Scan providers struggle to maintain patient volumes

Servicers blame vendors for increased competition

Two major operators of outpatient imaging services have run into hard times-and the vendors of high-performance equipment may be the major reason.

On March 12, Radiologix, which generates revenues through 117 imaging centers in 17 states, reported disappointing fourth quarter and year-end results. The single largest factor was increasing competition brought on by vendors' intensive selling of imaging equipment, according to Sami S. Abbasi, Radiologix executive vice president and CFO.

"In an effort to continue to grow their businesses, equipment manufacturers are aggressively selling high-end equipment on very favorable terms to new buyers," he said. "The result is a major change in the traditional supply of diagnostic imaging services in our markets."

The installation of high-performance systems increased capacity by 15% in MRI and other high-end modalities, Abbasi said.

"All of this in a marketplace that is growing at an estimated 8% to 10% per year," he said.

On March 4, Alliance Imaging, a leading provider of outsourced diagnostic imaging services including mobile operations, revised its financial outlook for 2003 downward, despite a strong 2002. The company cited several of the same problems as Radiologix, noting accelerated competition as one of the primary contributors.

"Our new guidance reflects higher customer losses than previously estimated and lower revenue gains from new customers, including slower startups for freestanding MRI centers," said Kenneth S. Ord, Alliance executive vice president and CFO.

Despite its problems, Alliance managed a positive fiscal 2002. Revenues increased 8.9% during the quarter ended Dec. 31, 2002, jumping from $95.1 million in the same period in the previous year to $103.6 million. For fiscal 2002, revenues increased 9.8% to $412 million from $375.2 million in 2001. The number of MR scans completed using Alliance systems increased 4.7% in 2002 to 873,300, according to the company.

In the context of looming problems, however, Alliance executives revised the company's first quarter 2003 revenue outlook downward to between $102 million and $104 million. Earlier estimates had predicted $105 million to $108 million. The executives also revised downward the outlook for 2003 from a range of $440 million to $450 million to one of $415 million to $425 million.

Radiologix may have misread early signs of problems related to increased competition, chalking up decreasing patient volumes seen in third quarter 2002 to vacationing patients and physicians.

"We had insufficient awareness of growing competition and waited too long to take action," Abbasi said. "We took our leadership in key markets for granted. We were complacent and did not fully comprehend the magnitude of the increase in capacity and how it would affect our business."

Excluding special charges, Radiologix reported service fee revenues in 4Q 2002 of $66.5 million versus $73.3 million for the same period a year earlier and a net of $1.6 million compared with net income of $2.6 million. The loss would have been greater if the company had figured in other costs totaling $3.7 million incurred in the fourth quarter 2002. (Nearly $1 million was attributed to severance and other costs related to the resignation of the former chairman and CEO.) For the year, the company recorded service fee revenues of $283.9 million, a 2.6% jump from $276.7 million in fiscal 2001. Net income was $10.8 million compared with $13.8 million the previous year.

As with Radiologix, competition appears to be drawing patients away from Alliance. The principal reason for Alliance's expected future revenue shortfalls is the burgeoning disparity between the number of customers leaving Alliance and those joining it, Ord said. Annualized revenue losses from customers leaving Alliance totaled $50 million in 2002 compared with revenue increases totaling $28 million due to companies joining Alliance.

"The gap is increasing," he said.

Another factor that could affect future revenues is unrest in the Middle East, he said. Increased heating oil costs will dig into the bottom line.

Weather also contributed to problems late last year and may affect the current quarter revenues for both Alliance and Radiologix. Harsh storms in the eastern U.S. during early 2003 have been particularly problematic, according to Ord.

"We're seeing MRI and PET scan volumes below our expectations, and our expectations always include some degree of weather-related problems," he said. "Obviously, reduced scan volumes cause a reduction of revenues."

Seven of the company's nine regions were seriously affected by poor weather this winter. In some cases, Alliance's mobile imaging systems could not reach customers; in others, large numbers of cancellations were reported. Physician offices often were closed immediately following storms, slowing the referral rate and reducing scan volumes. Alliance executives predict a $2.2 million loss in revenue due to the extreme weather conditions.

Radiologix is also battling the weather, but the company has other problems as well. Stephen D. Linehan, who took over as president and CEO in February, said his firm is taking steps to improve service, noting that backlogs of up to two weeks in some areas made it easier for competitors to take business away from the company's centers. Radiologix has improved efforts to recruit and retain technologists and is now taking steps to cut redundant administrative and management costs at corporate and regional offices. The company may try to expand revenues by owning and operating freestanding imaging centers in new markets.

Paul Viviano, Alliance president and chief operating officer, said several planned initiatives are expected to turn things around in 2003:

- Protecting and growing Alliance's core mobile MRI business, its traditional strength. Existing customers will be proactively managed, and new hospitals and medical group customers will be more effectively targeted.

- Aggressively pursuing freestanding imaging centers. Several already are scheduled to open this year.

- Continuing PET expansion. The company expects to add 10 to 15 systems in mobile suites this year.

- Increasing the company's sales management and support.

"I believe these strategies will make a significant and long-lasting impact on the organization, but they will take some time to be fully realized," Viviano said.