The head of InSight Health Services says it’s a great time to be in the diagnostic imaging services field.
The work, after all, is there,either InSight or somebody else has to do the MRIs and CAT-scans that doctors are always ordering up. It’s a great business for hospitals and HMOs to outsource. And thanks to a recent change in Medicare reimbursements, there will be more money available to pay those who do the scanning.
So Steven Plochocki, president and CEO of Newport Beach-based InSight, is carving out for his company a bigger piece of the mammoth, $50 billion-a-year diagnostic imaging pie.
The 25-year industry veteran, who joined InSight back in November, intends to continue InSight’s game plan of rolling up smaller players in the industry. At the same time he is trying to figure out ways to control costs and streamline operations in order to improve margins and satisfy investors.
The time is ripe for such an ambitious move, Plochocki asserts.
“The great opportunity InSight has, is that it’s in an industry that makes up 8% of healthcare and where there are no companies of scale,” said Plochocki (pronounced pluh-HUT-ski). “It creates the opportunity for a strong platform company to be the consolidator of this industry.”
Just how fragmented is the diagnostic imaging business? Plochocki notes that the industry’s biggest player is Orange County rival Alliance Imaging Inc. in Anaheim, with revenue last year of $262 million. (InSight has trailing 12-month revenue of $178 million; with Alliance, it is one of the four biggest players in the industry.)
By contrast, he noted, home healthcare is only 4% of healthcare costs, half of diagnostic imaging. Yet it has considerably bigger players, most notably $940 million-a-year Apria Healthcare Group in Costa Mesa, which Plochocki previously served as president.
Outsourcing Gains Ground
With MRIs and CT systems costing anywhere from $700,000 to $2 million each, Plochocki says many hospitals and HMOs are favoring outsourcing for their diagnostic imaging needs, including billing and collections services.
Things are also looking rosier in the healthcare industry as a whole, which Plochocki said is coming out of a five-year down cycle. Managed care organizations are raising premiums (thus putting less pressure on providers) and billions of dollars are going to be put back into Medicare programs as a result of the Balanced Budget Refinement Act of 1999.
Plochocki saw the recent hard times first hand in the No. 2 position at Apria, the largest home healthcare company in the U.S. It was formed by the merger of two OC companies, Homedco Group and Abbey Healthcare Group. Plochocki left Apria in September 1998 bruised, but wiser and richer for the experience,he got a $921,450 severance payment and some corporate lessons.
Apria stock got as high as the 35 level in early 1996 shortly after its debut, but it was down to 3 by October of 1998. It has now recovered to the 15 level.
“Hindsight is always 20/20,” he said. “If you just take a look at what transpired in healthcare back then, we merged the two companies at the front end of the worst five-year period for regulatory and reimbursement pressure in the history of healthcare.”
Carving a Niche
In some ways, Plochocki is trying to do with InSight what he had a hand in doing a few years back at Apria creating through consolidation a billion-dollar niche player in healthcare services.
Even before Plochocki arrived, InSight was on an acquisition binge, quadrupling sales from $40 million in 1995 to $162 million for the fiscal year ending last June 30.
In 1997, InSight received $175 million in capital funding: $25 million from The Carlyle Group and $150 million from Bank of America.
However, costs got out of control, margins shrunk and the stock sank. By July of last year the stock was mired in a 5-to-6 range, down from a high of 18 in January 1998. Former CEO Larry Atkins left to pursue other business ventures. Enter Plochocki.
Cost Containment
While InSight is keeping up with acquisitions, Plochocki said he’s also focusing on costs.
His plan is to continue developing the core internal business. “And be selective about acquiring regional based systems that can supplement our market niche.”
It took a few months under Plochocki for the stock to get out of the 5-to-6 rut, but it hit 11 earlier this year before settling back around the 8 level last week.
A higher stock price could help facilitate future acquisitions, which helps explain Plochocki’s push to tell InSight’s story to the investment community. To that end, he’s called on analysts and investors in Las Vegas, Boston and New York and next week his will be one of the companies addressing a healthcare conference put on by Sutro & Co. at the Four Seasons Hotel in Newport Beach.
Plochocki argues that it should be a lot higher, and for support points to a recent report by Morgan Stanley Dean Witter analysts William T. Reiland and David Phillips. They noted that the management buyout of Alliance (financed by Kohlberg Kravis Roberts & Co.) for $851 million in November attached a value to Alliance that was almost six times the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). They said InSight deserved at least as large a multiple in a sale, which would price InSight’s stock at the 18 or 19 level, more than double its current price.
InSight currently offers diagnostic imaging, treatment and related management assistance in California, Texas, New England, the Carolinas and the Midwest, 32 states in all. InSight has 1,400 employees nationwide including 120 in OC.
The company now has 57 fixed-site imaging centers, 78 mobile MRIs, five mobile litho-tripsy facilities (a non-invasive way to treat kidney stones) and one Leksell Stereotactic Gamma Unit (Gamma knife) treatment center. (OC rival Alliance operates some 400 MRI systems nationwide, including mobile MRI units.)
InSight was formed by the merger of American Health Services Corp. and Maxum Health Corp in June 1996.
Plochocki, who joined InSight in November, was CEO of Centratex Support Services from January 1998 to November 1999. He was with Apria from 1995 until he resigned in 1997. Before that he was COO of Abbey. n
