Filed with the SEC from Jan 24 to Jan 30:
JB Capital disclosed new holdings of 1,982,202 shares (5.2%) after it bought 69,140 from Jan. 17 through Jan. 25 for $2.72 to $2.86 apiece. In its filing, JB said it intends to communicate with management and other shareholders.
We are the leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States based on number of locations and annual imaging revenue, with 233 centers, which we operate directly or indirectly through joint ventures as of December 31, 2011, located in California, Delaware, Maryland, New Jersey, Rhode Island, Florida, and New York. Our centers provide physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often reducing the cost and amount of care for patients. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services, a key point of differentiation from our competitors. Our multi-modality strategy diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve the needs of multiple procedures.
We seek to develop leading positions in regional markets in order to leverage operational efficiencies. Our scale and density within selected geographies provides close, long-term relationships with key payors, radiology groups and referring physicians. Each of our center-level and region operations teams is responsible for managing relationships with local physicians and payors, meeting our standards of patient service and maintaining profitability. We provide corporate training programs, standardized policies and procedures and sharing of best practices among the physicians in our regional networks.
In late 2010 and early 2011 we sought to expand our offering of imaging related services with our acquisition of eRAD and Imaging On Call. eRAD develops and sells computerized systems for the imaging industry, including Picture Archiving Communications Systems (â€śPACSâ€ť) and Radiology Information Systems (â€śRISâ€ť). Imaging On Call provides teleradiology services for remote interpretation of images on behalf of radiology groups, hospitals and imaging center customers. The remote interpretation often occurs after business hours or is to provide support in overflow situations or in order to provide sub-specialty radiology capabilities. In addition to providing alternative revenue sources for us, the capabilities of both eRAD and Imaging On Call can be utilized by us to make the RadNet imaging center operations more efficient and cost effective.
We derive substantially all of our revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at our facilities. For the year ended December 31, 2011, we performed 3,740,443 diagnostic imaging procedures and generated net revenue from continuing operations of $619.8 million. Additional information concerning RadNet, Inc., including our consolidated subsidiaries, for each of the years ended December 31, 2011, December 31, 2010 and December 31, 2009 is included in the consolidated financial statements and notes thereto in this annual report.
History of our Business
We were originally incorporated in the State of New York in 1985 and have been continuously engaged in the medical imaging business since that time. On September 3, 2008 we reincorporated from New York into Delaware and have operated as a Delaware corporation since that time.
Prior to November 15, 2006, we operated facilities exclusively in California. On November 15, 2006, we completed the acquisition of Radiologix, Inc., a Delaware corporation, then employing approximately 2,200 people. Radiologix was a national provider of diagnostic imaging services through the ownership and operation of freestanding, outpatient diagnostic imaging centers, owning, operating and maintaining equipment in 69 locations, with imaging centers in seven states, including primary operations in the Mid-Atlantic; the Bay-Area, California; the Treasure Coast area, Florida and the Finger Lakes (Rochester) and Hudson Valley areas of New York State.
Since that time we have continued to develop our medical imaging business through a combination of organic growth and acquisitions. For a discussion of acquisitions and dispositions of facilities, see Item 7 - â€śManagementâ€™s Discussion and Analysis and Results of Operationsâ€”Facility Acquisitionsâ€ť below.
In addition to our imaging business, we have expanded into data workflow and information systems. On October 1, 2010, we completed our acquisition of Image Medical Corporation, the parent of eRAD, Inc. (see Note 3 to the consolidated financial statements to this annual report). eRAD, Inc., headquartered in Greenville, South Carolina, has been a premier provider of Picture Archiving and Communications Systems (PACS) and related workflow solutions to the radiology industry since 1999. Over 250 hospitals, teleradiology businesses, imaging centers and specialty physician groups use eRADâ€™s technology to distribute, visualize, store and retrieve digital images taken from all diagnostic imaging modalities. eRAD has approximately 30 employees, including a Research and Development team of 11 software engineers in Budapest, Hungary.
In addition, we have assembled an industry leading team of software developers, based out of Prince Edward Island, Canada, to create radiology workflow solutions known as Radiology Information Systems (â€śRISâ€ť) focused exclusively on RadNetâ€™s internal use. All members of this Canadian based team have significant software development expertise in radiology, and together with eRAD and its PACS technology, are creating fully integrated solutions to manage all aspects of RadNetâ€™s internal information needs. eRAD and the newly hired software development team form a Radiology Information Technology division of RadNet.
In January 2011, we entered into a new line of business with the acquisition of Imaging On Call, LLC, a provider of teleradiology services to radiology groups, hospitals and imaging centers located in Poughkeepsie, New York. The addition of the teleradiology business adds a new component to our portfolio of solutions, whereby we provide interpretation services to approximately 50 hospitals and hospital-based radiology groups.
References to â€śRadNet,â€ť â€śwe,â€ť â€śus,â€ť â€śourâ€ť or the â€śCompanyâ€ť in this report refer to RadNet, Inc., its subsidiaries and affiliated entities. See â€śManagementâ€™s Discussion and Analysis and Results of Operationsâ€”Overview.â€ť
We maintain a website at www.radnet.com . We make available, free of charge, on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as is reasonably practicable after the material is electronically filed with the Securities and Exchange Commission. References to our website addressed in this report are provided as a convenience and do not constitute, and should not be viewed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.
Diagnostic imaging involves the use of non-invasive procedures to generate representations of internal anatomy and function that can be recorded on film or digitized for display on a video monitor. Diagnostic imaging procedures facilitate the early diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often minimizing the cost and amount of care for patients. Diagnostic imaging procedures include MRI, CT, PET, nuclear medicine, ultrasound, mammography, X-ray and fluoroscopy. We estimate that the national imaging market in the United States is $100 billion annually, with projected mid-single digit growth for MRI, CT and PET/CT over the next several years, driven by the aging of the U.S. population, wider physician and payor acceptance for imaging technologies, and greater consumer and physician awareness of diagnostic screening capabilities.
While general X-ray remains the most commonly performed diagnostic imaging procedure, the fastest growing and higher margin procedures are MRI, CT and PET. The rapid growth in PET scans is attributable to the increasing recognition of the efficacy of PET scans in the diagnosis and monitoring of cancer. The number of MRI and CT scans continues to grow due to their wider acceptance by physicians and payors, an increasing number of applications for their use and a general increase in demand due to the aging population in the United States.
Additional improvements in imaging technologies, contrast agents and scan capabilities are leading to new non-invasive methods of diagnosing blockages in the heartâ€™s vital coronary arteries, liver metastases, pelvic diseases and vascular abnormalities without exploratory surgery. We believe that the use of the diagnostic capabilities of MRI and other imaging services will continue to increase because they are cost-effective, time-efficient and non-invasive, as compared to alternative procedures, including surgery, and that newer technologies and future technological advancements will further increase the use of imaging services. At the same time, the industry has increasingly used upgrades to existing equipment to expand applications, extend the useful life of existing equipment, improve image quality, reduce image acquisition time and increase the volume of scans that can be performed. We believe this trend toward equipment upgrades rather than equipment replacements will continue, as we do not foresee new imaging technologies on the near-term horizon that will displace MRI, CT or PET as the principal advanced diagnostic imaging modalities.
Wider Physician and Payor Acceptance of the Use of Imaging
During the last 30 years, there has been a major effort undertaken by the medical and scientific communities to develop higher quality, cost-effective diagnostic imaging technologies and to minimize the risks associated with the application of these technologies. The thrust of product development during this period has largely been to reduce the hazards associated with conventional X-ray and nuclear medicine techniques and to develop new, harmless imaging technologies. As a result, the use of advanced diagnostic imaging modalities, such as MRI, CT and PET, which provide superior image quality compared to other diagnostic imaging technologies, has increased rapidly in recent years. These advanced modalities allow physicians to diagnose a wide variety of diseases and injuries quickly and accurately without exploratory surgery or other surgical or invasive procedures, which are usually more expensive, involve greater risk to patients and result in longer rehabilitation time. Because advanced imaging systems are increasingly seen as a tool for reducing long-term healthcare costs, they are gaining wider acceptance among payors.
Greater Consumer Awareness of and Demand for Preventive Diagnostic Screening
Diagnostic imaging, such as elective full-body scans, is increasingly being used as a screening tool for preventive care procedures. Consumer awareness of diagnostic imaging as a less invasive and preventive screening method has added to the growth in diagnostic imaging procedures. We believe that further technological advancements allowing for early diagnosis of diseases and disorders using less invasive procedures will create additional demand for diagnostic imaging.
Diagnostic Imaging Settings
Diagnostic imaging services are typically provided in one of the following settings:
Fixed-site, freestanding outpatient diagnostic facilities
These facilities range from single-modality to multi-modality facilities and are generally not owned by hospitals or clinics. These facilities depend upon physician referrals for their patients and generally do not maintain dedicated, contractual relationships with hospitals or clinics. In fact, these facilities may compete with hospitals or clinics that have their own imaging systems to provide services to these patients. These facilities bill third-party payors, such as managed care organizations, insurance companies, Medicare or Medicaid. All of our facilities are in this category.
Many hospitals provide both inpatient and outpatient diagnostic imaging services, typically on site. These inpatient and outpatient centers are owned and operated by the hospital or clinic, or jointly by both, and are primarily used by patients of the hospital or clinic. The hospital or clinic bills third-party payors, such as managed care organizations, insurance companies, Medicare or Medicaid.
While many hospitals own or lease their own equipment, certain hospitals provide these services by contracting with providers of mobile imaging equipment. Using specially designed trailers, mobile imaging service providers transport imaging equipment and provide services to hospitals and clinics on a part-time or full-time basis, thus allowing small to mid-size hospitals and clinics that do not have the patient demand to justify fixed on-site access to advanced diagnostic imaging technology. Diagnostic imaging providers contract directly with the hospital or clinic and are typically reimbursed directly by them.
Diagnostic Imaging Modalities
The principal diagnostic imaging modalities we use at our facilities are:
MRI has become widely accepted as the standard diagnostic tool for a wide and fast-growing variety of clinical applications for soft tissue anatomy, such as those found in the brain, spinal cord, abdomen, heart and interior ligaments of body joints such as the knee. MRI uses a strong magnetic field in conjunction with low energy electromagnetic waves that are processed by a computer to produce high-resolution, three-dimensional, cross-sectional images of body tissue. A typical MRI examination takes from 20 to 45 minutes. MRI systems can have either open or closed designs, routinely have magnetic field strength of 0.2 Tesla to 3.0 Tesla and are priced in the range of $0.6 million to $2.5 million. As of December 31, 2011, we had 174 MRI systems in operation.
CT provides higher resolution images than conventional X-rays, but generally not as well defined as those produced by MRI. CT uses a computer to direct the movement of an X-ray tube to produce multiple cross-sectional images of a particular organ or area of the body. CT is used to detect tumors and other conditions affecting bones and internal organs. It is also used to detect the occurrence of strokes, hemorrhages and infections. A typical CT examination takes from 15 to 45 minutes. CT systems are priced in the range of $0.3 million to $1.2 million. As of December 31, 2011, we had 102 CT systems in operation.
PET scanning involves the administration of a radiopharmaceutical agent with a positron-emitting isotope and the measurement of the distribution of that isotope to create images for diagnostic purposes. PET scans provide the capability to determine how metabolic activity impacts other aspects of physiology in the disease process by correlating the reading for the PET with other tools such as CT or MRI. PET technology has been found highly effective and appropriate in certain clinical circumstances for the detection and assessment of tumors throughout the body, the evaluation of some cardiac conditions and the assessment of epilepsy seizure sites. The information provided by PET technology often obviates the need to perform further highly invasive or diagnostic surgical procedures. PET systems are priced in the range of $0.8 million to $2.5 million. In addition, we employ combined PET/CT systems that blend the PET and CT imaging modalities into one scanner. These combined systems are priced in the range of $1.1 million to $2.8 million. As of December 31, 2011, we had 38 PET or combination PET/CT systems in operation.
Nuclear medicine uses short-lived radioactive isotopes that release small amounts of radiation that can be recorded by a gamma camera and processed by a computer to produce an image of various anatomical structures or to assess the function of various organs such as the heart, kidneys, thyroid and bones. Nuclear medicine is used primarily to study anatomic and metabolic functions. Nuclear medicine systems are priced in the range of $300,000 to $400,000. As of December 31, 2011, we had 43 nuclear medicine systems in operation.
X-rays use roentgen rays to penetrate the body and record images of organs and structures on film. Digital X-ray systems add computer image processing capability to traditional X-ray images, which provides faster transmission of images with a higher resolution and the capability to store images more cost-effectively. X-ray systems are priced in the range of $95,000 to $440,000. As of December 31, 2011, we had 227 X-ray systems in operation.
Ultrasound imaging uses sound waves and their echoes to visualize and locate internal organs. It is particularly useful in viewing soft tissues that do not X-ray well. Ultrasound is used in pregnancy to avoid X-ray exposure as well as in gynecological, urologic, vascular, cardiac and breast applications. Ultrasound systems are priced in the range of $90,000 to $250,000. As of December 31, 2011, we had 341 ultrasound systems in operation.
Mammography is a specialized form of radiology using low dosage X-rays to visualize breast tissue and is the primary screening tool for breast cancer. Mammography procedures and related services assist in the diagnosis of and treatment planning for breast cancer. Analog mammography systems are priced in the range of $70,000 to $100,000, and digital mammography systems are priced in the range of $250,000 to $400,000. As of December 31, 2011, we had 152 mammography systems in operation.
Fluoroscopy uses ionizing radiation combined with a video viewing system for real time monitoring of organs. Fluoroscopy systems are priced in the range of $100,000 to $400,000. As of December 31, 2011, we had 112 fluoroscopy systems in operation.
Our Competitive Strengths
Our Position as the Largest Provider of Freestanding, Fixed-site Outpatient Diagnostic Imaging Services in the United States, Based on Number of Centers and Revenue
As of December 31, 2011, we operated 233 centers in California, Delaware, Maryland, New Jersey, Florida, Rhode Island and New York. Our size and scale allow us to achieve operating, sourcing and administrative efficiencies, including equipment and medical supply sourcing savings and favorable maintenance contracts from equipment manufacturers and other suppliers. Our specific knowledge of our geographic markets drives strong relationships with key payors, radiology groups and referring physicians within our markets.
Our Comprehensive "Multi-Modality" Diagnostic Imaging Offering
The vast majority of our centers offer multi-modality procedures, driving strong relationships with referring physicians and payors in our markets and a diversified revenue base. At each of our multi-modality facilities, we offer patients and referring physicians one location to serve their needs for multiple procedures. Furthermore, we have complemented many of our multi-modality sites with single-modality sites to accommodate overflow and to provide a full range of services within a local area consistent with demand. This prevents multiple patient visits or unnecessary travel between facilities, thereby increasing patient throughput and decreasing costs and time delays. Our revenue is generated by a broad mix of modalities. We believe our multi-modality strategy lessens our exposure to reimbursement changes in any specific modality.
Our Facility Density in Many Highly Populated Areas of the United States
The strategic organization of our diagnostic imaging facilities into regional networks concentrated in major population centers in seven states offers unique benefits to our patients, our referring physicians, our payors and us. We are able to increase the convenience of our services to patients by implementing scheduling systems within geographic regions, where practical. For example, many of our diagnostic imaging facilities within a particular region can access the patient appointment calendars of other facilities within the same regional network to efficiently allocate time available and to meet a patient's appointment, date, time, or location preferences. The grouping of our facilities within regional networks enables us to easily move technologists and other personnel, as well as equipment, from under-utilized to over-utilized facilities on an as-needed basis, and drive referrals. Our organization of referral networks results in increased patient throughput, greater operating efficiencies, better equipment utilization rates and improved response time for our patients. We believe our networks of facilities and tailored service offerings for geographic areas drives local physician referrals, makes us an attractive candidate for selection as a preferred provider by third-party payors, creates economies of scale and provides barriers to entry by competitors in our markets.
Our Strong Relationships with Payors and Diversified Payor Mix
Our revenue is derived from a diverse mix of payors, including private payors, managed care capitated payors and government payors, which should mitigate our exposure to possible unfavorable reimbursement trends within any one payor class. In addition, our experience with capitation arrangements over the last several years has provided us with the expertise to manage utilization and pricing effectively, resulting in a predictable and recurring stream of revenue. We believe that third-party payors representing large groups of patients often prefer to enter into managed care contracts with providers that offer a broad array of diagnostic imaging services at convenient locations throughout a geographic area. As of December 31, 2011, we received approximately 55% of our payments from commercial insurance payors, 15% from managed care capitated payors, 20% from Medicare and 3% from Medicaid. With the exception of Blue Cross/Blue Shield, which are managed by different entities in each of the states in which we operate, and Medicare, no single payor accounted for more than 5% of our net revenue for the twelve months ended December 31, 2011.
Howard G. Berger, M.D . has served as President and Chief Executive Officer of our Company and its predecessor entities since 1987. Dr. Berger is also the president or co-president of the entities that own Beverly Radiology Medical Group, or BRMG. He began his career in medicine at the University of Illinois Medical School, is Board Certified in Nuclear Medicine and trained in an Internal Medicine residency, as well as in a masters program in medical physics in the University of California system. Dr. Berger brings business leadership skills to our Board of Directors derived from his more than 25 years of experience in the development and management of the Company.
Marvin S. Cadwell served as a director of Radiologix, Inc. between June 2002 and November 2006, until its acquisition by the Company. He was appointed Chairman of the Board of Radiologix in December 2002 and served as Chairman of the Nominations and Governance Committee of the Board of Radiologix. He was the Radiologix interim Chief Executive Officer from September 2004 until November 2004. From December 2001 until November 2002, Mr. Cadwell served as Chief Executive Officer of SoftWatch, Ltd., an Israeli based company that provides Internet software. Since 2003, he has served as a director of ChartOne, Inc., a private company that provides patient chart management services to the healthcare industry. Mr. Cadwell has experience as an executive officer of several companies in the healthcare industry and brings to our Board of Directors a strong background in operating management of various organizations. Mr. Cadwell has been a member of our Audit Committee since 2007 and a member of our Nominating and Governance Committee since January 2011.
John V. Crues, III, M.D . is a world-renowned radiologist. Dr. Crues has served as our Vice President and Medical Director since 2000. Dr. Crues received his M.D. at Harvard University, completed his internship at the University of Southern California in Internal Medicine, and completed a residency at Cedars-Sinai in Internal Medicine and Radiology. Dr. Crues has authored numerous publications while continuing to actively participate in radiological societies such as the Radiological Society of North America, American College of Radiology, California Radiological Society, International Society for Magnetic Resonance Medicine and the International Skeletal Society. Dr. Crues is also currently Co-President of Pronet Imaging Medical Group and a director of BRMG. Dr. Crues plays a significant role as a musculoskeletal specialist for many of our patients as well as a resource for physicians providing services at our facilities and his active participation in radiological societies gives our Board of Directors access to thought leadership in the field of radiology.
Norman R. Hames has served as our Chief Operating Officer since 1996 and currently serves as our Executive Vice President, Chief Operating Officer-Western Operations and Corporate Secretary. Applying his 20 years of experience in the industry, Mr. Hames oversees all aspects of our California facility operations. His management team, comprised of regional directors, managers and sales managers, is responsible for responding to all of the day-to-day concerns of our California facilities, patients, payors and referring physicians. Prior to joining our Company, Mr. Hames was President and Chief Executive Officer of his own company, Diagnostic Imaging Services, Inc. (which we acquired), which owned and operated 14 multi-modality imaging facilities throughout Southern California. Mr. Hames gained his initial experience in operating imaging centers for American Medical International, or AMI, and was responsible for the development of AMIâ€™s single and multi-modality imaging centers. Mr. Hames brings business leadership skills from his experience as President and Chief Executive Officer of his own company and has a 20-year background in the day-to-day operations of imaging centers.
Lawrence L. Levitt is a certified public accountant and received his MBA in Accounting from the University of California Los Angeles. Since 1987, Mr. Levitt has been the President and Chief Financial Officer of Canyon Management Company, a company which manages a privately held investment fund. Mr. Levitt is also a director of River Downs Management Company, a private company that operates a thoroughbred racetrack in Ohio. Mr. Levitt brings to our Board of Directors extensive financial accounting experience and is an audit committee financial expert under the SEC rules. Mr. Levitt has been a member of our Audit Committee since March 2005 and a member of our Nominating and Governance Committee since January 2011. Mr. Levitt has served as the chair of our Compensation and Management Development Committee since July 2007.
Michael L. Sherman, M.D., F.A.C.R., served as a director of Radiologix from 1997 until November 2006, until its acquisition by the Company. He founded and served as President of Advanced Radiology, P.A., a 90-person radiology practice located in Baltimore, Maryland, from its inception in 1995 to 2001, and subsequently as its board chairman and a consultant until his retirement from active clinical practice in 2005. In addition, Dr. Sherman was a director of MedStar Health, a ten-hospital system in the Baltimore-Washington, D.C. area from 1998 until 2006 and served as a director of Medstarâ€™s captive insurance company until 2011. Dr. Sherman has trained as a mediator and runs Medical Mediation, LLC through which he has mediated professional liability and business cases. He was a director of HX Technologies, a healthcare IT private company, from 2006 until its sale in 2010. Dr. Sherman has broad experience in the medical and business aspects of radiology as a board member and chairman of various companies in the healthcare industry. Effective January 2011, Dr. Sherman was elected to serve as the chair of our Nominating and Governance Committee and has been a member of our Compensation and Management Development Committee since 2007.
David L. Swartz is a certified public accountant with over thirty-five years of experience providing accounting and advisory services to clients. Mr. Swartz currently serves as a member of the board of directors of the California State Board of Accountancy and previously served as president. Between 1993 and 2008, Mr. Swartz served as the managing partner of Good, Swartz, Brown & Berns LLP, a division of JH Cohn, and currently provides consulting services. Prior to that, Mr. Swartz served as managing partner and was on the national board of directors of a 50 office international accounting firm. Mr. Swartz is also a former chief financial officer of a publicly held shopping center and development company. Mr. Swartz brings to our Board of Directors extensive public financial accounting experience and is an audit committee financial expert under the SEC rules. Effective January 2011, Mr. Swartz was appointed as Lead Independent Director and has been the chair of our Audit Committee since 2004. In addition, Mr. Swartz has been a member of our Compensation and Management Development Committee since 2008 and a member of our Nominating and Governance Committee since January 2011.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are the leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States based on number of locations and annual imaging revenue, with 233 centers, which we operate directly or indirectly through joint ventures as of December 31, 2011, located in California, Delaware, Maryland, New Jersey, Rhode Island, Florida, and New York. Our centers provide physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often reducing the cost and amount of care for patients. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. As of December 31, 2011, we had in operation 174 MRI systems, 102 CT systems, 38 PET or combination PET/CT systems, 43 nuclear medicine systems, 227 X-ray systems, 152 mammography systems, 341 ultrasound systems, and 112 fluoroscopy systems.
We derive substantially all of our revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at our facilities. For the year ended December 31, 2011, we performed 3,740,443 diagnostic imaging procedures and generated net revenue from continuing operations of $619.8 million.
Our revenue is derived from a diverse mix of payors, including private payors, managed care capitated payors and government payors. We believe our payor diversity mitigates our exposure to possible unfavorable reimbursement trends within any one-payor class. In addition, our experience with capitation arrangements over the last several years has provided us with the expertise to manage utilization and pricing effectively, resulting in a predictable stream of revenue. As of December 31, 2011, we received approximately 55% of our payments from commercial insurance payors, 15% from managed care capitated payors, 20% from Medicare and 3% from Medicaid. With the exception of Blue Cross/Blue Shield and government payors, no single payor accounted for more than 5% of our net revenue for the twelve months ended December 31, 2011.
We have developed our medical imaging business through a combination of organic growth and acquisitions. For a discussion of acquisitions and dispositions of facilities, see â€śManagementâ€™s Discussion and Analysis and Results of Operationsâ€”Facility Acquisitionsâ€ť below.
The consolidated financial statements in this annual report include the accounts of Radnet Management and BRMG. The consolidated financial statements also include Radnet Management I, Inc., Radnet Management II, Inc., Radiologix, Inc., Radnet Management Imaging Services, Inc., Delaware Imaging Partners, Inc., New Jersey Imaging Partners, Inc. and Diagnostic Imaging Services, Inc. (DIS), all wholly owned subsidiaries of Radnet Management. Accounting Standards Codification Section 810-10-15-14 stipulates that generally any entity with a) insufficient equity to finance its activities without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack the characteristics specified in the Codification which evidence a controlling financial interest, is considered a Variable Interest Entity (â€śVIEâ€ť). We consolidate all voting interest entities in which we own a majority voting interest and all VIEs for which we are the primary beneficiary. We determine whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has the controlling financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the VIEâ€™s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIEâ€™s variable interests issued and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or redesign of the entity.
On November 7, 2011, we completed our acquisition of all outstanding equity interests in Raven Holdings U.S., Inc. (â€śRHâ€ť) from CML Healthcare, Inc. The acquisition of RH includes two operating subsidiaries, American Radiology Services (â€śARSâ€ť) and The Imaging Institute (â€śTIIâ€ť). ARS operates 15 free-standing outpatient imaging facilities in Maryland (including two facilities held in joint ventures with hospital partners) and one facility in Delaware. In addition to the imaging centers, ARS provides on-site staffing and professional interpretation services to five Maryland hospitals and teleradiology services to nine additional hospitals and radiology group customers. TII operates five imaging facilities in the Cranston, Warwick and Providence local markets in Rhode Island. Aggregate consideration for the purchase was approximately $40.4 million, consisting of approximately $28.2 million in cash, $9.0 million in a seller note and approximately $3.2 million of assumed equipment-related debt. See Note 4 to the consolidated financial statements contained in this annual report for more detail relating to our preliminary fair value determination of the assets acquired and liabilities assumed.
On November 1, 2011, Image Medical Corporation, a consolidated subsidiary of the Company, acquired a 51% controlling interest in Radar Medical Systems, LLC, a Michigan Limited Liability Company (â€śRadarâ€ť) for $1.1 million cash consideration. The technology acquired from Radar will enhance our existing PACS technology acquired through our acquisition of Image Medical. We have made a preliminary fair value determination of the assets acquired and liabilities assumed of this limited liability company. Approximately $1.1 million of working capital, $144,000 of intangible assets and $845,000 of goodwill was recorded with respect to this transaction. We also recorded $961,000 of non-controlling interests with respect to this transaction.
For services for which we bill Medicare directly, we are paid under the Medicare Physician Fee Schedule, which is updated on an annual basis. Under the Medicare statutory formula, payments under the Physician Fee Schedule would have decreased for the past several years if Congress failed to intervene.
For 2010, CMS projected a rate reduction of 21.2% in the absence of Congressional intervention. However, over the course of the first six months of 2010, various temporary solutions were enacted by Congress which resulted in delaying any such change to the physician fee schedule. Ultimately, a 2.2% increase in the conversion factor was passed by Congress effective June 1, 2010, further delaying the pending 21.2% conversion factor reduction to November 30, 2010. On November 2, 2010, CMS released the calendar year 2011 Medicare Physician Fee Schedule. Again, the rule would have significantly reduced physician fee schedule payments in 2011 had Congress not acted by passing the Physician Payment and Therapy Relief Act of 2010 and the Medicare and Medicaid Extenders Act of 2010, which together continued the 2.2% update from June 2010 through December 31, 2011. Similarly, the calendar year 2012 Medicare Physician Fee Schedule provided for a 27.4% decrease to the physician fee schedule which was averted by Congress passing the Middle Class Tax Relief and Job Creation Act of 2012. While Congress has historically provided temporary relief from the formula-driven reductions in the conversion factor, it cannot be guaranteed that Congress will act to provide relief in the future. The failure of Congress to act could adversely impact our revenues and results of operation.
Interest expense increased approximately $4.4 million, or 9.1%, to $52.8 million for the year ended December 31, 2011 compared to $48.4 million for the year ended December 31, 2010. Interest expense for the year ended December 31, 2011 included $2.9 million of amortization of deferred financing costs as well as $1.2 million of amortization of Accumulated Other Comprehensive Loss associated with fair value adjustments to our interest rate swaps accumulated prior to April 6, 2010, the date of our debt refinancing. Interest expense for the year ended December 31, 2010 included $2.8 million of amortization of deferred financing costs as well as $917,000 of amortization of Accumulated Other Comprehensive Loss associated with fair value adjustments to our interest rate swaps accumulated prior to April 6, 2010, the date of our debt refinancing. See â€śLiquidity and Capital Resourcesâ€ť below for more details on our debt refinancing. Excluding these adjustments to interest expense for each period, interest expense increased $4.2 million. This increase was primarily due to interest expense on the additional borrowings under the debt refinancing completed April 6, 2010.
Loss on extinguishment of debt
For the year ended December 31, 2010, we recorded a $9.9 million loss on extinguishment of debt related to our debt refinancing completed on April 6, 2010. This loss included a $7.6 million write-off of deferred loan costs associated with our GE debt settled on April 6, 2010, as well as approximately $2.3 million to settle a call premium associated with our prior credit facilities and for interest rate swap related expenses. There was no similar expense for the year ended December 31, 2011.
For the year ended December 31, 2011 we recorded approximately $5.1 million of other income primarily related to fair value adjustments on our interest rate swaps. For the year ended December 31, 2010, we recorded approximately $505,000 of other expenses which consisted of approximately $132,000 related to fair value adjustments on our interest rate swaps as well as $373,000 related to litigation.
Income tax expense
For the years ended December 31, 2011 and 2010, we recorded $820,000 and $576,000, respectively, for state income tax expense primarily related to taxable income generated in the states of California, Maryland and Delaware.
Equity in earnings from unconsolidated joint ventures
Equity in earnings from our unconsolidated joint ventures increased $272,000, or 5.5% to $5.2 million for the year ended December 31, 2011 compared to $4.9 million for the year ended December 31, 2010 . The 5.5% increase is primarily due to an adjustment in collection rates during 2010.
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Net revenue for the year ended December 31, 2010 was $551.8 million compared to $527.6 million for the year ended December 31, 2009, an increase of $24.2 million, or 4.6%.
Net revenue, including only those centers which were in operation throughout the full fiscal years of both 2010 and 2009, decreased $16.2 million, or 3.2%. This 3.2% decrease is primarily the result of a decline in patient scheduling during the first half of 2010, much of which was due to unusually severe weather conditions on the east coast during the first quarter of 2010 . The decline also was the result of lower frequency of office visits to primary care and specialist physicians, our referral sources, in 2010 as a result of a broad based economic slowdown. This comparison excludes revenue contributions from centers that were acquired subsequent to January 1, 2009. For the year ended December 31, 2010, net revenue from centers that were acquired subsequent to January 1, 2009 and excluded from the above comparison was $51.3 million. For the year ended December 31, 2009, net revenue from centers that were acquired subsequent to January 1, 2009 and excluded from the above comparison was $10.9 million.
Interest expense for the year ended December 31, 2010 decreased approximately $1.6 million, or 3.2%, to $48.4 million for the year ended December 31, 2010 compared to $50.0 million for the year ended December 31, 2009. Interest expense for the year ended December 31, 2010 included $917,000 of amortization of Accumulated Other Comprehensive Loss associated with fair value adjustments to our interest rate swaps accumulated prior to April 6, 2010, the date of our debt refinancing. See â€śLiquidity and Capital Resourcesâ€ť below for more details on our debt refinancing. Interest expense for the year ended December 31, 2009 included $6.1 million of amortization of Accumulated Other Comprehensive Loss associated with fair value adjustments accumulated prior to our January 28, 2009 modification of interest rate swaps. Excluding these adjustments to interest expense related to our interest rate swaps in both periods, interest expense increased $3.6 million. This increase was primarily due to interest expense on the additional borrowings under the debt refinancing completed April 6, 2010.
Loss on extinguishment of debt
For the year ended December 31, 2010, we recorded a $9.9 million loss on extinguishment of debt related to our debt refinancing completed on April 6, 2010. This loss included a $7.6 million write-off of deferred loan costs associated with our GE debt settled on April 6, 2010 as well as approximately $2.3 million to settle a call premium associated with our prior credit facilities and for interest rate swap related expenses.
Gain on bargain purchase
On June 12, 2009, we acquired the assets and business of nine imaging centers located in New Jersey from Medical Resources, Inc. for approximately $2.1 million. At the time of the acquisition, we immediately sold the assets and business of one of those nine centers to an unrelated third party for approximately $650,000.
In accordance with accounting standards, any excess of fair value of acquired net assets over the acquisition consideration results in a gain on bargain purchase. Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued. The Company underwent such a reassessment, and as a result, have recorded a gain on bargain purchase of approximately $1.4 million.
We believe that the gain on bargain purchase resulted from various factors that impacted the sale of those New Jersey assets. The seller was performing a full liquidation of its assets for the benefit of its creditors. Upon liquidation of all of its assets, the seller intended to close its business. The New Jersey assets were the only remaining assets to be sold before a full wind-down of the sellerâ€™s business could be completed. We believe that the seller was willing to accept a bargain purchase price from us in return for our ability to act more quickly and with greater certainty than any other prospective acquirer. The decline in the credit markets made it difficult for other acquirers who relied upon third party financing to complete the transaction. The relatively small size of the transaction for us, the lack of required third-party financing and our expertise in completing similar transactions in the past gave the seller confidence that we could complete the transaction expeditiously and without difficulty.
For the year ended December 31, 2010, we recorded $132,000 of other expense related to fair value adjustments on our interest rate swaps as well as $373,000 of other expense related to litigation. For the year ended December 31, 2009, we recorded $823,000 of other income related to fair value adjustments on our interest rate swaps, offset by $1.2 million of other expense primarily related to litigation.
Income tax expense
For the year ended December 31, 2010 and 2009, we recorded $576,000 and $443,000, respectively, for state income tax expense primarily related to taxable income generated in the states of Maryland and Delaware.
Equity in earnings from unconsolidated joint ventures
Equity in earnings from our unconsolidated joint ventures decreased $257,000, or 4.9% to $4.9 million for the year ended December 31, 2010 compared to $5.2 million for the year ended December 31, 2009 . The 4.9% decrease is primarily due to an adjustment in collection rates during 2010, offset in part by the fact that a charge to net revenue was taken during the third quarter of 2009 related to valuation adjustments of accounts receivable at September 30, 2009.
We use both GAAP and non-GAAP metrics to measure our financial results. We believe that, in addition to GAAP metrics, these non-GAAP metrics assist us in measuring our cash generated from operations and ability to service our debt obligations. We believe this information is useful to investors and other interested parties because we are highly leveraged and our non-GAAP metrics removes non-cash and nonrecurring charges that occur in the affected period and provides a basis for measuring the Company's financial condition against other quarters.
One non-GAAP measure we believe assists us is Adjusted EBITDA. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, each from continuing operations and exclude losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries, and is adjusted for non-cash or extraordinary and one-time events taken place during the period.
Adjusted EBITDA is reconciled to its nearest comparable GAAP financial measure, net income (loss). Adjusted EBITDA is a non-GAAP financial measure used as an analytical indicator by us and the healthcare industry to assess business performance, and is a measure of leverage capacity and ability to service debt. Adjusted EBITDA should not be considered a measure of financial performance under GAAP, and the items excluded from Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. As Adjusted EBITDA is not a measurement determined in accordance with GAAP and is therefore susceptible to varying methods of calculation, this metric, as presented, may not be comparable to other similarly titled measures of other companies.
On November 15, 2006, we entered into a $405 million senior secured credit facility with GE Commercial Finance Healthcare Financial Services. This facility was used to refinance existing indebtedness, finance our acquisition of Radiologix, and provide financing for working capital needs post-acquisition. The facility consisted of a revolving credit facility of up to $45 million, a $225 million first lien Term Loan and a $135 million second lien Term Loan. On August 23, 2007, we secured an incremental $35 million as part of our existing credit facilities with GE Commercial Finance Healthcare Financial Services. The Incremental Facility consisted of an additional $25 million as part of our first lien Term Loan and $10 million of additional capacity under our existing revolving line of credit bringing the total capacity to $55 million. On February 22, 2008, we secured a second incremental $35 million of capacity as part of our existing credit facilities with GE Commercial Finance Healthcare Financial Services, all collectively referred to as our â€śGE Credit Facility.â€ť
On April 6, 2010, we completed a series of transactions which we refer to as our "debt refinancing plan" for an aggregate of $585.0 million. As part of the debt refinancing plan, our wholly owned subsidiary Radnet Management, Inc. issued and sold $200.0 million in 10 3/8% senior notes due 2018 (the "senior notes"). All payments of the senior notes, including principal and interest, are guaranteed jointly and severally on a senior unsecured basis by RadNet, Inc. and all of Radnet Managementâ€™s current and future domestic wholly owned restricted subsidiaries. The senior notes were issued under an indenture, dated April 6, 2010, by and among Radnet Management, as issuer, RadNet, Inc., as parent guarantor, the subsidiary guarantors thereof and U.S. Bank National Association, as trustee, in a private placement that was not subject to the registration requirements of the Securities Act. We subsequently exchanged the senior notes initially issued on April 6, 2010 in a private placement for publicly registered exchange notes with nearly identical terms. The exchange offer was completed on February 14, 2011.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
With 236 centers, which we operate directly or indirectly through joint ventures as of September 30, 2012, located in California, Delaware, Maryland, New Jersey, Rhode Island, Florida, and New York, we are the leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States based on number of locations and aggregate annual imaging revenue. Our centers provide physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often minimizing the cost and amount of care for patients. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services, a key point of differentiation from our competitors. Our multi-modality strategy diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one location to serve the needs of multiple procedures.
We seek to develop leading positions in regional markets in order to leverage operational efficiencies. Our scale and density within selected geographies provides close, long-term relationships with key payors, radiology groups and referring physicians. Each of our facility managers is responsible for managing relationships with local physicians and payors, meeting our standards of patient service and maintaining profitability. We provide corporate training programs, standardized policies and procedures and sharing of best practices among the physicians in our regional networks.
We derive substantially all of our revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at our facilities. For the nine months ended September 30, 2012, we performed 3,127,687 diagnostic imaging procedures and generated total net service fee revenue of $487.8 million.
The condensed consolidated financial statements include the accounts of Radnet Management, Inc. (or â€śRadnet Managementâ€ť) and Beverly Radiology Medical Group III, a professional partnership (â€śBRMGâ€ť). The consolidated financial statements also include Radnet Management I, Inc., Radnet Management II, Inc., Radiologix, Inc., Radnet Management Imaging Services, Inc., Delaware Imaging Partners, Inc., New Jersey Imaging Partners, Inc. and Diagnostic Imaging Services, Inc. (â€śDISâ€ť), all wholly owned subsidiaries of Radnet Management. All of these affiliated entities are referred to collectively as â€śRadNetâ€ť, â€śweâ€ť, â€śusâ€ť, â€śourâ€ť or the â€śCompanyâ€ť in this report.
Accounting Standards Codification (â€śASCâ€ť) Section 810-10-15-14 stipulates that generally any entity with a) insufficient equity to finance its activities without additional subordinated financial support provided by other parties, or b) equity holders that, as a group, lack the characteristics specified in the ASC which evidence a controlling financial interest, is considered a Variable Interest Entity (â€śVIEâ€ť). We consolidate all VIEâ€™s in which we own a majority voting interest and all VIEâ€™s for which we are the primary beneficiary. We determine whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has the controlling financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the VIEâ€™s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIEâ€™s variable interests issued and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or redesign of the entity.
Howard G. Berger, M.D. is our President and Chief Executive Officer, a member of our Board of Directors and is deemed to be the beneficial owner, directly and indirectly, of approximately 14.1% of our outstanding common stock as of September 30, 2012. Dr. Berger also owns, indirectly, 99% of the equity interests in BRMG. BRMG provides all of the professional medical services at the majority of our facilities located in California under a management agreement with us, and employs physicians or contracts with various other independent physicians and physician groups to provide the professional medical services at most of our other California facilities. We generally obtain professional medical services from BRMG in California, rather than provide such services directly or through subsidiaries, in order to comply with Californiaâ€™s prohibition against the corporate practice of medicine. However, as a result of our close relationship with Dr. Berger and BRMG, we believe that we are able to better ensure that medical service is provided at our California facilities in a manner consistent with our needs and expectations and those of our referring physicians, patients and payers than if we obtained these services from unaffiliated physician groups. BRMG is a partnership of ProNet Imaging Medical Group, Inc., Breastlink Medical Group, Inc. and Beverly Radiology Medical Group, Inc., each of which are 99% or 100% owned by Dr. Berger. RadNet provides non-medical, technical and administrative services to BRMG for which it receives a management fee, pursuant to the terms of the management agreement. Through the management agreement and our relationship with Dr. Berger, we have exclusive authority over all non-medical decision making related to the ongoing business operations of BRMG. Through our management agreement with BRMG we determine the annual budget of BRMG and make all physician employment decisions. BRMG has insignificant operating assets and liabilities, and de minimis equity. Through the management agreement with us, all of BRMGâ€™s cash flows are transferred to us. We have determined that BRMG is a VIE, and that we are the primary beneficiary, and consequently, we consolidate the revenue and expenses of BRMG. BRMG recognized $15.0 million and $13.0 million, and $41.4 million and $40.6 million of net revenues for the three and nine months ended September 30, 2012 and 2011, respectively, and $15.0 million and $13.0 million, and $41.4 million and $40.6 million of operating expenses for the three and nine months ended September 30, 2012 and 2011, respectively. RadNet recognized $53.0 million and $47.0 million, and $156.6 million and $142.5 million of net revenues for the three and nine months ended September 30, 2012 and 2011, respectively, for management services provided to BRMG relating primarily to the technical portion of total billed revenue. The cash flows of BRMG are included in the accompanying condensed consolidated statements of cash flows. All intercompany balances and transactions have been eliminated in consolidation. The creditors of BRMG do not have recourse to our general credit and there are no other arrangements that could expose us to losses. However, BRMG is managed to recognize no net income or net loss and, therefore, RadNet may be required to provide financial support to cover any operating expenses in excess of operating revenues.
Aside from centers in California where we contract with BRMG for the provision of professional medical services and consolidate 100% of the patient service revenue, at the remaining centers in California and at all of the centers which are located outside of California, we have entered into long-term contracts with independent radiology groups in the area to provide physician services at those facilities. These third party radiology practices provide professional services, including supervision and interpretation of diagnostic imaging procedures, in our diagnostic imaging centers. The radiology practices maintain full control over the provision of professional services. The contracted radiology practices generally have outstanding physician and practice credentials and reputations; strong competitive market positions; a broad sub-specialty mix of physicians; a history of growth and potential for continued growth. In these facilities we enter into long-term agreements with radiology practice groups (typically 40 years). Under these arrangements, we provide management services and receive a fee which includes 100% of the technical reimbursements associated with imaging procedures for the use of our diagnostic imaging equipment and the provision of technical services. Our service fees also include a portion of the practice groupâ€™s professional revenue, including revenue derived outside of our diagnostic imaging centers as well as fees for administrative services. The radiology practice groups retain the professional reimbursements associated with imaging procedures after deducting service fees paid to us. We have no financial interest in the independent (non-BRMG) radiology practices; accordingly, we do not consolidate the financial statements of those practices in our consolidated financial statements and record only our service fee revenue.
Service fee revenue, net of contractual allowances and discounts, consists of net patient fees received from various payers and patients themselves based mainly upon established contractual billing rates, less allowances for contractual adjustments and discounts. As it relates to BRMG centers, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by BRMG as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees from BRMG. As it relates to non-BRMG centers, this service fee revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing administration services such as clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities.
Service fee revenues are recorded during the period the services are provided based upon the estimated amounts due from the patients and third-party payers. Third-party payers include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Contractual payment terms in managed care agreements are generally based upon predetermined rates per discounted fee-for-service rates. We also record a provision for doubtful accounts (based primarily on historical collection experience) related to patients and copayment and deductible amounts for patients who have health care coverage under one of our third-party payers.
Provision for Bad Debts
Although outcomes vary, our policy is to attempt to collect amounts due from patients, including co-payments and deductibles due from patients with insurance, at the time of service. We provide for an allowance against accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. We estimate this allowance based on the aging of our accounts receivable by each type of payer over an 18-month look-back period, and other relevant factors. A significant portion of our provision for bad debt relates to co-payments and deductibles owed to us by patients with insurance. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on the increased burden of co-payments and deductibles to be made by patients with insurance. These factors continuously change and can have an impact on collection trends and our estimation process.
Certain reclassifications have been made to the three and nine months ended September 30, 2011 consolidated financial statements and accompanying notes to conform to the three and nine months ended September 30, 2012 presentation. Additionally, we have adjusted the prior yearâ€™s presentation as a result of the adoption of ASU 2011-07, Health Care Entities (Topic 954). In connection with this adjustment, we identified certain mechanical errors in our historical calculation of the provision for bad debts, resulting in the gross up of the provision for bad debts and revenues by $3.0 million and $9.0 million for the three and nine months ended September 30, 2011, respectively. The error has been corrected in these financial statements and upon adoption of the new guidance, resulted in no impact to net service fee revenue.
Substantially all of our accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare programs, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare providers. Receivables generally are collected within industry norms for third-party payors. We continuously monitor collections from our payors and maintain an allowance for bad debts based upon specific payor collection issues that we have identified and our historical experience.
Depreciation and Amortization of Long-Lived Assets
We depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold improvements where we use the shorter of the assetsâ€™ useful lives or the lease term of the facility for which these assets are associated.
Deferred Tax Assets
We evaluate the realizability of the net deferred tax assets and assess the valuation allowance periodically. If future taxable income or other factors are not consistent with our expectations, an adjustment to our allowance for net deferred tax assets may be required. For net deferred tax assets we consider estimates of future taxable income, including tax planning strategies in determining whether our net deferred tax assets are more likely than not to be realized.
Valuation of Goodwill and Long-Lived Assets
Goodwill at September 30, 2012 totaled $174.1 million. Goodwill is recorded as a result of business combinations. Management evaluates goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable in accordance with Financial Accounting Standards Board (â€śFASBâ€ť), ASC Topic 350, Intangibles â€“ Goodwill and Other. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unitâ€™s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of a reporting unit is estimated using a combination of the income or discounted cash flows approach and the market approach, which uses comparable market data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. We tested goodwill for impairment on October 1, 2011. Based on our test, we noted no impairment related to goodwill as of October 1, 2011. However, if estimates or the related assumptions change in the future, we may be required to record impairment charges to reduce the carrying amount of goodwill. No indications of impairment were noted at September 30, 2012.
We evaluate our long-lived assets (property and equipment) and definite-lived intangibles for impairment whenever indicators of impairment exist. The accounting standards require that if the sum of the undiscounted expected future cash flows from a long-lived asset or definite-lived intangible is less than the carrying value of that asset, an asset impairment charge must be recognized. The amount of the impairment charge is calculated as the excess of the assetâ€™s carrying value over its fair value, which generally represents the discounted future cash flows from that asset or in the case of assets we expect to sell, at fair value less costs to sell. No indicators of impairment were identified with respect to our long-lived assets as of September 30, 2012.
Recent Accounting Standards
In April 2011, the FASB issued Accounting Standards Update (â€śASUâ€ť) 2011-04, Fair Value Measurement (Topic 820) (â€śASU 2011-04â€ť), which contains amendments to achieve common fair value measurement and disclosures in U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 explains how to measure fair value for financial reporting. The guidance does not require fair value measurements in addition to those already required or permitted by other Topics. This ASU was effective for the Company beginning January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on the Companyâ€™s consolidated results of operations, financial position or liquidity.
On January 1, 2012, we adopted ASU 2011-05, â€ś Comprehensive Income (Topic 220): Presentation of Comprehensive Income, â€ť which updates existing guidance on comprehensive income. This guidance eliminates the option to present the components of other comprehensive income as part of our Condensed Consolidated Statements of Equity and Comprehensive Income, which was our previous presentation. It requires companies to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two statement approach which we have adopted, the first statement presents total net income and its components followed consecutively by a second statement that presents total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. The adoption of this pronouncement did not have any effect on our financial condition or results of operations, though it did change our financial statement presentation.
On January 1, 2012, we adopted ASU 2011-07, â€ś Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities ,â€ť which requires health care entities to present the provision for doubtful accounts relating to patient service revenue as a deduction from patient service revenue in the statement of operations rather than as an operating expense. Additional disclosures relating to sources of patient revenue and the allowance for doubtful accounts related to patient accounts receivable are also required. Such additional disclosures are included in Note 1. The adoption of this ASU had no impact on our financial condition, results of operations or cash flows, although it did change our financial statement presentation.
On January 1, 2012, we adopted ASU 2011-08, â€ś Intangiblesâ€”Goodwill and Other (Topic 350): Testing Goodwill for Impairment â€ť, simplifying how a company is required to test goodwill for impairment. Companies will now have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
John Mills - IR
Good morning, ladies and gentlemen. Thank you for joining us today to discuss RadNetâ€™s Third Quarter 2009 earnings results. On the call today from the company are Dr. Howard Berger, Chairman and Chief Executive Officer of RadNet, and Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet.
Before we begin today, weâ€™d like to remind everyone of the Safe Harbor Statements under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore undue reliance should not be placed upon them.
For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements, we refer you to RadNetâ€™s 10-Ks for the 12-month periods ending December 31, 2007, and December 31, 2008, and 10-Q for the three-month period ended September 30, 2009, as filed with the SEC.
With that, I would like to turn the call over to Dr. Howard Berger.
Howard Berger - President and CEO
On todayâ€™s call, Mark Stolper and I plan to provide you with highlights from our third quarter 2009 results, review some recent events with respect to 2010 Medicare reimbursement and other healthcare reform, talk about some items that we feel are important to our stakeholders and discuss in more detail our future strategy. After our prepared remarks, we will open the call to your questions.
Iâ€™d like to thank all of you for your interest in our Company and for dedicating a portion of your day to participate in our conference call this morning.
We are pleased with several aspects of our results in the third quarter. First, similar to what we accomplished in the first two quarters of this year, we increased our procedural volumes and revenue on a same-center and aggregate basis over 2008â€™s same quarter performance. This performance improvement occurred despite a difficult macroeconomic environment, wherein general medical office visits were reduced in the third quarter.
We are in an environment where our staff has to work material harder to drive patient volumes, and I am proud to say that they have risen to the challenge.
Adjusting for a non-cash increase to our contractual allowance against prior fiscal year services, which Mark will walk you through with more detail, our revenue increased 3.1% over the third quarter of 2008. For the nine months, our revenue increased by 6.1% over the nine months of 2008.
During the third quarter, our same-center volumes were up 3.2% over the third quarter of 2008, while aggregate volumes were up over 4.9%. Although our EBITDA was lower than that of the third quarter of last year, there were several reasons for this which Mark will review in his section.
None of the reasons give us pause about the future performance of the company. Notwithstanding this, for the nine months our adjusted EBTIDA remains nicely ahead of last yearâ€™s pace, up 5.9% from the nine months of 2008. During the past third quarter, we paid off $7.4 million, including paying down the outstanding balance of our revolving credit facility, so that we are undrawn upon our revolver at the quarterâ€™s end. Even with this material debt paydown, we ended the quarter with 1.2 million of cash on our balance sheet.
During the nine months of 2009, we have reduced our net debt by over $10 million. Our working capital position has also improved. This metric has increased by $9.6 million from the beginning of the year and we have reduced our accounts payable and accrued expenses, a component of working capital, by $14.6 million since December 31, 2008.
We continue to see smaller operators in our industry struggle. The combined effects of lower reimbursement since the onset of the Deficit Reduction Act in 2007, a difficult economy and the credit crisis are putting intense pressure on less capitalized and less efficient operators.
Our pipeline of tuck-in acquisition continues to strengthen as more opportunities are presenting themselves to us. These opportunities are at multiples beneath anything weâ€™ve experienced in the past, which is a result of an abundance of sellers and very few buyers.
To this end, subsequent to the end of the third quarter, we completed tuck-in acquisitions in Rochester, New York and Baltimore, Maryland. The three strategic transactions for which we spent approximately $2.3 million continue to bolster our competitive positions in those markets and further eliminate competitive forces.
We have also seen instances of weaker players in our markets close their operations. We expect this trend to continue, and we anticipate our volumes benefiting from this over the long term. We have said for a long time that there is overcapacity in our industry, particularly in the MRI modality.
We predict some of this capacity will simply go away.
We continue to observe a significant decrease in the price of capital equipment as a result of the credit crisis and continued effects of the DRA. There is simply lower demand for equipment from outpatient imaging centers and the lack of available financing to fund these purchases. Used equipment is plentiful and available for purchases at unprecedented prices.
We are pursuing the expansion of Breastlinkâ€™s reach to include several markets in California, where we currently operate large womenâ€™s imaging facilities, particularly in the Palm Springs, Temecula, San Fernando Valley and Ventura County regions.
Iâ€™d like to spend a few minutes now to give you an update regarding reimbursement. But before I discuss reimbursement, I must emphasize that when the term reimbursement is used, most people are referring to prices changes within Medicare. Approximately 20% of our revenue is subject to adjustments in the Medicare Fee Physician Schedule or Hospital Outpatient Prospective System otherwise known as HOPPS. The remaining 80% of our revenue is derived from private contracts with insurance companies such as HMOs and PPOs, state-run programs such as Medicaid and other non-federal government third-party payers, including personal injury, workersâ€™ compensation, capitation among others.
I will briefly discuss the reimbursement outlook for both Medicare and private payers with respect to imaging. The reimbursement front continues to be evolving. We recently received some better- than-anticipated news and further visibility regarding our 2010 Medicare reimbursement. On October 30, the Centers for Medicare and Medicaid Services or CMS released its final rule with respect to 2010 Medicare reimbursement rates.
The final rule sets Medicare rates for 2010 and is reflective of all the input, comments and adjustments it incorporated into amending its initially proposed rates published earlier this year in July. We are pleased to announce that the final ruleâ€™s negative reimbursement impact is significantly reduced from CMSâ€™ original proposal in July. In fact, the rate reduction in the final rule will result in a 2.5 to $3 million decrease to our revenues in 2010, our calculation which is based upon RadNet performing similar procedural volumes and modalities in 2010. We had anticipated and prepared for a much larger impact on our business for 2010.
The final rules reduction is the result of CMS lowering the practice expense, relative value units or RVUs, and other inputs into the Medicare reimbursement formula. The practice expense RVU adjustment was the result of CMS changing, among other variables, the equipment utilization factor variable which is a proxy for the percentage of a 40-hour work week that imaging equipment is assumed to be used. This factor increases to approximately 60% in 2010 from the 2009 rate of 50%
In the anticipation of 2010 Medicare cuts, we have been working on certain cost initiatives to help mitigate any effects of the rate reduction. We are pleased to tell you that with initiatives that will be in place by January 1, 2010 regarding reductions in our medical supplies, equipment services and other operating expenses, we will be able to mitigate the entire effect of these reimbursement cuts.
With respect to legislative actions that might affect Medicare reimbursement, the debate lingers within Congress. Reform proposals have been discussed and submitted for review by both the Senate and the House of Representatives. Aspects of these proposals contradict or conflict with each other. While proposals like the CMS final rule have recommendations to change the utilization variable in the practice-expense RVU calculation, but as far as we know, contain nothing else that would impact diagnostic imaging negatively at this time.
It is unclear as to how, if at all, the 2010 CMS final rule will change or be superseded if a form of healthcare reform is passed by Congress. What we do know is that RadNet will most likely benefit from a portion of the imaging procedures required by the 47 million uninsured or underinsured Americans.
We also strongly believe that any Medicare rate pressure that is put on our industry, including the 2010 CMS final rule or some modified form of that, will create further consolidation opportunities for our Company similar to the ones on which weâ€™ve been capitalizing.
Our industry is full of centers and very few buyers. Acquisition multiples have contracted as a result. This represents an unprecedented opportunity for us to grow our Company. On the private side of our business, which includes directly negotiated rates with insurance companies, workersâ€™ compensation carriers, personal injury counterparties and capitated medical groups, our relationships have never been more numerous and stronger. We are working with a number of these payers in unique mutually beneficial ways as a result of RadNetâ€™s strong market presence and large multi-modality capacity.
Like Medicare, we are observing that private payers are increasingly focused on stopping the abuses of physician, self-referral through the creation of more strict pre-authorization processes and credentialing. We believe the trend to control overutilization in certain abusive imaging settings will continue and will ultimately have a positive effect on our volumes sometime in the future.
At this time, Iâ€™d like to turn the call over to Mark Stolper, our Executive Vice President and Chief Financial Officer to discuss some of the highlights of our third quarter 2009 performance. When he is finished, I will conclude our call with a discussion about the reimbursement and legislative outlook and make some closing remarks.
Mark Stolper - EVP and CFO
Thank you, Howard, and thank you all for participating in our third quarter 2009 conference call. I am now going to briefly review our third quarter performance and attempt to highlight what I believe to be some material items. I will also attempt to give some further explanation of certain items in our financial statements as well as provide some insights into some of the metrics that drove our third quarter performance. In my discussion, I will use the term adjusted EBITDA which is a non-GAAP financial measure. The Company defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, each from continuing operations and adjusted for losses or gains on the disposal of equipment, debt extinguishments, and non-cash equity compensation.
Adjusted EBITDA includes equity and earnings in unconsolidated operations and subtracts minority interests in subsidiaries, and is adjusted for non-cash unusual or infrequent events taking place during the period. With that said, Iâ€™d now like to review our third quarter 2009 results and discuss our update our 2009 guidance levels.
During the third quarter, we took a non-cash charge to increase our contractual allowance account against accounts receivable from services provided in 2008, 2007 and prior fiscal years. Each month, we true-up our valuation of our accounts receivable by adjusting with allowance accounts, based upon analyzing monthly statistics of the timing and amounts of historical cash collection experience, modality mix, payer mix, and any other operational factors that affect the collectability of our accounts receivable.
During the third quarter, in an effort to both capitalize on an internal consolidation opportunity and to provide additional internal controls and oversight, my finance and accounting team under my Chief Accounting Officer assumed the management of RadNetâ€™s Reimbursement Operations Division.
Prior to this consolidation, reimbursement operations was managed as a separate division, which was interactive with accounting and finance but run independently. Bringing this under accounting and finance gives us additional control and visibility into the management of our billing and collection department and the analysis of the net collection rates and accounts receivable valuation.
During this process, our own analysis, and one that was endorsed by our auditors Ernst & Young, determined that we should place an additional contractual allowance against certain receivables from fiscal years 2008 and prior.
As such, we recorded in the third quarter, a $1.5 million non-cash charge, the accounting implications of which effectively lowered our revenue, EBITDA and net income in the quarter by $1.5 million.
In my discussion of the third quarter itself and the three- and nine-month comparisons to the corresponding periods of last year, Iâ€™ll analyze them both with and without adjusting for the $1.5 million non-cash charge.
For the three months ended September 30, 2009, RadNet reported revenue and adjusted EBITDA of $133.4 million and $25.5 million respectively. Adjusting for this $1.5 million additional contractual allowance, revenue would have been $134.9 million, an increase of 3.1% or $4 million over the prior yearâ€™s same quarter, and adjusted EBITDA would have been $27.0 million, a decrease of 4% or $1.1 million over the prior yearâ€™s same quarter.
The decrease in EBITDA from the third quarter of last year was the result of two items. First, negatively impacting our quarter-over-quarter comparison with the third quarter of last year was the completion of our management services contract with a group of 20 facilities that we managed but did not own.
We received monthly fees for the management oversight and for providing back office billing and collection, transcription and other operational services. This contract, which began in the fourth quarter of 2007, ended in April of this year.
In the third quarter of 2008, we received approximately $1.6 million of revenue from this contract, which, including a fee related to our sale of one of the imaging centers to a third party. Thus, the contract contributed positively to the results of the third quarter of 2008 but not the third quarter of 2009.
Second, in the third quarter of this year we absorbed start-up operating costs associated with the integrating into RadNet of the New Jersey operations which we acquired last quarter, estimating to be around $350,000 of additional expense.
We acquired these facilities at the end of the second quarter of 2009 and spent considerable efforts during the third quarter in migrating the operations to our IT and billing platforms and adjusting operations, including upgrading to digital mammography. We believe this investment and integration would substantially complete during the third quarter.
Our procedural volume, despite a difficult economy, continues to exhibit growth. For the third quarter of 2009, as compared to the prior yearâ€™s third quarter, MRI volume increased 6.8%, CT volume increased 5.8% and PET/CT volume increased 4.3%.
Overall volume, taking into account routine imaging exams inclusive of x-ray, ultrasound, mammograph and other exams, increased 4.9% over the prior yearâ€™s third quarter.
In the third quarter of 2009, we performed 808,663 total procedures. The procedures were consistent with our multi-modality approach, whereby 77.9% of all the work we did by volume was from routine imaging.
Our procedures in the third quarter of 2009 were as follows: 93,919 MRIs, as compared with 87,933 MRIs in the third quarter of 2008; 78,965 CTs, as compared with 74,624 CTs in the third quarter of 2008; 5,503 PET/CTs as compared to 5,276 PET/CTs in the third quarter of 2008; and 630,276 routine imaging exams, which include nuclear medicine, ultrasound mammography, x-ray and other exams as compared with 603,110 of all these exams in the third quarter of 2008.
Net loss for the third quarter of 2009 was $1.7 million or negative $0.05 per share compared to net income of 138,000 or breakeven per share reported for the three-month period ended September 30, 2008 based upon a weighted average number of shares of 36.1 million and 37.0 million for these periods in 2009 and 2008 respectively.
Adjusting for the non-cash $1.5 million increase to a contractual allowance, net loss for the third quarter of 2009 would have been negative 200,000 or negative $0.01 per share. Affecting net loss in the third quarter of 2009 were certain non-cash expenses or non-recurring items, including: the $1.15 million non-cash charge to increase our contractual allowance reserve; $1.1 million of non-cash amortization expense with respect to interest rate swaps related to the companyâ€™s credit facilities; 670,000 of deferred financing expense related to the amortization of financing fees paid as part of the companyâ€™s $405 million credit facilities drawn down in November 2006 in connection with the Radiologix acquisition and the incremental term loans and revolving credit facility arranged in August 2007 and February 2008; and 713,000 of non-cash employee stock compensation expense resulting from the vesting of certain options and warrants.
With regards to some specific income statement accounts, overall GAAP interest expense for the third quarter of 2009 was $12.4 million. Adjusting for the non-cash negative impact of 670,000 of amortization of financing fees, a non-cash negative impact of $1.8 million from the loss related to the fair value adjustments of interest rate hedges and accrued interest, cash interest expense was $10.2 million during the quarter. This compares with GAAP interest expense in the third quarter of 2008 of $12.1 million and cash paid for interest of $12.7 million.
The decrease in cash interest expense in the third quarter of 2009 was primarily the result of savings in our interest rate related to the lower LIBOR rates on our floating-rate facilities and the savings we are experiencing from our two blend-and-extend interest rate swap modifications we completed in the first quarter of 2009.
For the third quarter of 2009, bad debt expense was 6.3% of our net revenue compared with an overall blended rate of 6.1% for the full year of 2008. With regards to our balance sheet, as of September 30, 2009, we had $456.1 million of net debt and we were undrawn on our $55 million revolving line of credit. This is a decrease in our net debt of $8.6 million during the quarter.
Since December 31, 2008, accounts receivable decreased approximately $3.8 million. A part of the decrease resulted from our net day sales outstanding, or DSOs, having decreased in the third quarter of 2009 from the fourth quarter of 2008 from 61 days to 57 days, respectively.
The net balance of our accounts receivable also reflects the addition of the $1.5 million of contractual allowance we recorded in this third quarter. Our accounts payable and accrued expenses decreased by $14.6 million to $66.6 million during the first nine months of 2009. Much of this decrease is attributed to the repayment of equipment and related tenant improvements of projects which began prior to 2008 year end and have been paid down as part of our budgeted 2009 capital expenditures.
We increased our working capital position during the first nine months of 2009 by $9.6 million. During the third quarter of 2009, we repaid $6 million of notes and leases payable and had cash capital expenditures of $7.2 million, which included the buyout of several operating leases which had monthly expenses of approximately $100,000 a month.
For the first nine months of 2009, we repaid $17.7 million of notes and leases payable, had cash capital expenditures net of asset dispositions of $22.2 million and entered into notes and leases payable of $10.4 million.
Based upon our third quarter results, I will now provide an update to our 2009 full-year guidance. For revenue, our previous guidance range was 515 million to $545 million. Our updated guidance range is $515 million to $535 million. Our adjusted EBITDA of our previous guidance range was 105 to a $115 million; our updated guidance range is 105 to $110 million.
For capital expenditures, our previous guidance was 30 to $35 million, and our updated guidance range is 38 to $40 million, which reflects the additional capital expenditures related to the repurchase of operating leases.
Our cash interest expense, our previous guidance range was 41 to $45 million. Our updated guidance range remains the same at 41 to $45 million. For free cash flow generation, which we define as adjusted EBITDA less total capital expenditures and cash interest expense, our previous guidance range was 25 to $35 million; our updated guidance range is 20 to $30 million. Our end-of-year, net debt balance, which we define as total debt net of cash, our previous guidance range was 438 to $448 million; our updated guidance range is 445 million to $450 million.
Several things are important to note with respect to our updated guidance levels. First, our guidance reflects our confidence that we will have a stronger fourth quarter of 2009 as compared with the revenue and adjusted EBITDA performance of the fourth quarter of 2008.
Second, we continue to project six to $8 million of cash interest expense savings in 2009 as compared with 2008. This is due to the hedge modifications I discussed earlier, as well as our benefit from lower LIBOR rates on the unhedged portion of our credit facilities.
Third, lower 2009 projected capital spending and cash interest payments is enabling us to produce valuable free cash flow that continues to allow us to reduce our net debt, the result of which will be strong de-levering in 2009 for RadNet where we continue to believe our debt to adjusted EBITDA will approach 4.25 by the end of this year.
Finally, Iâ€™d like to reiterate that the tranches of our credit facility are either funded or committed through their maturity dates. In the case of our revolving credit facility, its maturity is November 15, 2011. In the case of our first lien term loan, its maturity is November 15, 2012. Finally, in the case of our second lien term loan, its maturity is May 15, 2013.
Although we face no near-term maturities, we continue to monitor the credit markets very closely and evaluate refinancing opportunities to lengthen the term of our debt and create further financial flexibility to allow us to capitalize on prospects that we see today and that will continue to present themselves to us in the future.
We will continue to give updates on our capital structure as we evaluate alternatives.
Iâ€™d now like to turn the call back to Dr. Berger who will make some closing remarks.
Howard Berger - President and CEO
Since it appears more likely that some type of health reform will pass in this Congressional session, I would like to spend a few moments on how I believe reform, as well as reimbursement changes, might reshape the diagnostic imaging sector.
There seems little doubt at this point that imaging providers have begun and will continue to consolidate. We have received increased interest from providers in all regions in which we currently operate. So it is unlikely that this is a process unique to RadNet and its markets. Our perspective is that consolidation is necessary and ultimately beneficial to the healthcare system.
Overcapacity is partially responsible for the downward pressure on reimbursement and has led to overutilization, which has particularly been enhanced by self-referral from non-radiologists that have put imaging equipment into their own offices. It appears unlikely that our Washington representatives have the political will to enact the appropriate legislation to prohibit this self-referral loophole.
Economic pressure, as well as credentialing, will probably be the only practical methods to eliminate this abusive behavior. I believe these pressures are not far into the future and ultimately will benefit the surviving imaging providers since some of these procedures occurring in these abusive settings will still need to be performed.
If indeed the reform does bring some 40-plus million people into the healthcare system, imaging providers who have multi-modality offerings are likely to be the biggest beneficiaries.
Of the total procedures performed in RadNet centers, over 75% are routine imaging. These procedures comprise the bulk of what these newly insured people will require. Since the proposed public option in the reform currently passed in the House over the weekend calls for negotiating reimbursement rates with the providers, it is also likely that the ability to negotiate with large networks will be the preferred method.
Both these conditions make RadNet likely to benefit, which will become even more obvious as the number of outpatient providers dwindle and access to services becomes even more compromised.
It would be irresponsible to believe that hospitals could absorb this capacity if the number of outpatient centers was severely reduced. This is particularly true when it comes to mammography, which is often not even performed in many hospitals.
All this being said, these circumstances along with the continuing lack of access to credit for smaller operators put RadNet in an enviable position. The imaging sector can best respond to these challenges with larger, well-financed operators with good management and scale to provide the greatest efficiencies in a reimbursement-challenged environment.
One thing which we can count on for certain is that physicians and patients will continue to demand access to state-of-the-art imaging regardless of reimbursement.
Operator, we are now ready for the question-and-answer portion of the call.