Hello, everyone. Good afternoon. My name is Chris Tippett, and I'm an associate here on the J.P. Morgan Healthcare Coverage Team. Today, it is my pleasure to introduce RadNet Incorporated, and without further ado, I will turn things over to the Chief Executive Officer, Howard Berger.
Thank you, Christopher. There's three of us that are gonna be speaking here, myself, Mark Stolper, the Chief Executive Officer, and Dr. Gregory Sorensen, Chief Science Officer and board member. So, we'll get through this as quickly as we can to entertain questions, and also, take the opportunity to kind of broaden the conversation about some initiatives that we're embarking on here in 2024. It's been a while since we presented at J.P. Morgan, and, I wanna thank, the J.P. Morgan team for inviting us back.
The story surrounding RadNet has been one now that is about 40 years old, about 30 years as a public company, and on the surface of it, and face of it, what most people know us for is being the largest outpatient diagnostic imaging company in the United States. We've grown the company substantially since the last time we were here. Mark will talk a little bit about that, but we're also proud of the innovation that we're bringing, not just to the imaging sector, but also for perhaps some opportunities to broaden us as a healthcare company. The company was founded in 1980, a very fragmented industry at that time, and still a very fragmented industry.
It's one that has been traditionally run or performed by outpatient, what we call mom-and-pop operators, perhaps over 6,000 of them in the United States. RadNet, which is approaching 400 centers, is still a very small part of that delivery system. However, the company is concentrated in seven states, and those seven states represent about 25% of the population in the United States. Much like other industries and some healthcare companies, we're largely defined by the volume of business that we do. Company currently does about 10 million outpatient imaging procedures annually, which is by far the largest in the United States.
Over the last several years, the company has grown not just in terms of the number of centers, but more importantly, the number of centers that we own, which are well over a third of our centers now, are jointly owned by large health systems that have essentially looked to us to be their outpatient imaging strategy. That's for two reasons. 1, as more and more of the payers and patients, for that matter, look to outpatient imaging as a better alternative to the hospitals, which are several times more expensive than we are, and perhaps not as nice a patient experience, if you will. That's, you know, one aspect of it. The other is that hospitals generally just don't know how to operate and navigate in the outpatient arena, and this goes for almost all ambulatory or outpatient procedures.
So given the fact that this is an expanding business which has begun to transition itself not only for the diagnostic work that we do, but screening tools that are used for population health are gonna become more and more part of what people seek for early detection of disease, not only cancer, but other diseases, cardiovascular diseases, diabetes, and other things that imaging will be uniquely positioned to do. In the past few years, we've expanded the company and gone into artificial intelligence. You hear a lot about that, and Dr. Sorensen will hopefully expand on that. But you hear a lot about artificial intelligence in every sector of business, particularly in healthcare.
But in imaging, the early detection of breast cancer, along with lung cancer, prostate cancer, colon cancer, and others, is an important part of what artificial intelligence is able to do to detect the disease, not only earlier, but more accurately, than even the best of radiologists. So we began that initiative about three years ago, and we'll talk about how the transition from clinical artificial intelligence, which is what I just talked about, to generative artificial intelligence, primarily driven by ChatGPT, will be a major focus of the company, to combine all this on a single operating system platform, which we're very excited about. The company, since 2006, which was really what put RadNet on the map, through..
with a large merger that was done at that time, now is gonna do close to $1.6 billion. Our actual revenue that comes through the company, because in our joint ventures where we're not the consolidated partner, we don't report our revenue, but our actual billed revenue in collections is closer to $2 billion. EBITDA this year, as we've forecasted in our guidance, will be between $235 million-$240 million. We have 9,000 employees operating in the seven states that I mentioned. You'll notice that on a map which is East Coast and West Coast, we're where the people are.
My favorite line is, why-- when they caught, Willie Sutton, and as a famous bank robber, and they asked him, "Why do you rob banks?" Says, "That's where the money is," if you will. Given that the population, and particularly, is so dense on the coast, and our business, much like the airline business, much like the hotel business and others, is really how well we can fill the capacity that we have in our imaging centers. But there's other facets of what we've done to really separate ourselves, one of which is, for probably about 30 years now, we've been doing capitation, which, I remember when I first started talking about this, it was a dirty word.
But now it's really just an alternative form of payment that is used to try to manage controlling costs by medical groups and payers that we have these agreements with. It's a significant part of our business, about 10% or so of our revenue, and a growing one, which has been somewhat dormant but now is picking up again. But I think the theme there that people should think about is alternative forms of reimbursement. With that, I'm gonna turn it over to Mark Stolper.
Thanks, Howard. I'll take you through a little bit of the industry dynamics, which represents a backdrop for what we believe to be a continuing environment for us to grow the business. If you believe the research out there, we're operating in about a $100 billion industry on an annual basis of services revenue. So it's an enormous industry. The research also says that the hospitals today perform about 50% of all the imaging in the United States. And in that $50 billion of imaging that the hospitals perform, it's believed that about half of that is outpatient diagnostic imaging that could ultimately be moved into the freestanding location.
So yeah, as RadNet looks at its marketplace today, we're operating in roughly a $50 billion industry, and as Howard said, you know, our revenue, even if you gross it up for non-consolidated operations, is about $2 billion of that $50 billion. So there's a lot of room for us to continue to grow the business. Over 6,000 imaging centers in the United States, of which we own 400, so a lot of room to continue to grow the company. Growth in our industry occurs every year. It's grown steadily for a variety of different reasons. We've got a growing population and an aging population. As the population ages, we all utilize diagnostic imaging more frequently. Medicare lives utilize diagnostic imaging three times more frequently than commercial lives.
So that will continue to be a nice trend demographically for our business. Technology, advances and innovations of equipment, contrast materials, radioactive pharmaceuticals, post-processing software and AI is also driving additional indications for ordering these types of diagnostic tests. Over the years, MRI and CT and PET CT have become a household name. There's far more acceptance, from the physician community, referring physician community, as well as the, the consumers. As Dr. Berger said, it's very much a mom-and-pop cottage industry. It has not been professionalized or corporatized, like a lot of other areas of, of healthcare services.
We're doing that on a regional basis, and we think that in the coming years, this industry will look a lot more like some of the other industries that have been consolidated in a more meaningful way, like dialysis or even hospitals, surgery centers, urgent care centers. We think that, you know, we're well positioned relative to our competition to continue to grow the company very substantially. Acquisitions has been a major part or a portion of our growth over the years.
We've been able to acquire smaller operators, mom-and-pop operators, at anywhere between 3 and 5 times, 3 and 6 times EBITDA, and implement and integrate those businesses into our operations very effectively and very accretively, and that will continue to be a part of the strategy going forward. As we all know, labor has been a challenge. The availability of labor, the cost of labor, the cost of capital, the fact that we're in a capital-intensive industry, all puts pressure on the smaller players and will continue to drive consolidation into the future. I'll do a little bit of a deep dive into RadNet before turning it over to Dr. Sorensen to talk about some of our IT initiatives. As Dr. Berger mentioned, we're in seven states.
We're an East Coast, West Coast company, where about 25% of the population lives. We continue to have a lot of growth in all of these markets. The most profitable growth we can have as a company is continuing to penetrate the markets in which we currently exist. There's unique aspects of being able to centralize cost or cost functions that we perform on behalf of our centers, such as centralized call scheduling or appointment scheduling, pre-authorization, insurance verification, as well as revenue cycle functions, and that continues to be a strategy that allows us to utilize our scale relative to our competition. So when we acquire or build, buy centers in our markets, we can do that very efficiently, very cost effectively.
The other reason for geographic concentration, which has been a core tenet of our operating history, is because it gives us a fair seat at the table to negotiate long-term, equitable pricing with the commercial insurance. So we have the ability, because we do so much volume, relative to the other players in this industry, to, you know, have a seat at the table. The payers know that if we were to go out of network and not be able to see their patients, that a lot of the volume that we currently perform will find its way back into the hospitals at much, much higher pricing. And so, this has been an effective strategy for long-term health and survival. So where does our revenue come from?
About 77% of what we do, 76% of what we do by volume is actually routine imaging, X-ray, ultrasound, mammography, and nuclear medicine studies. The more advanced imaging, which represents the other roughly 24% of what we do, is really where the revenue driver is and where the growth in the industry is in terms of MRI, CT, and PET CT. And that portion of our business, the advanced imaging, about 24% of our procedure volume, represents about 60% of our revenue. So clearly, there's a value to, you know, the more advanced imaging.
We've always felt, as a company, and it's been a core part of our strategy, to be a one-stop shop for the referring physician community, so that we, from a marketing perspective, we could put one prescription pad on the table for our referring physicians, and no matter what their imaging needs are, we could, we can handle it and service it. And that's been a big benefit of ours relative to our competition, where we generally have these large, advanced, what we call, centers of excellence, that have the full breadth of the imaging capabilities. From a payer standpoint, we have a very diversified payer class. The biggest payer that we have is commercial insurance.
These are the HMOs, the PPOs of the world, both the large national payers, the likes of Cigna and United and Aetna and others, as well as some of the small regional payers. Medicare, a government payer, represents about 22% of our revenue. Capitation, which I'll talk about in more depth on the next slide, is about 10% of our business, about a $160 million book of business. And then we've got some smaller books of business, like personal injury and workers' compensation. Capitation, as Dr. Berger mentioned in his opening remarks, is a unique aspect of our business. You know, there's a lot of talk these days about value-based care and risk-taking and risk-sharing. Well, we're actually one of the few companies that does it.
We are responsible for almost 2 million lives, the vast majority of which are in California. These are HMO patients, whose care is held in by these large medical groups or IPAs, and who are taking full risk for the medical care of these patients. We contract or sub-capitate with these large medical groups and take the imaging risk off of their plate for a piece of the per member per month fee that they're receiving from the various HMOs. It's been a book of business we've done for over 25 years.
It grows steadily every year, both as enrollment in these plans go up, as well as, as we're able to have some leverage on pricing, as utilization in these contracts continue to rise, as diagnostic imaging becomes a bigger part of the healthcare delivery system. We've had an average tenure of over 10 years of each contract. We have an exceptional renewal rate, and we get price increases generally in all of these contracts. So it's a great book of business, and most importantly, these doctors who are obligated to send us these HMO or managed care patients also see all the other payer classes, like Medicare, workers' comp, personal injury, private insurance, and they tend to send us their discretionary or their fee-for-service business as well.
So it's a great way to build the business, and to lock a lot of our competitors out of large patient volumes. Dr. Berger also mentioned joint ventures is a big part of what we do today. 36% of all of our imaging centers are held jointly with some of the larger health systems in our market, in our markets, representing about 25 joint ventures, which house 130 of our imaging centers. Some of them are accounted for on a consolidated basis, some are unconsolidated basis. We partner with some of the largest health systems in not only our region, but in the country, the likes of Dignity Health, Adventist Health, RWJBarnabas, University of Maryland, Cedars-Sinai.
As hospitals are losing patient volumes to ambulatory outpatient freestanding centers because the payers are getting more and more aggressive in moving this business into the lower cost sites of care, some of the more forward-thinking health systems and hospitals are looking for ways to recapture some of that revenue and have a long-term viable strategy around outpatient diagnostic imaging. They look to us, who has you know a 30-40-year track record in managing these outpatient facilities profitably as their long-term partner. So this is a growing aspect of our business. We believe in the next 3-4 years, it would not be unlikely that over half of our centers will find their way into these health system joint ventures.
With that, I want to turn the presentation over to Dr. Sorensen, who is RadNet's Chief Science Officer, and also the founder of the first AI business that we purchased.
Great. Thanks, Mark. I'll just, in a couple of slides, walk you through some of our digital health strategy and why RadNet is such a unique opportunity for growth and, I think, innovation. So I joined the company, as Mark said, 4 years ago, about almost 4 years ago, when DeepHealth became part of RadNet. And RadNet wants to control or be involved in AI for, I would say, three kind of very interesting reasons from my point of view. First, it just makes economic sense for us. We're so big that rather than contract out for certain AI tools, it just makes sense to own those and help control their direction. Second, though, importantly, at our scale, we can build AI better than most other groups for certain apps, for certain applications.
For example, in X-ray mammography, RadNet does about as many mammograms every year on the order of magnitude as England, the entire country. And we own all of that data. And so since data is the mother's milk of AI, we can build better AI than anybody else. We also have a more diverse population than most other groups with our extensive, underserved and minority populations on the East and in the West Coast. So we have a very diverse population, which makes the AI very robust. So it made economic sense for us. We can build really top-notch AI. And then the third reason may not be intuitive, but in times of innovation, having vertically integrated both the service and the technology allows us to create and innovate in ways that are much more nimble and creative. So let me give you a specific example.
Mammography AI, again, to choose that example, we've been trying to figure out: how do we monetize that? How can we build it in a sustainable way? And because we have both the tech and the services, we could figure out, well, what is the best way to bring value to patients? It turned out that if we used our AI a way no one else was using it, to drive a novel workflow with what we call a safeguard review, we could actually improve care substantially. We were lowering the recall rates, so fewer false positives, and finding many more cancers earlier, so fewer false negatives. And that was really impressive. I mean, we were seeing 20% changes in both directions and we felt okay, this is so compelling, why don't we offer this to patients as a way to build the sustainability?
And because the AI company and the provider are all together, we didn't really have to fight over where was the money going to go. We could just try things out, and we could then modify things. And because of that, both combination of scale and vertical integration, AI in-house makes just a ton of sense. And I think we're going to continue to do that in other areas where we feel like we have a particularly high impact, hence our investment in lung cancer screening, in prostate cancer, where we think that will be moving to, MR as a partial screening methodology. There's quite a bit of buzz over the last year about that. So this all really is why, over the past few years, we've been deeply investing and working to build our AI capacity.
Now, as we did that, we realized that one of RadNet's long-term strengths, more than a decade, is that we control our own nervous system. We have our own IT staff, if you will. And that lets us gain efficiencies that both Dr. Berger and Mark mentioned, because when we acquire a new center, we can RadNetize them and quickly have them operate efficiently. But it also means that when we do, say, a novel workflow like this mammography one, that we can introduce that relatively efficiently. Well, as part of that, we also realize that there's more than just pixel AI that we need to do. We have to actually touch many different parts of the patient journey, from scheduling, "Do you want to pay that extra $40 for the safeguard review or not?" All the way through billing, and many pieces in between.
As a result of that, we realized, you know what? We need to kind of rethink and reimagine and rework how we are operating and essentially upgrade our entire nervous system. So, last quarter, in November, we introduced at the big radiology meeting, RSNA, a new operating system, again, based on DeepHealth. DeepHealth was now not just going to be our pixel AI or our clinical AI, but our full portfolio of cloud native AI-enabled operating system for the entire kind of medical operations we're doing, radiology and beyond. And this, we brought in a new team.
We're investing seriously in it, and it will allow us to capture the benefits, both of the clinical AI that we either build or insource, but also the substantial improvements that are happening, especially in the cloud, due to the generative AI and large language models. And in fact, the way we've kind of described this to people is with this infinity sign, where on the right, you can see our clinical AI tools that we're calling those Saige after Saige-Dx, our first mammography product, and on the left, our orchestration tools, both with Maestro. Again, both with AI embedded in them, hence the cutesy spelling of those two words. But it really, it helps you understand that as the whole patient journey happens, all of that will be now digitally enhanced and markedly enabled with technology.
And so we're going to leverage the innovations that other people are doing around language models and a scalable generative AI, with the operations that we're carrying out and embed them with the clinical or the pixel AI. And that whole continuity of operations is something we looked for a vendor to do for years and couldn't. Literally, a couple of years, couldn't find one. We've decided to do it for ourselves. You may know or may not know that some of our biggest competitors are already the customer of our own IT stack, and we will offer this as well to those 300 customers that we have.
So this we expect will become both a major driver for innovation and cost reduction and revenue growth inside RadNet, but also as a software business on its own, will be something that will be of very high value and of great interest to other operators of radiology and other kinds of imaging centers. So that's kind of the AI story. We can talk more about the Q&A. Back over to you, Mark, for the rest. Thanks.
Sure. I'll just end the presentation with some financial information. You know, company's been performing extremely well. We're going to be announcing our fourth quarter results and year-end results towards the end of next month, so we're a quarter behind here. But we, you know, we've been growing the business nicely. In the third quarter, revenues were up almost 15%. EBITDA was up over 20%. That's being driven by robust volumes we're seeing both on a same center and an aggregate basis. Same center performance was up over 4% year over the third quarter of 2022, and then aggregate procedures approached about 9%. We had also a busy quarter as well.
We announced a substantial expansion of an existing joint venture with Cedars-Sinai, and now the announcement of a new joint venture with Cedars-Sinai. So we have three new or three joint ventures with that hospital system. Our AI revenue is increasing very nicely. It was up over 220% over last year's third quarter. And we continue to build aggressively the capacity that we need to service the heavy volume in a number of our local markets. And today, we have, as we speak today, we have about 13 de novo facilities under various stages of construction and development, which we believe will come online this year and then early into next year.
This was our guidance for 2023, and we'll be issuing new guidance next quarter. We expect to next month. We expect to see substantial increases in 2024 in all of these metrics, in terms of revenue, EBITDA, free cash flow, as well as substantial growth in our AI division. Historically, we've grown the business very effectively. And this shows over the last 14 years, we've grown the top line at about 8.5% compound annual growth rate. EBITDA slightly behind that at over 5% growth over the last 14 years, and procedure volumes have also grown nicely.
We expect the similar performance going forward, if not better, from our same, you know, same center performance, as well as other, organic and inorganic growth opportunities that the company has. We did an equity offering in June of last year. It was the first time the company raised equity in the history of the company. We raised about $250 million of proceeds. We're sitting with a pretty healthy balance sheet at this point. We ended last quarter with about $338 million of cash on the balance sheet, full availability of over $200 million revolving credit facility. Our net leverage ratio is about 2.2.
So we've got a lot of capacity to accelerate the growth into the future, do acquisitions, and continue to execute on the, you know, the multipronged strategy that, that we have. From a valuation standpoint, we're trading about 12 times EBITDA based upon historical EBITDA. We expect, you know, our EBITDA obviously to go up in 2024, and, and so, we think we have a bright future ahead of us. And, and with that, we've got about almost 10 minutes, where we're happy to entertain your questions. So thank you.
... I was wondering if you could comment a little bit on the labor market for radiologists, and do you see tightness there, and what is its potential impact on your economics going forward?
Sure. I think like almost every industry out there, healthcare is no exception, and maybe in some respects, even worse. The labor pool is both limited in terms of availability, and the cost has gone up dramatically. We've already experienced that impact. I think if it weren't for those factors, we'd be driving more revenue and better margins. That, in fact, is really one of the major impetuses for our whole generative AI. The opportunity to create improved efficiency and productivity cannot be overstated. The capabilities that ChatGPT brings to us, I'll give you one small example. In the scope of things, maybe it's not huge, but it's illustrative. Currently, given the markets that we're in, with very diverse ethnic populations, we spend about $2 million a year on interpretation services.
We believe we could eliminate, or will eliminate all of that when we fully implement our generative AI, which will be able to answer the patient probably better and faster than interpretation can. So, these are not unique or novel to the healthcare industry. Other companies and other industries are using those. It's about time that we start adapting aggressively this because it will address both the cost side of our business, which will improve our margins, but perhaps even more importantly, create huge efficiencies, particularly for our radiologists. We believe in the next maybe 12-18 months, we will be able to have interpretive services for our radiologists, for their reporting, where they simply put in the results, and then ChatGPT actually creates the report.
The benefit of that will not only be enormous for the radiologists in terms of their productivity, but it will create uniformity from one radiologist, one exam to the next. That doesn't exist right now. Just because somebody went to medical school and got a degree in medicine doesn't mean he necessarily articulates everything as well as, as they could or should. So these are the, the nuances that I think we'll be able to start demonstrating towards the latter half of this year and into 2025 that will improve our margin and address what I believe are chronic problems that healthcare, in particular, is gonna face with labor shortages and cost of labor.
Yeah. Hi, I was wondering if you could share more details about your Capitation model, how well it's performing, and where you see it going in the next three to five years?
Yeah, the capitation model is one where we continue to evolve from the standpoint of pricing of it. We have built-in pricing every year with our capitation groups, ranging anywhere from 3% to sometimes 5%. However, that doesn't always keep up with the utilization that we see, given how rapidly imaging itself is utilized, and which it should be. We try to control that so that the utilization is appropriate, but every opportunity that we have, when our contracts term out, we actually reprice that. Not that much different than what we attempt to do with our commercial payers and our fee-for-service business, but I think we're more effective in that negotiation, as well as becoming even more essential to the delivery of the imaging in the markets that we're in.
This year, for example, I think we're gonna have very substantial price increases, not just because utilization is high, but our costs have gone up quite a bit, and everybody's gonna have to realize that the cost of paying for this technology, this state-of-the-art medicine, is not always free. It's a great book of business for us, but one that has to be constantly monitored because the nature of imaging is constantly changing.
I noticed that in Florida, you have just a few centers. Do you see that?
We have 4, 4 in Florida.
Yeah, four. Do you see that as a market where you'll continue to expand, potentially? Then second question, do you see, with care continuity, health systems wanting to have more connectedness, and how you do that with EHR systems, and most of them shifting towards Epic, for example?
Yeah. Well, first of all, Florida's. There's a reason why we only have four centers in Florida. It's a very competitive, very difficult market. If you look at the map and see where we are on the East Coast, central Mid-East Coast, the Port St. Lucie, Port Stuart area, we're really the only outpatient imaging in that market, and we're thriving there, 'cause we have better control of the pricing and we really have very busy centers. In fact, we just last year built a fourth center because of the need for more capacity.
I believe there's opportunities for us to grow, working both with potential health systems in Florida as well as, I believe, other acquisition opportunities that are likely to come our way, if the pricing and is right for those. So Florida represents obvious expansion opportunities, but it's an interesting market down there. Is, and the second part of your question?
EHR integration.
Integration, yeah. As Dr. Sorensen was saying, we probably have a built-in customer market for our AI, our IT tools, and that's our health system partners. They all want to be able to have a single solution for their imaging, whether it's inpatient or outpatient. Outpatient is the driver of the inpatient business, and so the connectivity of that, both for continuity of care and, more importantly, for the cost of... You should never have to go to a hospital and have to repeat an imaging procedure because somebody down the street did it, and you can't get the images.
So, whether it's Cedars-Sinai, which is an enormous health system, or RWJBarnabas or the Memorial Health System, we believe ultimately they will become customers, not just as far as the joint ventured centers, but other centers that we don't own with them, as well as, and even perhaps more importantly, as a solution for their inpatient services, which systems like Epic and Cerner do not address at all. Very few, if any, that I can think of, hospitals actually use any kind of homegrown Epic or Cerner imaging solution because they just don't exist.
But we link with those today. We're well linked with Epic and Cerner, all the EHRs.
Yes.
Hundreds... thousands of connections, points.
Do you describe the AI opportunity more, with more of an emphasis on the operational potential, or is it diagnostic? And if it's the latter, is there something, or even the former, is there something about radiology in particular that makes it predisposed to AI success ahead of maybe other specialties?
Radiology is unique within the healthcare industry because everything we do is digital. There is nothing that we don't touch that has some kind of a digital component or connectivity to it. And so, it's a natural evolution for that. We think that there's a lot of opportunity on both the clinical and the generative AI side of it. The part which probably is the most exciting, though, today is the generative side of it, because simply the scale that we have and the need to create this kind of operating system. And I wanna emphasize that this is a operating system rather than take individual components and try to integrate them, because everything we're doing has already been done, but not necessarily with one system that will be as robust as what we're creating ourselves on our own platform.
And then on top of that, we can put other non-homegrown tools, if you will, but the basic operating platform will. And I, easiest way for me to describe this is almost like the Apple phone. You know, underpinning all of the apps that you see when you pick up your phone is the iOS, if you will, the imaging, not the imaging, but the operating system. Because I stands for?
Just the iPhone, right?
The iPhone. iPhone, right.
Yeah.
Thank you.
Yeah.
That's right, the iPhone. And that's essentially what we're creating. It doesn't mean that we have to develop every app, but we need the operating system to create the efficiencies that those apps then will provide for additional capabilities, whether it's on the clinical side or perhaps even on the generative side. So I see unlimited potential in what we're doing, and frankly, I think it'll be the standard by which everybody else will be measured. And given the new platform for software development, particularly with generative AI and new technology for tech stacks and whatnot, things that would have potentially taken us years to implement may now take just quarters.
Okay, I think we're out of time.
Well, just, so thank you very much, everyone, for the, you know, engagement, and thank you very much for the wonderful presentation. That concludes all the time that we have today. Thank you again.