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1 Market Domination: How Hospitals can Recapture the Outpatient Imaging Market Presentation By: W. Cannon King E.V.P. Business Development Outpatient Imaging Affiliates Presentation Overview Industry Highlights and Trends Building an Imaging Services Strategy Buy or Build? - De Novo Strategies - Acquisition Strategies Market Development Structures Radiology Industry: Significant Growth $100 billion industry 7-8% of total healthcare spending. Double digit growth in MR, CT, PETCT; Better informed patients. Aging population. Product innovation MR, CT, PET/CT. In office imaging

2 Significant Market Shift To Non-Hospital Based Imaging Inpatient Setting Source: U.S. Bancorp Piper Jaffray Equity Research 1980 & IMV 2007 MRI Benchmark Report. MRI Procedure Volume Inpatient Setting IMV Medical Information (in millions) Procedure Mix: The use of MRI in the management of breast cancer has doubled since 2003, from 314,000 to 645,000 procedures - Now account for 2% of MRIs MR angiography comprises 9% of the total procedure mix.

3 MRI Procedure Mix 2007 Interventional and Misc, 0.4% Other Cardiac, 1% Chest, 2% Breast, 2% Spine, 2 6% Head and neck, 6% Pelvic and abdominal, 8% Upper extremities, 9% Brain, 25% Inpatient Setting Vascular (MRA), 9% Low er extremities, 11% IMV Medical Information (all sites) Factors Driving Outpatient Imaging Center Growth: Outpatient centers are better positioned to meet service expectations of patients and physicians; More accessible Focused No ER, inpatients, etc Continuing shift from hospital based imaging to outpatient providers; If you don t have an outpatient access point you are limited in your ability to service outpatients Remains a highly fragmented market Imaging Centers Chains Headquarters Imaging Centers % of Total Radnet Management Inc Los Angeles, CA % Novant/MedQuest Associates, Inc Alpharetta, GA % Alliance Imaging Anaheim, CA % HCA Nashville, TN % InSight Health Services Corporation Lake Forest, CA % Medical Resources Inc Bloomfields, NJ % Diagnostic Health Corp (Fmrly HealthSouth) Birmingham, AL % Doshi Diagnostic Imaging Services Hicksville, NY % Center for Diagnostic Imaging Minneapolis, MN % PresGar Medical Imaging Tampa, FL % Total % *Includes only fixed sites; mobile imaging units not included Adapted from the Diagnostic Imaging Center Market Report: 2006 Edition; Top 25 Diagnostic Imaging Center Chains.

4 Negative Trends Medicare reimbursement cuts Deficit Reduction Act Primarily effected outpatient centers Downward reimbursement pressure from commercial payors Closing networks Intermediaries growing rapidly (HealthHelp, AIM, CareCore) Continuing in-office development of imaging services by referring physicians Number of outpatient centers outpacing procedure growth Imaging Centers Procedures per week Source: August 2005 Diagnostic Imaging Center Market Report by Verispan Over Supply of Centers? The significant organic growth in utilization of these modalities is being diluted due to the even more rapid development of centers. Combined with DRA in 2007 you have: Less volume per center Lower rates per scan

5 Effects of Oversupply and Decreasing Reimbursement Market analysis rarely identifies underserved markets Must be positioned to take or recapture market share Many centers nationally are barely surviving Medicare cuts doomed many New center development requires careful analysis of the market What do the parties bring to the table to ensure success? Must get more out of equipment and staff Consider value gear versus leading edge Positive Trends Payors are catching on to self- referral Intermediaries especially Question is, will they get any real traction? Lease deal loopholes are being addressed by CMS PET continues to experience rapid growth PET added as DHS Financing companies are tightening up raising barriers to entry Underlying fundamentals remain strong No end in sight to the growth Positive Trends Weakened outpatient providers create an excellent opportunity for local hospitals Health Systems are already taking full advantage: - Hermann Memorial Health System in Houston recently acquired River Oaks, the largest outpatient center network in Houston - Novant with the afore mentioned Medquest acquisition - HCA has acquired a number of centers - Norton Healthcare in Louisville

6 Imaging Services Strategy Develop an Imaging Services Strategy What is meant by dominate? Think in terms of an Imaging Strategy rather than an imaging center What goals do you have for the market? Where does the Health System want to be in five years One center or a network of geographically dispersed centers How do your radiologists fit into the plans? Building the Strategy Customer Service Customer centered culture Ease of scheduling Marketing relationships RIS /PACS Market Presence Reputation Physician loyalty Leverage with the payors Professional Services Quality Timeliness Sub-specialty Expertise

7 Building the Strategy Are you in a position to leverage your market relationships and reputation? - Promote affiliated radiologists subspecialty expertise Are there opportunities to acquire one or more centers - Can t assume centers will close, they will only fight harder and further create a negative environment while trying to survive. From a payor perspective does the hospital have negotiating leverage? Building the Strategy Need to position center (or centers) to compete for off- campus business - Heightens the need for a service oriented culture which often conflicts with historical hospital culture - RIS/PACS systems and integration can be a key distinguishing factor for your center Moving hospital outpatients out of hospital can help unclog the radiology department - Improve length of stay statistics Those who can afford to receive services will not wait for services. Those who cannot will wait. - Opportunity to improve payor mix Building the Strategy Imaging is a sticky service - Can be an entry point to the system for downstream services Doing nothing is conceding the outpatient market to competitors - Both technical fees and professional fees

8 Buy or Build Basic Tools for Assessing a Market Developing a Center Basic Market Analysis Determine the service area Demographic analysis Number, Age, growth, affluence of target population Competitive Analysis Map the competitive locations Identify potentially underserved areas Assess quality of service and equipment (vendors know) Backlog/service analysis secret shopper calls Do you have backlogs for services? (asset/liability) Payor Analysis Reimbursement is key - what can the center expect to be reimbursed? Are payors willing to add sites? Basic Market Analysis Market sizing via utilization per 1,000 statistics Estimated Scans within 15 Mile Radius - 385K Population Medicare (12.9%) Commercial Modality Scans Projected Scans Projected Total Number Per/1000 Scans Per/1000 Scans of Scans MR 113 5, ,775 25,436 CT , ,629 37,957 US , ,598 81,915 PF , , ,331 Mammo 195 9, ,339 26,109 DEXA 47 2, ,938 6,293 Flouro 53 2, ,441 7,096 Total 155, , ,136

9 Basic Market Analysis Market sizing via utilization per 1,000 statistics MR CT 5 mile 15 miles 5 mile 15 miles Commercial Population 83, ,125 83, ,125 Medicare Population 11,875 46,875 11,875 46,875 Utilization per 1,000 population Commercial exams per 1,000 population Medicare exams per 1,000 population Commercial exams 4,912 19,391 5,860 23,133 Medicare exams 1,342 5,297 3,396 13,406 Total Expected Utilization 6,254 24,688 9,257 36,539 Average Scans per Unit 3,145 3,145 5,000 5,000 Units to cover current population Units in the area Units needed (0.0) Market Analysis National Average 85% OP/15% IP National Inpatient vs. Outpatient MRI Scans regardless of Site of Service 85% Outpatient 15% Inpatient Inpatient Outpatient Loss indicated with 8,000 MRI scans National Average 15% 85% 0 Hospital 1 25% 75% 5,333 Hospital 2 35% 65% 10,667 Hospital 3 45% 55% 16,000 Source: 2004 MRI IMV Benchmark Report 8,000 Inpatient Outpatient Total 2005 MRI Scans 2,800 5,200 8,000 Percentage 35% 65% 100% National Average Inpatient to Outpatient 15% 85% Extrapolate total volume from Inpatient 2,800 15,867 18,667 Number of Outpatient Exams 5,200 Number of MRI scans being lost to competitors (10,667) Hospital MRI Exams: Actual Results vs. Market Opportunity

10 Market Analysis Referring Physicians Ultimately the support of area physicians is the most important factor in success or failure of a center Survey the key physicians in the area regarding: Where are they sending currently and why? Perception of the hospital s services What does it do well what does it not do well? Perception of the competition What do they do well what do they not do well? The affiliated radiologists What location would best service their patients? Do they have equipment preferences? Open vs. Closed MRI Market Analysis Financial Modeling All of this information assists in building a center Proforma and business plan Projected volume Reimbursement Expenses Equipment configuration, space lease and build-out, pro fees, staffing needs, insurance and etc Build the expected model and then a sensitivity analysis based on higher and lower expectations of key assumptions Buy or Build - Acquisition Opportunities

11 Acquisition Opportunities Most markets have been overbuilt with centers Stand alone imaging centers are severely handicapped in regard to payor negotiations The fixed cost nature of the expenses makes it hard to turn down even the worst payor contracts Even large networks of centers in big markets have trouble gaining meaningful leverage Health Systems, however, generally, have far more leverage with the payors Negotiating for larger basket of services Acquisition Opportunities Could look for recently or soon to be closed centers. Work with the lenders The lenders don t want the equipment and leaseholds are very expensive Valuation Methods Book Value Discounted cash flow Multiple of Earnings

12 Determine the historical value Basic Due Diligence: Detailed financial analysis How close is the cash collected to the Net Rev. being accrued? Legal Analysis space leases, notes, referring physician financial relationships, etc What are the necessary capital expenditures? What is the makeup of the referral base? Verify the information you are receiving! Your offer should be primarily based off this analysis Determine value going forward Business Planning Due Diligence: Compare the average reimbursement per scan What is the perception of the hospital in the market the center is located Stock or Asset purchase? - Generally hospital would desire an Asset purchase Build Proforma based on new assumptions This analysis illustrates the ROI the project could have going forward Acquisition Multiples April 2007 HealthSouth Imaging Division was acquired by the Gores Group for $47.5MM for 54 centers, 2.5 (?) multiple November MedQuest was acquired by Novant for 12 times trailing 12 month EBITDA So it is somewhere between 2.5 and 12!?

13 Acquisition Multiples Sources: CapitalQ, Stanford Group, Press Releases and New Articles Acquisition Example Imaging Center Technical Revenue $ 3,061,800 Operating and SG&A Expenses $ 2,500,000 EBITDA $ 561,800 Purchase Multiple 4 Purchase Price $ 2,247,200 Note: Subtract debt Effect of Better Payer Contracts Technical Revenue per Scan Imaging Center Hospital 15% Hospital 30% MR $ 480 $ 552 $ 624 CT $ 265 $ 305 $ 345 Ultrasound $ 98 $ 113 $ 127 X-ray $ 37 $ 43 $ 48 DEXA $ 95 $ 109 $ 124 Mammo/CAD $ 95 $ 109 $ 124 Exams per Day MR CT Ultrasound X-ray DEXA Mammo Annual Technical Rev $ 3,061,800 $ 3,521,070 $ 3,980,340

14 Effective Multiple Imaging Center Hospital 15% Hospital 30% Technical Revenue $ 3,061,800 $ 3,521,070 $ 3,980,340 Operating and SG&A Expenses $ 2,500,000 $ 2,500,000 $ 2,500,000 EBITDA $ 561,800 $ 1,021,070 $ 1,480,340 Purchase Multiple 4 Purchase Price $ 2,247,200 $ 2,247,200 $ 2,247,200 Effective Forward Muptiple Acquisition Risks Payers might steer business away from centers due to new higher contracted rates Previously neutral third party centers, once aligned with a market health system might alienate some of the referring physicians in the market Be careful not to run it like the hospital Scheduling needs to stay easy Must stay customer service focused Consider incentive programs for every employee If you don t have the expertise, hire it! Third party companies can assist in evaluating the acquisition Can provide capital to assist in getting the deal done Offer management and marketing expertise once transaction completed Should provide for a service oriented culture to help sustain and grow business

15 Market Development Options Market Development Models: Go it alone or Joint venture with the radiology group and or a third party company Typical Legal Structure if Involved in JV: Usually a newly formed LLC LLC would secure its own provider number and payor contracts - Can piggy back hospital s in some instances Partner s ownership, Board composition, and participation in income and cash distributions pro rata to investment; Sometimes brand limitations or licensing requirements Non- competes

16 Goals Geographically dispersed network of centers Leverage with payors Once too big to ignore - ask for exclusivity, rate increases, etc Broadens service offerings Strengthen health system Winnow down the competition Tighten relationships with radiologists Questions? Presentation By: W. Cannon King, E.V.P. Business Development Outpatient Imaging Affiliates cannon.king@oiarad.com