Mark Stolper: And Gary, to your question directly about our potential advantage in development and selling these solutions we have — Dr. Berger mentioned the data set, we’re now north of 100 million digital images and growing by 10 million a year, given our current size, which is a huge advantage in terms of developing and training these algorithms. And secondly, as we deploy them in the RadNet’s 366 and growing number of centers, we can be a test bed for our own technology and our algorithms, which then makes external customers that much more comfortable that there’s already an installed base is already an operator who is using these algorithms effectively. And I think that, that’s a huge advantage to selling these solutions externally once, as Dr. Berger mentioned once these solutions start being more ubiquitous, which is going to occur at such time where there’s third-party reimbursement from commercial and other payers.
Howard Berger: That little interval there might be one other point I want to make. We do have a potential built-in marketplace for ourselves with our hospital joint venture partners. And I can’t overestimate that enough in that most of these hospital systems will want to use the tools that we’re developing. If not for hospitals that are part of our joint venture, but other parts of their systems where we may not be a joint venture partner with them, perhaps in other states or in other areas, number one, and the ability to have a seamless flow of data between inpatient and outpatient, which will create the kind of efficiencies that will help reduce costs. So right now, I can’t remember the number, we probably have 30 or more different large health systems that are…
Mark Stolper: We have 24 JVs.
Howard Berger: Yes, but…
Mark Stolper: Encompassing 130 locations.
Howard Berger: But those hospital systems, they have other hospitals that were not necessarily JV with. So there’s a pretty big marketplace out there where we’ll have a very receptive audience that will not only want to potentially use our tools, but to help unify their entire radiology platform on an outpatient and inpatient basis.
Operator: The next question comes from Larry Solow with CJS Securities.
Lawrence Solow: Great. I’ll go to the congrats on a solid finish to a really good year. I guess first question for me, Mark, is I think you mentioned you’re targeting, I think, 8% to 8.5% revenue growth in the Imaging segment all in. How does that — if we look at just volume growth in 2023 or pursue growth, same-store procedural growth is actually above kind of that 3% to 4% sort of annual target every quarter, not saying we’re reaching an inflection point, but how do you view that growth last year? What are you kind of targeting this year in that sort of 8% overall 8.5% overall revenue growth? I realize maybe a couple percent of that is from acquisitions, but whatever that net is 6%, 7%. How do you view that volume versus price? Because also on price, if we look last year, I think average price per procedure was also up about 3%. So how do you kind of view those two components as you look out for this year?
Mark Stolper: Sure. So on the procedure volume front, typically, we’ve told our stakeholders over the long term, we felt that we could grow kind of in the low single digits on a same-center basis. Obviously, that becomes harder, the more efficient you get and how the busy at your centers are. But we’ve been making a lot of capital investments and investments in technology to be able to drive better throughput into our centers to continue to comp in sort of the low to mid-single digits on a same-center basis. And those are investments in these MRI scanners that Dr. Berger talked about that allow for shorter scanning times, the remote technologists, which allows us to open up on nights and weekends and get coverage from a labor perspective, we’ve done a bunch of things at our centers to try to get patients in and out of our centers more quickly with digital check-ins and better clinical protocols and so on and so forth.
So embedded in next year’s guidance of plus growth. We are assuming mid, low single-digit same-store sales performance, which if you look at 2023, we did even better than that in — throughout the year, we were north of 5%, 6% in terms of our same-center performance. And then the rest of it are the contributions of other centers that either weren’t — were opened or purchased that weren’t in the same center calculation going from 2023 to 2024. So I think is it possible that we can do better than that. Yes, absolutely. Given all some of the tailwinds that we talked about in the industry that are trends that are driving more and more of the patient flow out of more expensive hospitals and inpatient imaging towards ambulatory outpatient imaging, a lot of these advances in technology, the benefits that we’re seeing in certain modalities like PET CT, like the PSMA test and the Alzheimer’s imaging, which we talked about.
So I think all of those things are contributing to a more robust than historical same-center potential here for us. So we’ll see how the year kind of unfolds.
Lawrence Solow: Okay. And in terms of just pricing, are you guys — obviously, on the government side, still a little bit of a headwind there. But as I just look at for the full year average price per procedure was actually up 3%-ish. And I realize some of that is just a mix to these higher modalities. But are you getting actual price on the commercial side that more than offset the inflationary pressures?
Mark Stolper: Yes, we are. Thanks for reminding me to talk about price. As you mentioned, we are facing a small headwind with Medicare pricing as a result of the lowering of the conversion factor of the Medicare fee schedule by 3.4%, and that’s not being that’s not specific to radiology. Anybody who builds under the physician fee schedule, the Medicare physician fee schedule regardless of specialty is facing that hit. And for us, that’s about a $7 million to $8 million headwind. But that is dwarfed by the pricing increases that we’re getting from our commercial book of business and from our capitated payers. In our capitation contracts, although we’re very effective in managing utilization, utilization of diagnostic imaging still goes up every year because of all the benefits of technology and the aging population and so on and so forth.
And so as that utilization goes up, we get pricing escalators in these contracts. So we benefit from that each year. And then on the commercial front, I would say that the payers are more recognizing that we are their partners in trying to move this business and shift this business out of the more expensive hospitals into our freestanding centers. And in most of our markets, our — the hospitals for the inpatient work are charging anywhere between 2x and 5x the prices that we’re charging the payers. So the payers recognize that it’s far more beneficial to them to getting this business — to shifting the site of care, and they’re less concerned about paying RadNet a couple of points or 3%, 4% more to do this type of work. Because we’ve got a staff of a couple of hundred plus marketing representatives to purpose in life is to go around and call on physician practices and try to get this business into our centers and out of hospital.
So we did experience pricing increases, which benefited us last year in our 2023 results. And we’ve got a number of pricing increases going into effect in 2024 that will impact our revenue positively this year.
Lawrence Solow: Great. And if I could just squeeze one more in just on the enhanced breast cancer testing test. I think you mentioned, I think East Coast penetrated or adoption on the East Coast centers was somewhere in the 30-ish range? Curious, has that been — I know it sort of increased during the year last year. Do you expect that number to continue to increase as your marketing efforts improve and you learn more as well. And just West Coast, is that a similar number in the low 30s from the start and exact growth as well?
Mark Stolper: Yes. So we are approaching close to 35% adoption rate in EBCD on the East Coast, which is more and more mature, obviously, than the West Coast. We started rolling out the West Coast in the fourth quarter of last year, we are completed in the rollout here in Southern California. We’ve got about 18 more centers in — by the way, we’re completed in Southern California and Arizona. We’ve got 18 more centers in Northern California and Central California to roll out the EBCD program. These are obviously mammo centers. And what we seen and the rollout has been a little bit slower on the West Coast than originally intended. But what we are seeing is much higher initial adoption rates on the West Coast. Our West Coast adoption rates in currently are over 30%.
It took the East Coast many, many months to get to that level. And part of why we’re being more successful on the West Coast isn’t so much that there’s differences in the patient population. It’s just that we learned a lot from the East Coast rollout, and we took those learnings and we’re much more effective at communicating the program to the patients, to the referring physicians. We’ve done more in-market marketing and we started off with the $40 price here on the West Coast. And when we originally started on the East Coast, we were at a $60 price, which then created some level of resistance in the adoption rate. So I think we’re fairly bullish as we continue to roll out this program, which is embedded in our guidance. In other words, our revenue was close to $13 million in the EBCD program recognized by the AI division in 2023, and that should go somewhere into the low 20s in 2024.
So we’re talking about 65%-ish growth just in that program within our digital health segment in 2024.
Lawrence Solow: And I’m just curious, Howard mentioned it might take a couple of years before you actually get kind of your coverage. But is it too early to think about or have you gotten interest from outside — centers outside of your network for this test?
Howard Berger: Well, I think we do have some interest, but interestingly enough, where it may be coming from our people that self-insure. And so at least two of our hospital joint venture groups, they now are extending the EBCD program to their employees and dependents. And in fact, in New Jersey, the Barnabas Health System, the RWJ Barnabas Health System, is rolling this out as a benefit that they’re going to be paying for, I believe, it’s April 1. So we have similar…
Mark Stolper: For their employees. They have about 30,000 employees.
Howard Berger: And dependents, right. And so I think this actually may be a different form of marketing before we’re going to see adoption by the commercial payers. But one may follow from the other because the — if I use New Jersey as an example, their TPA, the third-party administrator happens to be on the Blue Cross Shield entity, Horizon in New Jersey, and they essentially are going to be paying the — for these procedures as part of the RWJ Barnabas benefit program. Once they see the evidence of how beneficial this is, it may be easier to sell them, meaning Horizon on a more larger market approach to the use of this. So all of these are tools that I think we’re in a unique position to do because of the way we are concentrated in markets and the kind of conversations that we can have by not just being kind of a one-off provider in any particular market.
Operator: The next question comes from Ed Kressler with Angelo Gordon.
Edward Kressler: Congrats on the great quarter and year and always thanks for your time to taking the time to speak to us. Appreciate it. Can you discuss how you’re funding the Houston acquisition and the effect on pro forma leverage? And obviously, given what we discussed here in terms of your regional density strategy, should we be thinking about kind of next steps as more M&A, possible JVs in that area? Or will you pivot to some de novo activity there? And then in the context of just kind of spending down some of that balance sheet cash that you derived from the equity offering. Can you talk about your comfort level regarding leverage as you spend that down?
Mark Stolper: Sure. Thanks, Ed. So if you remember, when we did the equity raise back in June of last year, where we raised about $245 million of net proceeds. We earmarked about $100 million of that $245 million of proceeds to a potential debt paydown. And then in October one of last year, we did pay down $30 million of that $100 million, and we communicated at the time we did that, that we wanted to hold on some more of that cash because we had other opportunities that we thought were very accretive our shareholders, for all of our stakeholders for the use of that cash. When we did that, we had the Houston deal in mind, and you’ll see in our 10-K that we paid about $30 million for that practice. There’s other things in our pipeline that will also be a use of those proceeds that we raised back in — back last year in June.
So that deal will be paid for in cash. And after that, we’ll still have a pretty robust cash balance that will continue to use not only for other investments like M&A but also capital investments in de novo centers as well as some of the IT investments that we’re making. But clearly, we have a lot of firepower, a lot of capacity not only with the $342 million of cash, we ended with at year-end. We have $195 million unfunded undrawn upon revolving line of credit. Our leverage — our net debt leverage ratio is now below 2x. And so we have a lot of debt capacity. So we certainly have the capacity to continue to grow this business and execute on M&A opportunities if they should arise.
Edward Kressler: Got it. And do you think you will pursue a de novo strategy in that area as well? Or are you going to kind of just marinate in the market and learn it for a while first?
Mark Stolper: Are you talking specifically about Houston?
Edward Kressler: Yes.
Howard Berger: Yes. I think our strategy in Houston will be similar to what it’s been in other new markets that we’ve entered into to we had for four years. But we’re looking at other acquisition opportunities, probably a couple of de novos and then wait to see who shows an interest if there is any, from existing hospital operators in that market. But I would say for the next year or 2, it will be mostly acquisitions and de novos, but maybe more of an emphasis on the acquisition side of it rather than the novel side of it.
Operator: The next question comes from Jim Sidoti with Sidoti & Co.
James Sidoti: I know it’s been a long call, so I’ll try and be quick. Thank you for the time, though. So a quick one, how many centers do you have operating as of today?
Howard Berger: As of today, we have 366, actually, that maybe more than that. I take that back. Because when you say today, you mean in the calendar first quarter so far this year?
James Sidoti: Right.
Howard Berger: Yes. Well, we’ve made some other small acquisitions. We’re probably in a couple of de novos have finally opened up, if you will, but we’re probably somewhere around 370 to 3.72 right now. We expect by year-end with all the activities, some of which we’ve talked about, de novos and acquisitions to be around 400.
James Sidoti: Okay. And the revenue guidance you provided last night, does that include the seven centers in Texas and additional centers you expect to come online?
Mark Stolper: Yes. Well, it includes the seven centers in Texas from the point that we end up closing that deal, which will be during the second quarter, we’ll close it. It does not include any other acquisitions that have yet to be announced.
James Sidoti: Okay. And can you just make a comment on reimbursement rates in Texas and how they compare to the reimbursement on the — how it compares to reimbursement on the coast?
Howard Berger: It’s going to be — I can assure you it’s going to be better. The coast is a challenging environment here, both in Arizona as well as California, primarily because Arizona has a large Medicare population. And in Arizona, there’s a large managed care population as well as Medicare population. So our original due diligence showed us that we were comfortable with the reimbursement rates in Texas being significantly better than they are in Arizona and California.
Mark Stolper: Yes, with more commercial patients, less government pay.
James Sidoti: Okay. All right. And then two more quick ones. The guidance you gave for interest expense for 2024, is that net of any interest income you’ll gain on the capital you raised in 2023? Or is that just straight interest expense?
Mark Stolper: Yes. Thank you for asking that. Yes, it’s net of two things. One is it’s net of any payments to and from our swap counterparties. And it’s also net of interest income to be earned on our cash balance. This is how we reported our — which is how we reported our cash interest expense for this year of — excuse me, for 2023 of $38.3 million.
James Sidoti: So it’s increasing. I assume because of the increase in rates. But as you progress through the year, generate more free cash assuming rates don’t continue to go up, at some point, that number should start to come down again, I guess, depending on your acquisition activity?
Mark Stolper: Yes. I think in 2023, we received about $14 million on our interest rate swaps from counterparties because of the — in the money nature of our swaps.
James Sidoti: I’m just saying though overall interest expense, while it’s going up this year, you would think at some point, because of the strong free cash flow generation you have that, that number should start to at least level off in ’25, ’26, those years?
Mark Stolper: Yes.
James Sidoti: Okay. All right. And then the last one from the physicians on that product? Or are they happy to get the support and they have plenty of other things they can do?
Howard Berger: When you say physicians are you talking about on a radiologist or the referring physician?
James Sidoti: No, radiologists. Are radiologists at all give you any kind of pushback to the are they happy to…
Howard Berger: On the contrary, they’d be very upset if we took it away from them. So I think radiologists and adversely all the radiologists where we introduced this to feel that they have a greater confidence level. It’s almost like getting for them a second read, a second opinion and one that helps them better analyze areas that are less visible to the human eye. So it’s been an overwhelming success within our radiology community of mammographers.
James Sidoti: And I assume you’re not seeing any negative financial impact if this technology gets adopted?
Howard Berger: No, there’s not. I mean, that’s really up to the patient. The patient can elect to have this value added to their scan or not. So it’s their choice.
James Sidoti: Right. Right. But in terms what the radiology fees are that their fees are the same, whether the patient adopts us or elects to do this or not?
Howard Berger: Yes. Yes.
James Sidoti: Okay. Just wanted to be clear on that.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Berger for any closing remarks.
Howard Berger: Thank you. Again, I would like to take this opportunity to thank all of our shareholders and stakeholders for their continued support and the employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader that provides great services with an appropriate return on investment for all stakeholders. Thank you for your time today and look forward to our next call.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
