If you have any questions, please reach out to your Morgan Stanley sales representative. I'm joined today with Mark Stolper, CFO of RadNet. Thank you again for joining us today. Before we jump into the questions, maybe I'll just pass it to you for any opening remarks that you have.
Well, first of all, thank you, Chris. It's a pleasure to be here. It's our first time presenting at this conference, and it's a wonderful conference. We appreciate the opportunity and the exposure.
Thank you. I want to start off thinking about the competitive landscape. Given your scale, can you discuss a little bit on your perspective on opportunities there for further industry consolidation?
Yeah. I mean, you know, one of the great things about our industry, you know, at least from our perspective, is that it is highly fragmented. You know, if you read the research out there, it's believed to be that there's over 6,000 outpatient diagnostic imaging centers in the United States. And if you took ourselves, who own roughly 400 of those 6,000 imaging centers, and the next four largest players in the industry, which are private equity-backed, you know, we would only own between 10% and 15% of all the imaging centers in the United States. So, it's an industry that, you know, has a lot of opportunity for growth and consolidation, and we believe that consolidation will take place.
You know, going forward, there are significant efficiencies that you get from scale.
Mm-hmm.
It also, having scale also allows you to invest in technology that, you know, further patient care and improve patient care, which is great for the whole healthcare delivery system. These are investments in not only the equipment, but in. You know, more recently, we're investing in AI, and I'm sure we'll get, you know-
Yeah
... get to talk about that a little bit later. Software solutions that, you know, improve the patient experience, post-processing, you know, software on the machines, radioactive isotopes, contrast materials, all these things are driving more clinical indications for ordering diagnostic tests, which will continue to grow the industry going forward, and, you know, the shift that's occurring, you know, between hospital-based imaging and freestanding diagnostic imaging, continues to, you know, drive revenue into the lower cost sites of care, like the ones that we operate.
Thank you. That's very helpful. Following up on that point, I want to spend a minute thinking about kind of white space in the broader radiology market. What is the reimbursement environment like across this market, and how can this help drive incremental growth for the business?
When you talk about reimbursement, you really have to bifurcate the discussion between government payers, meaning Medicare and commercial payers, and I think the experience of the industry might be very different depending upon which provider you're talking to. You know, with respect to government, you'd have agreement that, you know, Medicare rates have been fairly stable since two thousand and fifteen. There was a period, you know, going back, you know, over a decade, where Medicare was reducing reimbursement for advanced imaging, you know, in the early two thousands and really from two thousand and seven as part of the Deficit Reduction Act, up through two thousand and fourteen. Since that point, you know, you'd say we've had very stable reimbursement.
There hasn't been a target on the industry's back. We have had some smaller reimbursement cuts in the last several years, but it wasn't targeted on diagnostic imaging. It was really a payback for under budget neutrality when Medicare, about four years ago, substantially increased the reimbursement for primary care doctors and internists under these E&M codes, and they're taking that reimbursement back from all the other specialties. So we've had small declines in reimbursement from Medicare, but essentially, it's been fairly stable, and it's believed to be stable, you know, going forward. Where we've seen benefit has been on the commercial side of our book of business.
You know, we've built ourselves into the largest provider of outpatient services in virtually all the markets in which we operate, and what that means is you know, we are the principal alternative to the much more expensive hospitals in our markets. And so when we go back to the insurance companies and, you know, we're setting what we hope to be fair and equitable long-term rates with them, you know, they recognize that, you know, they can save a lot more money by trying to move this business into you know, the freestanding centers, and they obviously need to have us be a healthy company in order to be able to service that book of business.
So, we've not been shy about potentially sending cancellation notices to payers who don't appreciate the value that we're providing, and so far, we've been able to, you know, negotiate fair and equitable rates.
Mm-hmm
... you know, once we've done that, because the hospitals in our markets are charging anywhere between 200% and 500% for the same services that we're providing. So, we've actually been getting price increases on average in our commercial book of business, which represents about 58% of our payer mix, where the government portion, which I spoke about earlier, is about 22% of our payer mix. In addition, we have a very special book of business that we do that we're not aware of any other major imaging center chain does, which is called capitation business.
These are full-risk contracts, primarily in the state of California, where we take the utilization risk on about two million patients for a per member per month fee, and then it's our burden and responsibility in managing those contracts, profitably and managing the utilization. There also, we have built in price increases in those contracts as, you know, we project continued heavy demand-
Mm-hmm
... for utilization, you know, going forward.
Thank you. So shifting to a hot topic, the labor and inflationary environment that we're in today. Can you, can you spend a minute talking about what the current labor and inflationary environment is for your business? And then, have you been able to automate any processes or positions to help alleviate some of these pressures?
Yeah. So I think what we're experiencing is not dissimilar to what any healthcare business is experiencing today, and even if you were to go outside the healthcare delivery system, you know, it's just a fact of life in the labor market today, that it's a very difficult labor market in terms of attracting and retaining talent. So we've had to be much more aggressive or much more generous with our employee base in recent years, to be able to attract the talent that we need and retain that talent, particularly in the areas of technologists-
Mm-hmm
... which make up the majority of our 10,000 employees. You know, as diagnostic imaging has grown steadily, you know, over the last decade and will continue to do so into the next decade, there's heavy demand for these technologists. We're simply not graduating enough of these folks from these vocational programs to meet the heavy demand in diagnostic imaging, and they're in high demand, you know, from other imaging centers, from hospitals, and the like. So, although we've demonstrated margin enhancement over the last several years, that margin enhancement would have even been better had we not, you know, had to, you know, had this difficult labor market. But we're doing all the things that I think we think are necessary to manage this labor situation effectively.
One is that we're establishing much better relationships with the vocational schools-
Mm-hmm
... where we're offering internship programs, tuition reimbursement programs, we're offering bounties to our own employees to bring in technologists from the outside. And in one case in California, we're actually setting up our own schools in California, in partnership with a large vocational nonprofit firm called JVS.
Mm
... Southern California. So that's been effective and will continue to be effective. But to your, you know, directly to your question, we're also making the necessary investments on the technology side.
Mm-hmm
... of our business. We own our own IT backbone. Today, it's called eRAD. It's an end-to-end solution. And we are in the process of redeveloping that product into a new product. That product is called eRAD. We're developing it into a product called DeepHealth OS, which we're launching as a fully commercialized product in November at the big radiology show in Chicago called the RSNA. And that solution is taking the current product, eRAD, to the cloud, and in that solution, we've built in a number of generative AI-powered automation tools that will further automate areas of patient scheduling, pre-authorization, insurance verification-
Wow!
... and certain revenue cycle functions that will all allow us to rely less on human capital, i.e., labor, which should help the labor situation going forward. And that's a tool not only do we use a software package, not only do we use internally, but we sell that software, currently the eRAD version of that software, to about 200 customers outside of RadNet.
Thank you. Discussing a little bit on organic growth, I want to shift to that and just talk a little bit about what are some key initiatives you have that drive organic growth and same-store volume trends for your business?
Yeah. Well, I'd say a couple of things. First of all, part of the organic growth is just being driven by some nice tailwinds and trends that we're seeing within healthcare and within diagnostic imaging-
Mm-hmm
... specifically. The first thing to note is that our industry grows every year. As technology advances, both on the equipment side, the post-processing software side, the contrast materials, radioactive pharmaceuticals, these advances simply drive more medical indications or clinical indications for ordering these tests, you know, going forward. And so more and more of these tests are gonna continue to be ordered as technology advances. Second, as that pie grows, we're also seeing that market share shift that's not unique to diagnostic imaging. You're seeing it in all areas of healthcare, where the payers are getting more and more aggressive in trying to move this business out of the hospitals into freestanding or lower cost sites of care.
And you're seeing that in diagnostic imaging. You're seeing that with outpatient surgeries, with, you know, outpatient surgery centers. You're seeing that with urgent care visits, home health, physical therapy, and the like. And so more of that business is coming into our centers, which is creating, you know, tremendous demand. The other trend that we're seeing in our business is that a lot of these technology advances are focused on the higher or the more advanced imaging modalities of MRI, CT, and PET CT. For instance, in the PET CT world, you've got a newer test called the PSMA test, which is a prostate test, that really has been exploding over the last couple of years and represents over 10% of our PET CT business today.
You've got the promise of Alzheimer's bringing in a lot of imaging, both on the PET CT side and the MRI side. So if you look at all the projections, that are out there about the industry, you're gonna see that the industry is gonna continue to grow, and that's gonna drive organic growth. Specifically to RadNet, in addition to those trends, you know, we're building a number of de novo facilities. We've got a big de novo initiative to try to build capacity to meet the heavy demand in our local markets. So we've got six centers that should open between now and the end of the year. We've got fifteen additional de novo projects that are slated for two thousand and twenty-five, and all of those will continue to drive growth.
I'd say, finally, the hospital partnership initiative is creating great organic growth for us. This is a business that we've been growing very substantially over the last five or ten years, where many of these same hospitals that are losing business to us and to other ambulatory players are looking for a long-term strategy around outpatient diagnostic imaging. They have very little expertise or business acumen in being able to operate ambulatory sites of care with low pricing and high volume, you know, with any level of success, so they look to partners to potentially do that for them, and we essentially allow a hospital to participate in this trend, as opposed to continuing to fight this trend.
And so today, as we sit here, we have a hundred and forty-nine of our three hundred and ninety-eight locations held within partnership with some of the larger health systems in our marketplaces. You know, partners like Cedars-Sinai, MemorialCare, Dignity Health, Adventist Health on the West Coast. You know, folks like the RWJBarnabas system here in New Jersey, and the University of Maryland Medical System in the Mid-Atlantic. And so, this is becoming a bigger portion of our business. 37.4% of our centers are now held in joint ventures, and we think that it wouldn't be unlikely that within the next three or four years, that number could grow to over 50% of the imaging centers that we own.
Interesting. Thank you. Shifting back to AI, how important is AI and technology to your business, and how should we think about that as driving same-store volume growth and growth overall for revenue?
Yeah, well, we have conviction that AI is gonna have a transformative impact on the business of radiology-
Mm-hmm
... for owning diagnostic imaging centers. You know, today, every scan that we take is read by a human being, a licensed physician, a radiologist. That is a cost of delivering our service. We bill globally for both the technical component and the professional component, and we pass on most, if not all, of that professional component to our radiologists for the services that they provide. These tools that have been cleared by the FDA or CE marked in Europe have been cleared as productivity and accuracy tools to be used by the radiologist. You know, some of these tools we've developed ourselves and gotten cleared through the FDA, others are third-party tools.
We're using them in the areas of breast cancer, prostate cancer, lung cancer, and ultimately, we're interested in colorectal cancer and cardiac screening. And the idea is that we believe that these tools can be used to drive screening opportunities into the RadNet facilities and into the industry. You know, today, of those chronic diseases and those cancers that I mentioned, only one of them relies heavily on diagnostic imaging as a screening tool, meaning breast cancer with mammography.
But we believe using AI to increase the accuracy and lower the cost of MRI for prostate screening, CT for lung cancer screening, CT ultimately for colorectal screening, and CT for cardiac screening, that we can deliver these screening, you know, services on a mass level, you know, to keep the population more healthy. So that's where our interest lies with respect to our own internal investments in that. But I would say broader, you know, when you speak broadly about how it'll change radiology, there could be a time, sometime 10 years from now, 20 years from now, seven years from now, we don't know, where-...
Some of these tools are actually cleared for autonomous use, meaning you can actually eliminate the requirement for a radiologist for certain scans, and that will have a massive impact on, you know, on healthcare and, and the cost of delivering, diagnostic imaging services. So we're all in, in AI. We were an early investor in AI, you know, in, in the year 2020, when before AI became, you know, ubiquitous in the news.
This area of healthcare is really ripe for AI, both on the clinical side, where computers can clearly recognize patterns in digital images better than human beings can, but also on the generative AI side, in the areas of automation tools that can help our business processes that we perform on behalf of our centers that we're building into that DeepHealth OS product.
Thank you. Spending a minute on your multimodality strategy, how has this diversified strategy and also tied with some of these exclusive managed care capitation arrangements that you have in place, driven your growth?
We've always had a strategy around what we call centers of excellence, or large centers that have the full breadth of capabilities, from the routine studies to the more advanced studies, for a number of reasons. First is, from a marketing perspective, this is a way that we can distinguish the RadNet facilities from some of our competitors-
Mm-hmm.
meaning that we can put one prescription pad on their desk and say, "No matter what imaging needs you have for your patients, you can send it to the RadNet facility down the street." And though people have said, "Well, wouldn't it be more profitable for you to only do MRI, CT, and PET CT?" Meaning the advanced imaging that have higher prices and better margins. The answer is yes. However, we capture a lot of the advanced imaging because we are a one-stop shop to the-
Mm-hmm
... referring physician community. Often, someone will be referred into one of our centers for some routine study, like an X-ray and an ultrasound, and based upon the results of that study, they'll be sent back for the more advanced imaging. The other thing is that when you look at a normal patient population and the distribution of imaging that occurs within that population, 75% of what a normal patient population needs is advanced imaging, excuse me, is routine imaging. And so that's the tests that the primary care docs, and the internists, and the specialists are sending on a daily basis, and we want to be able to capture all of their business, including that, you know, that 25%, you know, of the high-end exams.
And because we have the relationship with them on the routine studies, that they're constantly communicating and sending us business around, we capture all of their business. And then back to your question with regards to capitation. When we're contracting exclusively for what's now about two million lives on a per-member per-month basis, you know, for capitation, we have to be able to perform all of the breadth of services, because we're not just capitating on one modality, we're capitating on all the diagnostic imaging. So it's really a way for us to capture, you know, a tremendous amount of revenue and referral sources.
Thank you. Very interesting. I had not appreciated all of that. Shifting back on the de novo and the JVs with hospitals and health systems for a minute, can you talk a little bit about how the de novo development strategy and these joint ventures with health systems is accelerating your growth as well?
Yeah. So de novos is something that we've always done as part of our growth algorithm. What I would say is that that part of our business is accelerating, because the opportunity's there. What we're finding is that we're experiencing extremely heavy demand in virtually all of our markets. We're running into capacity constraints. Sometimes there are small mom and pops that we can buy that might have excess capacity that we can fill, but at other times, they're not. And so we've embarked on a program where we're more aggressively building the capacity in many of our local markets. As I mentioned, we've got six that should open up by year-end, 15 slated for next year. Interestingly enough, almost half of these de novo facilities that we have in development are gonna be within hospital joint ventures.
Some of them are wholly owned centers, some are our health system joint ventures. All of them have opportunities where we believe either we're losing business today because we can't schedule patients fast enough into our centers to satisfy them, or B, we don't have access points for certain patient populations that we're currently not servicing, or we're currently, you know, unable to service effectively today. And so, you know, a typical de novo facility will cost us anywhere between $5-$7 million to build. It may take upwards of a year between, you know, conceptual idea to signing a lease, building out the center, provisioning the equipment, getting accreditation for the machines, any nuclear licenses, and seeing our first patient, so it's a long process.
But that center that costs $5-$7 million to build should produce, once mature, anywhere, you know, give or take about $6 million of revenue and bring, you know, about 20% EBITDA margins to the contribution line before the allocation of corporate overhead. So when we look at the return on invested capital of the de novo center, you know, we're looking at targeting anywhere between four and six years in terms of our return.
Thank you. Shifting back to M&A, thinking about a typical tuck-in acquisition, can you walk through what a typical tuck-in acquisition looks like from LOI to integration phase? What are some of the key drivers that you have for incremental volume, cost reductions, margin expansion kind of at your fingertips?
Sure, well, the first thing I'd say is I'm not sure there's a typical M&A transaction.
Good point.
You know, everyone's a little bit different, and I would also characterize M&A differently in separating kind of the small mom-and-pop tuck-in transactions from kind of a mid-sized group versus something at a larger scale, because there are different characteristics of those deals, both from a pricing perspective as well as, you know, the synergies that might exist once we get them into our network, but typically, we'll spend anywhere between four and six, four and seven times the EBITDA for a small tuck-in transaction in our market. There are typically economies of scale that we bring to the table. You know, many of these mom-and-pops, or all these mom-and-pops, don't have the benefits of scale that we have, so when we get in there, you know, we can lower their costs of equipment service.
We can eliminate their corporate overhead. We take on their billing and collecting operations. There's a variety of things that we can do to, you know, get more EBITDA.
Mm-hmm.
And then also, if they have capacity, we're generally pretty good at filling that capacity over time. So, on the larger transactions, kind of the mid-sized transactions, you know, we might stretch beyond that multiple level for something that's very strategic, that there's scarcity value that's important to the network in that regional marketplace. And then we haven't done anything of real scale in recent years. There are those transactions available out there. They're very binary in nature, and many of them are owned by sophisticated sellers, private equity firms, and we just haven't had a lot of success in buying from financial sponsors. We've been much better suited at buying from physician owners who care about who they're ultimately gonna work for. They care about our clinical co-protocols.
They care about the quality, what equipment we're buying, the software solutions we have, and it's not all about price.
Mm-hmm.
You know, we would do something of scale. We certainly have the firepower of doing something of scale. We ended last quarter with $741 million of cash on our balance sheet. Our net leverage is about 1.1 times, so we have a lot of capacity to do this, not only, you know, using cash and leverage, but, you know, our own equity as well. So we have the appetite to do that, do something. We would like to expand geographically and we demonstrated that this year with our acquisition in Houston, where we bought two imaging center chains, and we put them together. We're gonna continue to do more in Houston, but we'll see.
Thank you. I know we only have a few minutes left. I'll ask another question, and then we'll open it up for a question from the audience. Following up on that last point on M&A, can you discuss a little bit more on... You mentioned on the core radiology side, M&A opportunities in digital health and AI as well, potentially. And then on that same note, how does your scale expand your reach here and your ability to integrate these across your platform?
Yeah. So, I'm glad you brought that up, 'cause I was talking about M&A for our core business, but, there will be M&A opportunities in digital health.
Mm-hmm.
There's been a lot of money poured into AI solutions within radiology, and you know, there aren't a lot of business models that are being successful right now in terms of revenue. We've managed to create a business model by going directly to our patients and charging $40 out of pocket for this mammo product that we have, that's been incredibly successful at detecting cancer up to two years sooner than the human eye. And so, you know, we'll have an AI division that this year will do somewhere likely between $20 million and $25 million of revenue by itself in 2024. But others haven't had this success because they don't know, we're a living laboratory of 400 imaging centers that we can monetize our AI through.
Others have to sell it to folks like us, and the radiologists have been hesitant or resistant to adopt these solutions, not because they're not great solutions, but because they can't then bill and collect for it on the back end. So there are a lot of companies that were funded by private capital that today are struggling to find a business model and looking for a home. So I think that there's going to be a consolidation in the radiology AI space. I think we're obviously well positioned to do that, and, you know, look in the near future for us to do some things. We're not gonna be spending the kind of capital we did initially when we got into AI, because the market's changed, and we don't have to, but there will be a consolidation there.
There may be some other interesting software solutions that we can, you know, also integrate with our DeepHealth OS product that, you know, we'll look to acquire in the future. I think we'll see acquisitions in both segments of our business.
Thank you.
Yeah.
Any questions from the audience? Another from me. Going back to cost and operating leverage, it'd just be interesting to hear about the variability at the clinic level that you have from a cost and operating leverage perspective, but it also and I guess at the corporate level as well, if there's additional levers there.
Yeah. Well, I mean, like most investors in the audience, we have a portfolio of imaging centers, right? And they're all a little bit different-
Yeah
... and some are performing better than others at times, and so on and so forth. But, you know, the real benefits of scale in this industry, you know, come down to, a number of areas. One is owning our own IT solution has been key to our success. It allows us to drive efficiencies, everything from patient scheduling to all the, you know, back-end billing and collecting, and that's been, you know, important for our growth. And when we acquire businesses or, you know, build centers, they immediately go onto our IT platform, and that's a necessity, you know, for us. So we've got one billing platform, one end-to-end radiology, you know, software solution. We're also we use our scale in provisioning equipment, meaning procuring equipment, buying equipment.
We're often the largest purchaser of imaging equipment to all of the major vendors, you know, in the United States, so we're able to use our scale to drive bulk-
Mm-hmm
... pricing. Same thing on equipment service, which is not an inexpensive part of our operating costs. You know, these advanced imaging equipment are very costly to keep up and running. Because we have scale and because we have a regional scale allows us to, you know, contract for those services less expensive than those folks that we're buying. Our revenue cycle management program is extremely robust and much more sophisticated, both on a system side, but on a workflow side, than a lot of the folks that we're competing against and buying. That's been a big benefit of our scale, and I would also say the ability to subspecialize.
So our radiology groups, who are large, you know, some of the largest groups in the country on a regional basis, are able to sub-specialize so that, you know, if your, you know, son or daughter is going in for a test, we'll have a pediatric radiologist read that scan, or if you're going in for a brain scan, we'll have a neuroradiologist, or our breast imagers are the only ones reading our mammo scans, you know, specialists. And that's a major selling point to referring physicians when they're thinking about who to send their diagnostic imaging to. So all of these aspects, and many others, is what really creates the benefits of scale in our industry.
Thank you. I know we're up on time, so thank you again for the time today. This has been very interesting on our end, and we appreciate the conversation.
Appreciate it, Chris. Thanks for the opportunity.
All right.