RadNet, Inc. (RDNT) Earnings Call Transcript & Summary

Thank you all for attending. I'm Chris Bruin, Managing Director here at Morgan Stanley. And I'm joined today by Mark and Greg. Maybe I'll pass it to you for quick intros on your end.

Sure. Mark Stolper, Chief Financial Officer of RadNet been with RadNet. This is my 23rd year in the same seat.

Yes, exactly. Greg Sarson. What a great thing. I'm the Chief Strategy Officer. I've only been with Radnet 6.5 years. So the young star on the team. Chris, we're looking forward to the conversation. Thanks for having us.

Excellent. So I want to start with the competitive landscape in radiology. Given your scale, can you provide a little perspective on the opportunity for further industry consolidation? .

Sure. I'll start. One of the interesting things about the diagnostic imaging industry is that it remains highly fragmented. So when you look at other areas of health care services like dialysis or clinical laboratory home health, health systems, there's been a lot of consolidation. And our industry really is sort of the wildlife the West. If you take the top 5 players of which we're the largest outpatient player in diagnostic imaging. We own less than 20% of the market. It's believed that there's somewhere north of 6,000 outpatient diagnostic imaging centers in the United States. We're the largest player by a factor of OBOs 2 to the next player. And we have 445 centers. So a lot of room for continued growth and consolidation and which we believe will happen over the coming years.

And I would say just it's interesting, this is an industry where at least we're seeing in our hands, scale really does make a difference. -- especially, I think everybody who has IT or what they're doing realizes that once you have scale, all those investments really start to pay off in a way that is difficult for the single or kind of smaller chains. And so I think there's quite a bit of -- there's going to be even more pressure in the future for consolidation to happen.

Yes, that's a good point. I mean most of the out there owned by mom-and-pop radiologist-owned facilities, who don't have the benefits of in revenue cycle, billing and collecting equipment purchasing, equipment service up and down the cost structure. And like other areas of health care services, scale matters, particularly in an arena where labor is -- there's a shortage of labor and labor is continuing to be more expensive. .

So I want to expand on that point a little bit about when we think about kind of white space in the radiology market, what is reimbursement like in the market? And how can that help to impact incremental growth? And when we think about that to some of the efficiencies from a clinical staffing model that you kind of hit on.

Sure. Well, when you talk about reimbursement, you really have to have a bifurcated discussion between government reimbursement and private pay or commercial insurance. the Medicare reimbursement has been fairly stable over the last few years in our industry. I think CMS recognizes the importance of diagnostic imaging as a gateway to the broader health care delivery system. And they also recognize on the outpatient side, meaning the physician fee schedule that they want to move as much of this business out of the hospitals to the lower-cost sites of care. And so -- they've been fairly -- there's been stability in the Medicare reimbursement side this year, meaning 2026, we had a slight increase. Next year, it's about a net neutral for us. So we can't -- unfortunately, with CMS and with our government, we can't count on increases going forward in our industry to deal with the rising cost of doing business. On the commercial side of our business, however, that's where we have a focus and that's where we've got some greater ability to impact or affect reimbursement. And we learned early on in the company's history, over 30 years ago that it was extremely important to have concentration on a regional basis because that gives you a seat at the table with negotiating rates with the commercial insurance companies because if you can prove to them that you're indispensable to their provider network. And if you were to not come to an agreement on pricing that, that would create both access issues and quality issues and the volume that you would no longer be doing for them would end up going back into a much more expensive hospitals. -- now they have to deal with you. They have to come to an agreement. So we've been pretty effective as we've grown our concentrations on both the East Coast and the West Coast in negotiating increases each year to our commercial book of business, which has been extremely important and very valuable in our ability to absorb the inflationary aspects of doing business today and growing our book of business.

And I would just add, Chris, I think one of the biggest sort of rumors or sort of news items in the government reimbursement is the Trump administration's chatter about site-neutral payments. This has been something that's been talked about for at least a decade, maybe 2 decades more because it's -- if you're -- if you look at your radiology spend, which for many payers is a substantial part of their spend, they can't help but notice that RadNet's rates are a fraction of what an inpatient or HOPS rate is. And that drives them nuts. And this is an area where the commercial payers have actually been in the lead. So you've seen some of the bigger payers really put incentives to try to get to the imaging services to lower sites cost of care like ours. And we're also seeing that pressure, hence, opening centers in Walmart and other kind of -- we're trying to get our costs down. If the Trump administration were to be successful in that, I think that would be a major disruption in the industry. We see it as a major potential tailwind positive for us because we've learned how to image at a low cost in a sustainable, scalable way. Most of my former colleagues that were a big academic medical centers don't have that cost discipline. It's just not part of their DNA. And so if imaging services were cut in half reimbursement or a quarter down to our levels, I think they just closed. I don't think they could afford to staff and provide the service at the level of let's call it, relative inefficiency compared to the outpatient or nimble market. So that's a big unknown right now.

In next year's proposal for reimbursement, the -- there are some site neutral provisions for noncontrast advanced imaging, where the HOP schedule or the hospitals for the outpatient business is now going essentially to be reimbursed under the physician fee schedule rate and not the HOPs rates, which are which are significantly higher. So it's the first step towards what Greg is talking about towards site-neutral payments. It's one thing with CMS doing it, if the commercial insurance companies do it, and it's very often that the rates that they're paying within the hospitals for outpatient imaging are anywhere between 200% and 500% of the rates that they're reimbursing outpatient players like RadNet. If that happens, then the hospitals are really in trouble. And we think that, that bodes really well for our joint venture business, which is a big and growing business for us.

So I want to spend a little bit of time on organic growth and driving same-store volume trends. Can you talk a little bit about what levers and key initiatives you have in place to help drive organic growth and same-store volume growth.

Sure. I divide those into sort of operational initiatives and then technology initiatives, and I'll let Greg talk a little bit about that since he's the expert up here on the technology side. We are constantly monitoring backlogs. The great thing about our industry is the demand. Every year, the demand is growing. So the overall pie for diagnostic imaging is growing and then you now have a market share shift that's occurring away from hospitals towards freestanding centers. So the challenge that we have and it's -- some believe it's a high-class problem, is managing the increased demand and the volume. So we're always looking at operational initiatives that we can get patients either expand hours, we monitor our backlogs, particularly around advanced imaging, where we expand hours like in Manhattan here we're scanning into 10:00, 11:00 at night in many of our centers. We're opened up on weekends and many of our centers. And we have a lot of initiatives to make certain investments in technology. For instance, on the equipment side that have faster scanning times, more advanced post-processing software that allows for shorter scanning times that can get patients through our centers more quickly. And then there's a whole host of digital health initiatives, which I'll let Greg speak to that are both designed for increasing our capacity as well as the speed...

Yes. I actually think in Q2, we reported a little over 10% same-store growth in MRI. And this is actually one of those areas where the digital health initiatives have really been able to -- I think you can connect the dots to that same-store growth, specifically our tech live implementation now, almost all, if not all of our 400 MRI scanners are now connected to these remote boxes. And what that means is we can hire a tech in Arizona to scan here in New York City, she can be at home in her pyjamas scanning me or you, while we're in 1 of 3 different scanners that she can control, and that has allowed us to open on weekends and nights and at times that previously we just had a hard time staffing. I've talked with other radiology groups and it's quite common for them to need to cancel slots because they can't get a tack. Somebody calls in sick, and there's no backup because they're running so lean. And this tech live remote initiative is what's really allowed us to tap into this backlog. And so we didn't buy 10% more scanners and the speed up slots, that's a hard thing to do, but just keeping things open more is one of the kind of highest incremental margin improvement ways we can go about doing things. One last anecdote, I was in L.A. at one of our centers recently and the operator in there said, we're near LAX in Inglewood. We've started opening scan slots at 3 a.m. because a lot of the shift workers finish at 1 or 2, and they've got a knee problem or a shoulder or the and those slots are filling up. So to Mark's point, I think the demand for what imaging can bring to the health care process is high and growing in recognition. And so we don't have a demand problem. We have a problem meeting that demand. And that generally comes down to labor. We can buy another scanner, but can we staff it and that's where these remote initiatives that -- and the other sort of technical speed up initiatives that the digital health business have created and are now embedding that's really working. I think we can legitimately point to that 10% and say it wouldn't have been that high without things like Tech Live.

Yes. And another example of this is thyroid and breast ultrasound. So we bought a company I guess it's going back about 1.5 years ago, an Australian-based company called C-Mode, who had an FDA-approved thyroid ultrasound product that does 2 things essentially. One, it speeds up the exam time at the facility so that the tech, which is a laborious process for the tech who's identifying thyroid nodules and sizing thyroid nodules and putting that into a worksheet that ultimately gets synthesized into the radiologist report. Now all of that done is done with AI and autonomously such that the exam time can now be scheduled in 20-minute increments instead of 30-minute increments, and that 50% shortening of that exam time has massive implications for the capacity at a particular center for ultrasound. We just got FDA approval for breast ultrasound as well within the last few months. Between the 2 of those, it's about $1.250 billion of our 3.7 million ultrasound exams annually. And that's also speeding up the interpretation and the reporting time for the radiologists by as much as 50%, which is -- has implications for the radiologists. And we get to bill under what's called the Category III reimbursement code or what's called the T-code. So these are the types of technology initiatives that will continue to allow us to service the growing demand. And increase the same center performance that is driving the growth and profitability of the business.

If you don't mind, Chris, I'd love to segue just briefly about this story on the CP -- the category 3 CPT shoes. Because there's a couple of interesting tidbits in there. For sure, a big one is that now for -- in one of the -- this is one of the few instances where an AI tool, these ultrasound post-processing AI solutions, are generating added revenue. If you look at what other -- if I just put my deep help out on and I look at how other AI tools are being sold, most of them are being sold as an efficiency story for the doc or a quality improvement story you're going to find that stroke faster or something like that. But there's been rare examples only where there was actually new revenue coming in for using the AI itself. And that's exactly what's happening with these ultrasound post processing codes. And this -- so that's one interesting thing. The second thing that I think is super interesting about this is this wouldn't have happened without the marriage of RadNet and DeepHealth software companies in the same vertical stack. And let me just tell you a little bit about that. When we bought C-mode, they -- their AI worked, but it didn't work perfectly for our team. And that's pretty common. Once you get the solution into a provider at scale, it always means a little tweaking. But what they didn't know is that the RadNet payer team is quite good at negotiating with payers. And these Category III codes by definition, are not required to be paid. They're experimental. There -- category I, you have to pay. Category III is optional. And so most payers opt out. And in fact, prior to this, I would have told you, Category III isn't really a path for a successful reimbursement because so many payers just say, never mind. But our payment team has been able to bring the data about the better quality and the improved care to the payers, especially fewer false positives, less biopsies and convince them to start paying for these Category III codes. So now more than half our payers pay us about a $60 fee for these Category III ultrasound code payments. So if I'm selling software that often is -- I mean, prior to this, you were happy to get a couple of dollars a click on the software. Now I can go to an outside customer as a DeepHealth sales guy and say, look, more than half the time, you're going to get $60 for using my software, you should pay me $10 or $20 or $30 because I'm going to help you make another $30 or $60 or $50 on each case. That's a totally different story. And that's part of the reason why more than half of the DeepHealth revenue story on the digital side is external customers. They're seeing, "Oh, we can use your software just like RadNet is to not just make these efficiencies and get more same-store growth, but actually boosted revenue." So these TCOs are certainly millions of dollars of added income or added revenue both the services and the digital health side of the business. It's a big sea change. And again, I don't think that would have happened without the combination of both the tech and the services piece together, going essentially to the payer with this compelling story.