to find, especially for private-practice physicians. Since the early 1990s, physician practice management (PPM) firms have offered doctors alternatives in an increasingly consolidated environment. Although most PPMs are multispecialty, several companies have arrived on the scene that target niche markets such as radiology.

Last month, two radiology PPM firms announced imaging center purchases: Navix Radiology Systems, a privately held company in Coconut Grove, FL, and American Physician Partners (APPI), a public company based in Dallas. While both are PPMs, they take different approaches to the imaging services market, with Navix acquiring mobile routes while APPI targets fixed-site centers.

Navix was established in 1995 by Miles Gilman, the company's president and CEO, and the firm's first acquisition was Radiology Associates of Florida in 1996. Its most recent deal was the purchase of National Medical Care/Diagnostic Services (NCM/DSI), a division of Bad Homberg, Germany-based Fresenius Medical Care. Fresenius decided to sell the division to focus on its core renal business, and Navix found the unit complementary to its PPM activities. Navix renamed the division Navix Diagnostix (NDX).

NDX is a mobile imaging services provider that offers x-ray, ultrasound, mammography, and some nuclear medicine. The division has annual revenues of approximately $50 million, according to Doug Mozealous, Navix's senior accountant. The acquisition gives Navix four freestanding imaging centers and 145 mobile imaging routes, which serve more than 1100 sites. Although Navix has been predominately based in Florida, the acquisition of NCM/DSI spreads its reach across 26 states.

While Navix makes inroads in the mobile market, APPI has focused on fixed centers. The company went public last fall with seven founding physician practices, which wanted to band together to gain access to capital as well as to gain strength through numbers in negotiating managed-care contracts. The practices sold their assets to APPI in exchange for shares in the new firm and a total of $50.6 million in cash. The physician practices then formed a new medical professional corporation, which entered into 40-year service agreements with APPI.

Since the IPO, APPI has grown to nine radiology practices consisting of 243 physicians and 47 hospital contracts. The Dallas firm posted second-quarter (end-June) revenue of $51.1 million, of which $17.6 million was retained by the physician practices. APPI had net income for the period of $3.4 million. The company in July acquired two centers in California and New York, bringing the firm's total to 72 centers in six states. The new centers provide a full range of imaging modalities and have combined revenues of $2.6 million.

Despite the financial troubles of such multispecialty PPM companies as PhyCor, MedPartners, and FPA Medical Management, radiology-specific PPMs are poised for action. Radiology is attractive to PPMs because the market segment enjoys a high level of revenues but is relatively fragmented and disorganized, according to an article published in Diagnostic Imaging by Dr. Charles Fiske, chair of Affiliated Medical Practices, a radiology management service organization in Walnut Creek, CA.

Companies like Navix and APPI are aware of radiology's potential for consolidation and believe that many radiology groups would welcome an affiliation with a company that would address the business aspects of a practice.

"Radiology's been virtually untapped," said Sami Abbasi, senior vice president and CFO of APPI. "Our average group size is 25 physicians. They've come together over time, and now they're looking up and saying, 'You know, when we started this 20, 30 years ago, medicine was very different.' Today you really have to really understand the business aspect of medicine to be successful."

Avoiding discord. Both APPI and Navix negotiate long-term agreements in which physicians' reading fees are determined by the Heath Care Financing Administration's relative value unit (RVU) schedule. The schedule calculates professional and technical reimbursement amounts for a particular scan, and the PPMs keep the technical fee while physicians keep professional fees. Such an arrangement prevents discord over the division of imaging studies revenues, according to Abbasi.

"Physicians have been very receptive to (the model)," Abbasi said. "They don't have to worry about haggling with us over how much of that revenue stream they get."

APPI's strategy is to integrate its radiology group networks with its imaging centers to cover a wide geographical base. The company enters a new area by purchasing physician practices before buying fixed imaging centers.

Navix's strategy differs in that its new mobile sites are not necessarily near its affiliated practices. The company hopes the newly acquired units will provide opportunity for further group acquisitions, according to Mozealous.

"(The Fresenius deal) opens doors to radiology groups for Navix to broach practice management," he said.

By focusing on radiology, PPMs like Navix and APPI become potential rivals of other radiology groups or PPMs, as well as imaging center companies like U.S. Diagnostic of West Palm Beach, FL, and Medical Resources of Hackensack, NJ. After two years of frenetic acquisitions, both imaging center giants are catching their breath as they process their purchases and deal with personnel troubles (SCAN 2/19/97 and 12/17/97).

Some industry watchers wonder whether radiology PPMs can avoid the pitfalls that multispecialty PPMs have experienced. Lauded as an effective model in an era of managed care, investors expected publicly held PPMs to make medicine more efficient by managing physicians. But when revenues didn't support expectations, investors lost confidence and stock prices fell.

"Wall Street is looking for double-digit growth from year to year," said Dr. James Thrall, chief of radiology at Massachusetts General Hospital in Boston. "There is no way, (besides) practice acquisition, that (PPMs) can grow at double-digit (rates)."

Yet other observers believe firms like Navix and APPI may have a competitive advantage. The competitive edge may come from the companies' blending of multiple revenue sources, according to John Cumming, CEO of WDI Healthcare Markets Group in Hilton Head, SC.

"(Firms like APPI) are buying both the radiology group and the outpatient center," Cumming said. "They can serve in two roles-as suppliers or competitors-so they compete with other practice management groups that happen to buy imaging centers and with imaging service companies. They're a hybrid."