Anaheim medical scanning services provider Alliance Imaging Inc. says it saw it coming.
Two key sources of business for Alliance,hospitals and the federal Medicare healthcare program for seniors,are seeing shifts.
Hospitals have started taking on scanning services themselves, instead of contracting out for them from Alliance and others. The story with Medicare is a familiar one,declining reimbursements for Alliance’s services to patients in the program.
Medicare changes prompted Alliance to warn Wall Street in December that 2007 earnings could be off by $14 million. The company is seeing less federal money for imaging procedures as a result of the Deficit Reduction Act of 2005.
Alliance counts yearly sales of about $440 million and a recent market value of about $345 million.
“This is a time of great change for our industry,” said Paul Viviano, Alliance’s chief executive since 2003. “When they hired me, the job was to find other products to replace the (rest) of the shrinking business.”
Alliance started looking at ways to grow a few years back, when hospitals started cutting back on its services. The company provides scanning for hospitals and doctors’ offices, mostly through trucks that make rounds among healthcare providers.
“Our sole business line, the only product we offered, began to shrink,” Viviano said. “It wasn’t just us shrinking,it was the entire global industry that began to shrink. Since we are the largest in the industry on a national basis, it obviously began to impact us.”
Growth Plans
Alliance is looking to three areas for growth, according to Viviano:
n Offering positron emission tomography scanning for cancer. Alliance began focusing on PET cancer scanning shortly after Viviano’s arrival in 2003. It now does some 10% of those scans nationally.
n Outpatient scanning centers run with hospitals. Alliance has 74 centers, including at Los Alamitos Medical Center, Orange Coast Memorial Medical Center and Mission Hospital Medical Center in Mission Viejo.
The buildings “have the hospital’s name on the front,” Viviano said.
Alliance is paid to run the centers. The hospitals in turn bill Medicare and insurers for the services.
n Alliance Oncology, a new business in which the company works with hospitals to provide radiation therapy for cancer patients. Alliance Oncology has two centers in Los Angeles County and more in the works.
The bulk of Alliance’s business,87%,is “wholesale” from hospitals that contract with the company to run scanning services, Viviano said.
The rest is “retail,” he said, where Alliance enters into joint ventures with hospitals to provide services. Alliance typically owns 75% of scanning ventures. The hospital owns 25%. Profits are split.
The retail side feels the Medicare pinch.
A recent rule change brought outpatient Medicare scanning payments to the same rate as those done at hospital centers, Viviano said.
This year, Alliance said it expects earnings before interest, taxes, depreciation, amortization and other onetime charges of $148 million to $156 million. Sales could come in at $431 million to $443 million, down slightly from what analysts project for 2006.
Kaiser Foundation Health Plan, the Oakland-based health system that operates Orange County’s largest health maintenance organization, is Alliance’s largest customer, said Viviano, who earlier served as chief operating officer at Orange-based hospital operator St. Joseph Health System.
Alliance also works with hospitals owned by HCA Inc. of Nashville, and with facilities owned by Tenet Healthcare Corp., the Dallas-based hospital operator with a regional office in Santa Ana.
Among Alliance’s rivals is InSight Health Services Holdings Corp. of Lake Forest.
Possible Acquisitions
The Medicare cuts Alliance is facing might not be all bad, according to Citigroup analyst Matthew Ripperger.
“We believe the Medicare cuts will create opportunities to retake market share and grow through selective acquisitions,” Ripperger wrote in a research report after Alliance issued its guidance in December.
The cuts could prove too much for some smaller players, opening the door to possible acquisitions by Alliance.
“My guess is that we’ll return to an acquisition strategy,” Viviano said.
With fewer competitors, Alliance could wind up doing more scans, according to Ripperger.
A recent Associated Press story suggested Alliance could benefit from a more cost-conscious Medicare program that encourages doctors to screen their patients early on, prior to developing costly, life-threatening health conditions.
But Alliance faces another challenge, what Viviano called “utilization management.”
Call that managed care for medical scanning. Insurers have hired radiology benefit managers with an eye toward limiting scans through pre-authorization, pre-certification and other managed care tricks.
“Those principles began to be expanded and extended to imaging in the middle of 2005,” Viviano said. “They’re a part of the landscape, and that’s the way it is.”
Investors don’t seem overly worried about lower Medicare payments and even Alliance’s own profit warning.
The company’s shares fell late last year but ended 2006 up about 20%.
Still, Viviano contends the company is “underappreciated, that’s for sure.”
One factor could be what Viviano calls Alliance’s “financial sponsor”,Kohlberg Kravis Roberts & Co. of New York.
Viewer Holdings LLC, which is owned by two investment funds sponsored by KKR, owns the majority of Alliance’s shares.
It once held about 70%, though that’s down after a $9 million November stock sale that caused a big drop in Alliance’s shares.
“They sold $9 million worth of stock, which certainly had a depressing effect on our share price,” Viviano said. “But we’ve ticked back up since then.”
The shares are up about 16% since November.
Alliance would like to boost its profile on Wall Street, Viviano said. Seven analysts follow the company. Executives attend conferences nearly every month, he said.
