All right, great. We're gonna get started with our next session here. I'm Steven Valiquette, the Healthcare Services Analyst here at Barclays. Next session here will be with RadNet. With us from the company, we have Mark Stolper, the company's CFO. And this will be a fireside chat. I think with that, I guess we'll just go ahead and dive right in.
Sounds good. Thank you.
All right, great. Just kicking things off, RadNet and also other in the hospital space as well, there's been, you know, obviously a pretty well-documented shift in volumes from the inpatient to the outpatient setting. That's been, you know, a tailwind for you guys for, you know, multiple years. Maybe just spend some few minutes here talking about some of your JV structures with hospitals and maybe update us on what you expect in terms of new JVs for 2023 and 2024.
Sure. Our hospital JV business is really an outgrowth of that shifting that you mentioned in your question of volumes leaving the hospitals in favor of lower cost freestanding ambulatory centers. What's happening in radiology is not unique to healthcare. You've probably seen it, you know, in all the other disciplines with urgent care centers, surgery, outpatient surgeries, home health, and the like. The hospitals that are losing business, many of the more entrepreneurial, forward-thinking hospitals realize that they're fighting against an inevitable trend. Therefore, some of the more forward-thinking hospitals are looking for a strategy that gives them long-term viability in diagnostic imaging.
One of those strategies is to partner with an outpatient player in that market who already either has assets or has the expertise to run outpatient centers efficiently. We've seen much more demand from hospitals looking to have these partnerships. Today, 119 of our 357 centers are in joint ventures with some of the larger hospital systems in our markets, including the likes of, on the West Coast, Cedars-Sinai. We've got MemorialCare, Adventist Health, Dignity Health on the East Coast. We have a statewide joint venture with the RWJBarnabas Health system in New Jersey, University of Maryland, and a number of other prominent health systems. They're valuable to us and valuable to them for a variety of reasons.
From RadNet's standpoint, the hospitals become instrumental in driving incremental volumes to now our jointly owned facilities. And in the past, some of those volumes were going into the hospital and their outpatient departments. Now they're directing that business to a jointly owned center. We see an improvement in the economics and volumes of those jointly owned facilities. Secondly, the health systems can be instrumental if needed in helping us establish long-term fair and equitable pricing. We've had to use that leverage once or twice when aggressive payers have kind of come our way to look to lower our costs. I think that that has been very valuable to RadNet and will continue to be valuable.
From the hospital standpoint, it gives them a mechanism to recapture revenue that they have lost and will continue to lose as the payers become more aggressive in trying to move that business out of the hospitals through plan design, through pre-authorization departments, through pre-authorization efforts. As well as, you know, as patients have migrated more and more frequently to higher deductible health plans, the patients are becoming more educated as to the lower cost settings to get their work done. So we think that this is a growing, or it is a growing aspect of our business.
We've said publicly, and I'll say it again here, that we think in the next three or four years, we think, north of 50% of our centers could be in health system joint ventures.
Okay, great. just kinda shifting gears here a little bit. I mean, you talked about the, you know, the positive influence that, you know, payers have had in shifting volumes to lower cost settings, which that's pretty obvious to anybody who follows managed care. but the, I guess I'm curious, any specific reimbursement adjustments that investors should be aware of for 2023. Not there's any read, you know, for 2024 at this stage, but just any changes that maybe you're keeping in your eye on that might impact your reimbursement beyond 2023.
Medicare, from 2015 through 2020, those six years have been very stable reimbursement in our industry. That comes on the heels of a period of about eight years where Medicare really targeted the diagnostic imaging industry as the growth in advanced imaging, the growth in the number of centers, created significant cost inflation for Medicare. As the number of centers in this country have curtailed, I think the peak of the data that I've seen was in 2012, was when the greatest number of imaging centers that existed out there. Medicare has really kind of laid off our industry.
Having said that, about two years, I think it was two or three years ago, Medicare increased reimbursement for these ENM codes, evaluation and management codes, which increased reimbursement for primary care docs, family practitioners, they did it on a budget neutrality basis. They took the conversion factor and the Medicare fee schedule down for every other specialty. We have faced a phase in of that cut over the last couple years. For us, in 2023, we estimate that to be about $6 million-$8 million revenue hit. We think that there might be one or two years of additional phase-in of that, you know, of that cut. It wasn't targeting specifically diagnostic imaging.
In terms of the private payers, and just to level set, Medicare is about 22% of our business. We're much more concerned as an entity about what we can do and how we can impact the rest of our business, which is the other 78%, most of which are commercial contracts. Our strategy has always been to be an indispensable or grow to be an indispensable provider in the provider network, so that if we were to leave that provider network, that would create access issues and quality issues. A lot of the volumes that we would do would find its way back into the hospital at costs that are 2x to 5x, what we charge.
We've gotten to that level of scale in most all of our markets, with the exception of Florida, where we're a small player, in Arizona, where we're continuing to build out our network. That has allowed us to create not only stable pricing over the last, you know, five or so years, but also we're getting some nice increases from the private payers as they recognize that we're really their partner in trying to drive the business out of the hospitals into the lower cost settings. We have over 200 marketing reps that go from physician office to physician office and market our services, you know, against the hospital.
The private payers recognize that we're being effective in trying to drive that business just like they are out of the hospitals into our freestanding settings. They're not concerned. They don't seem to be concerned about whether they pay us 2% more or 2% less. It's really how do they get the business out of the hospital into the freestanding centers.
Okay. Okay. Thinking about your volume growth and, you know, just thinking about growth of just overall patient volumes and/or surgeries in the US market and what that means for radiology demand. Just curious, remind investors kind of where you stack up on your current volume base versus your pre-COVID baselines. Let me stop there, and then I have a follow-up kind of tied into that.
Sure. I mean, I think like every other provider, we were impacted significantly during COVID. We had at one point furloughed 3,600 employees. We had closed down 109 centers, which at the time was about a third of our centers temporarily, until that volume came back. We hired most all of those employees back and reopened the centers. Since COVID, and, I think there may have been some pent-up demand right after COVID, kinda late in 2020 going into 2021. At this point, you know, we're not seeing any pent-up demand from COVID.
The demand for our services, our increase in volumes really is just a function of, you know, the continuing migration of hospitals into freestanding centers, our own efforts in capturing market share vis-a-vis our competitors, and our own expansion. I mean, we're at this point, building 15 de novo facilities that will open up throughout 2023 and early into 2024. We're expanding a number of our hospital joint ventures, which we'll be excited to talk about later on in the year. We'll likely have established new joint ventures during this year. We continually have an active M&A pipeline of small tuck-in transactions within our markets, which are highly accretive and where we have very little competition from others in going after these targets.
There's a lot of reason to be very optimistic, you know, going into 2023. We came off a very strong quarter in 2024, where we had record volumes, record revenue, record EBITDA. That those record volumes seem to be staying with us. We had record volumes in January and February, assuming good weather conditions or continually good weather conditions in the East Coast, we'd expect, you know, the first quarter of this year to also be a strong quarter.
Okay, great. I think, just digging deeper into 2023 guidance, I think you guided for 3%-5%, same center growth for the year. Maybe just help investors, unpack that a little bit more with some of the, embedded assumptions or components that are driving that growth.
Sure. You know, it's not something extraordinary, honestly. We've been growing 3%-5% organically for many years, with the exception of, you know, the COVID period and a couple of years after the credit crisis, you know, in 2010, 2011 timeframe. The industry is growing. I mean, depending upon the research we read out there, we think that the routine imaging, which is the X-rays, ultrasound, and the mammography, which represent 75%-80% of what a normal population needs with respect to its imaging, that's growing kind of at the rate of population growth.
You've got the advanced imaging, MRI, CT, and PET CT that are growing more quickly, probably in the low single digit rates, which is a function of advances in technology and the equipment, advances in contrast materials, radioactive pharmaceuticals, faster scanning times which creates greater throughput and capacity, as well as physician awareness, patient awareness. We think that the industry itself will continue to grow. We'll grow with it. We'll continue to take market share from our smaller players. This industry remains a very fragmented industry. There's very few players that are of scale like RadNet. I think that there's no reason to think that the industry won't grow, that we'll continue to take market share to...
To predict 3%-5% same-store sales growth for us seems to be very achievable. If you look, there's a slide in our investor deck that shows the last 14 years of our history, and we've averaged about an 8.5% compound annual growth rate on the top line, which is a function of that 3%-5% same-store sales growth plus inorganic growth such as M&A opportunities as well as the expansion of hospital joint ventures and de novo facilities. We think that that 8%-9% growth is continually achievable as we move forward.
Okay. I think, to the answer to the prior question, you made a comment on the first quarter. We're asking every company, whether they're payers or providers, just how things are trending so far in calendar 2023, if we're able to opine on that. Just curious, maybe build on your comment, kind of what you are seeing, you know, in the first quarter, you know, volume wise. Just if you are able to give any additional color, that'd be great.
Yeah, sure. I mean, first quarter, tends to be our most challenging quarter. As the reset of deductibles occur, there tends to be lower utilization in general of healthcare services. Additionally, about 45% of our business is in the Northeast or Mid-Atlantic region, which tends to have some weather impact. Having said all that, you know, we've seen record volumes in January and February. We've been blessed so far. Is there any wood around so I can knock on it? With very good weather conditions in the Northeast.
If, if you remember at the end of December of 2021 going into January of 2022, the Omicron wave of COVID, and that was a double impact for us, both on the cost side as well as the revenue side in the first quarter of last year because we reached our peak in terms of the number of RadNet employees that were out on COVID leave. About 8.4% of our employees during the first week of January last year were out on COVID leave. Right now, we've got very few employees out, less than 0.3% of our employees out with COVID.
Not only did that raise our costs last year because we had to rely further on temporary staffing and paying overtime to the existing employees that weren't sick, last year, but it also impacted our ability to staff our centers fully to meet the demand that we had. I would expect that, you know, relative to last year's first quarter that we'd have a pretty good quarter this year.
Okay, great. I think further upside to 2023 guidance could come from incremental staffing improvements throughout the year. Maybe just remind investors kind of what you've baked in to guidance around, you know, the level of improvement, but also just any updates on staffing trends, contract labor utilization? If it makes sense to break it down geographically or not, but probably not maybe for this, the context of this discussion. Just overall, maybe remind investors kind of what's baked into guidance and could there be upside based on what you shared before?
Sure, sure. I mean, staffing was a challenge for us really starting in the second half of 2001, or really as we emerged from COVID. Last year it probably hit its peak, its worst in September, where we had upwards of 800 unfilled positions that we're looking to hire talent for. Since September, it seems to have stabilized significantly. We've been much more successful in filling open positions. We've beefed up our recruiting, our talent acquisition teams. The market seems to have softened a little bit. That doesn't mean that we're able to hire employees at lower rates. There's been a structural shift and unfortunately in terms of the way that we have to pay our employees.
The good news is that it seems to not be getting worse. It's still challenging out there, particularly for technologists, who are in great demand both from hospitals as well as other imaging centers. In our budget and in our guidance, we've embedded $17 million of additional salary benefits and wages, which is simply annualization of increases that we gave to our own staff last year, 2022 or new staff that we brought on in 2022, and that's, you know, the full year impact of that. Plus, we've embedded over $5 million of additional cost of merit-based increases that we will give in 2023.
We think that's conservative and so hopefully, I think what we've moved to is just a structural change in the cost of labor and the cost of doing business, but it doesn't seem to be getting worse.
Okay, great. We're just shifting gears here a little bit. Let's talk about some of the inorganic growth for a moment. You guys have highlighted that, you know, I think tuck-in M&A is still part of the growth algorithm for you guys. I think earlier in our discussion, you talked about there's really no more pent-up demand in the overall health system per se, but you also, I think from time to time, talked about M&A being focused on markets where there, you know, appears to be some backlogs. Maybe just, if that's still relevant or not, maybe just talk about what you are looking for, you know, in your criteria for M&A targets.
Sure, sure. Tuck-in acquisitions have been a part of our strategy really since our inception. We have found that the most accretive transactions are the ones that are, you know, in our markets that generally we can buy at somewhere between three and five times EBITDA. There's unique synergies and efficiencies with centers when we buy them in our own markets. We, you know, we can eliminate employees, we can centralize call centers, pre-authorization departments, scheduling. We can have techs that float amongst facilities. Our marketing teams are already in those markets, and we don't need additional marketing talent. It's, it's up and down the cost structure.
We have unique synergies when we buy within our markets, which is why our focus has been to continually to penetrate and create more density in the seven states in which we operate. We have an active pipeline, we'd like to do bigger transactions. We have looked in past years, recent years at larger regional platforms that would take us into other areas of the United States. Unfortunately, we've been. Well, fortunately or unfortunately, however you look at it, we haven't done those transactions. They've been bought by private equity firms who've been willing to pay significantly higher multiples than we've been willing to pay. I think that strategy or that discipline has proven to be wise, given, you know, that we've kept our leverage very conservative relative to the private equity firms.
Today, we're sitting here between three and half times leverage. We have a lot of liquidity on the balance sheet, and have, you know, significant capacity if we wanted to do something bigger or more transformative. I think that discipline has proven to be.
Maybe just gears to a smaller but faster-growing part of the not fast, but just faster growing part of the business. The as far as your AI segment, I think you've been successfully improving the AI capabilities. It's kind of deeper into, you know, medical technology, et cetera. I guess maybe a question just might be, what inning do you think?
Sure. We're very excited about AI. It's gonna have a, we believe, transforming impact on our business and in the industry at large. I'd say we're in the top of the first inning. We just started commercializing and monetizing our AI. We launched a program that we call EBCD, Enhanced Breast Cancer Detection, in our Delaware market on November first of last year. We're now rolling out that program nationwide. By the end of this month, we should have all of our East Coast facilities offering this service. What it is it's an AI-assisted package of services that we're offering to women for $60 out of pocket.
That includes an AI-assisted read, a second opinion read for suspicious exams, a lifetime risk score that's based upon a measure of breast density as well as family history, and then access to a 1-800 number for women to talk to a clinician about the results of their exams. It's been met with a really good adoption given how early we are in this. We're seeing right now 20%-25% adoption on the East Coast. We're seeing that it's a trend upwards towards as the center matures with this offering. Our front office people, our schedulers are becoming more effective at communicating this offering to women and the value of these women and to women.
We've already found over 300 cancers that otherwise would not have been found, but for the use of AI. I think we're gonna end up saving lives. What's interesting is that hopefully, you know, the CMS and other payers will take note of this and ultimately, I think, ascribe a reimbursement to the use of AI with respect to mammography. We're really excited about monetizing that. About half of our AI revenue, we gave guidance of $16 million-$18 million of revenue this year, meaning 2023. You know, our AI division, over half of that or about half of that is gonna come from this EBCD program. We're expecting that in 2024, our AI division will actually be profitable.
We also launched a lung AI product from a company that we bought in the Netherlands called Aidence, and we're rolling out a program with the National Health Service in the UK called the Targeted Lung Health Check Programme, where it's mandated for high-risk patients that they come in and get a lung cancer screening test. That is assisted with AI. Aidence right now has, I think, upwards of an 80% market share in the rollout of this test. We're hoping that with the success that may come out of the data from the UK, that we can import that product and that offering here into the United States and refer it to the payers here.
Okay, great. We got maybe one or two minutes left. Maybe two final questions here. We'll keep it more financial, maybe CFO-oriented.
Okay.
For the financial part of it. The first one, I guess, just on, do you guys have a, you know, a CapEx budget? Within that, kind of beyond the maintenance portion, what's the priority for the, you know, the discretionary part of your CapEx budget?
Sure. We spent extraordinarily in 2022, and that's carrying over into 2023, primarily the result of this de novo strategy that we launched last year. We have 15 centers in various stages of development. These are de novo facilities that we're building out in markets that we feel have untapped demand or where we need access points to service certain patient populations that we're currently not servicing. I would say almost half of our CapEx budget for 2022 and 2023 have been focused on these de novo facilities. Those will open at various times throughout 2023 and may fall into the first quarter of 2024. That should, you know, provide us additional, obviously, growth of revenue and EBITDA.
Hopefully after 2023, our CapEx budget can be more normalized. We think today, given the size of our business, we think that about $60 million-$70 million is the right number for a true maintenance CapEx level.
Okay, great. Final question. I guess sort of tying all these initiatives together and how it's all gonna be financed. Obviously with, in the current interest rate environment, every company, you know, facility-based provider needs to be cognizant of, you know, debt loads, et cetera, and manage that effectively with growth initiatives. I think you guys got your debt down to what, about three and half turns, I think?
Yeah, just curious if, you know, is that the appropriate number just given the current environment? Is there more to do, you know, on that front, and also in the context of, you know, again, all these growth initiatives that you have?
Sure. Well, from a liquidity standpoint, you know, we ended last quarter or last year, you know, with over $125 million of cash on the balance sheet. We had full availability of a $195 million revolver. We mentioned we're between three and three and half times leverage. Our, you know, our cost of capital is fairly low, we're at LIBOR plus 300 right now. We were fortunate to have entered into interest rate swaps in 2019 that fixed our LIBOR at around 2%. Those roll off in $400 million or $500 million at the notional value of the swaps roll off in October of 2025.
We have $100 million rolling off towards the end of this year. We're sleeping very well at night, you know, with a $40 million-$45 million cash interest expense, you know, with 200+, you know, $220 million-$230 million of EBITDA. We have no problems in terms of meeting our, you know, fixed charges or our financial obligations. We would like to get the company under three times. That's kind of our goal. I think that's, you know, that's highly achievable if we continue to. We're projecting $70 million-$80 million of free cash flow after CapEx and after our fixed charges this year.
We should be able to lever significantly in the next couple years.
Okay, great. With that, I think we're out of time. I want to thank Mark for your time today, enjoy the rest of the conference. Thank you.
Thanks, Steve. I really appreciate it. Thanks everyone for coming.