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Item 1A. Risk Factors

2023-03-01 compared with 2022-03-01 · 178 added, 192 removed, 172 unchanged (68% of the section changed)

Risks Related to Our Operations and Third-Party Relationships

General Economic and Industry Risks

Adverse changes in general domestic and worldwide economic conditions could adversely affect our operating results, financial condition, and liquidity.

We are subject to risk arising from adverse changes in general domestic and global economic conditions, including recession or economic slowdown and disruption of credit markets.

Concerns about the systemic impact of potential long-term and wide-spread recession, inflation, energy costs, geopolitical issues, the availability and cost of credit have contributed to increased market volatility and diminished expectations for near-term growth in the United States and many global economies.

Continued turbulence in domestic and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our patients.

Patients may transition work, leaving insurance programs, or defer non-emergency procedures which could reduce overall demand for our services.

A decline in global economic conditions could also have a significant impact on the financial condition and operations of our third party payors, contracting radiology groups, equipment manufacturers and other suppliers.

A downturn in the economic environment can also lead to increased risk of collection on our accounts receivable and impairment of goodwill, possible reductions in liquidity, as well as the risk of failure of derivative counterparties and other

financial institutions.

These and other economic factors can materially adversely affect our business, results of operations, financial condition and stock price.

Increasing interest rates or disruption of credit markets could adversely affect our financial condition and liquidity.

In response to recent macroeconomic concerns, the United States and other western countries have implemented monetary policies focused on suppressing inflation, including increasing interest rates.

We operate in an industry that requires significant amounts of capital to fund operations, particularly the initial start-up and development expenses of new diagnostic imaging centers and the acquisition of additional centers and new diagnostic imaging equipment.

To meet these capital requirements we have incurred various indebtedness including senior secured credit facilities and equipment leases.

Most of our indebtedness is borrowed under terms with variable interest rates.

We have purchased, and may in the future purchase, forward swaps or other derivative instruments designed to hedge the risk of changes in interest rates.

The use of such hedging activities may not be effective to offset any, or more than a portion, of the adverse financial effects of unfavorable movements in interest rates over the limited time the hedges are in place.

If these market conditions continue, we may experience increased expenses associated with borrowing and resulting decreases in profitability.

Moreover, continued disruption in credit markets could render it more difficult for us to timely replacing maturing liabilities or to expand credit facilities, which would adversely affect our liquidity and financial condition.

We face various risks related to health epidemics and other outbreaks, which may have a material adverse effect on our business, financial condition, results of operations and cash flows.

We face various risks related to health epidemics and other outbreaks, including the global outbreak of COVID-19 (including the virus' variants that have emerged and could emerge in the future):

• Restrictions intended to slow the spread of COVID-19, including quarantines, government-mandated actions, stay-at-home orders and other restrictions, have led and may in the future lead to periods where procedure volumes drop significantly;

• Disruptions in supply chains can affect the cost and availability of reagents and other materials needed for certain procedures;

• Significant portions of our workforce may be unable to work illness, quarantines, facility closures, ineffective remote work arrangements or technology failures or limitations;

• General economic downturns as a result of COVID-19 may affect demand or pricing for our services;

• Volatility in the global capital markets may result in a decrease in the price of our common stock, or an increase in our cost of capital.

Our results of operations have recovered from the initial outbreak of COVID-19, but a further outbreak or similar pandemic event would negatively impact our results of operations.

In addition, changes to statutes, regulations or regulatory policies or practices as a result of, in response to or otherwise relating to COVID-19, including the wind-down of the COVID-19 Public Health Emergency (PHE) and similar federal and state regulatory measures, could affect us in substantial and unpredictable ways.

Given the many uncertainties and far-reaching consequences of potential developments, we cannot assure that the COVID-19 outbreak or similar event will not require extended or additional diagnostic center closures and other disruptions to our business or will not materially and adversely affect our business, results of operations and financial condition for significant periods of time moving forward.

Business interruptions due to natural disasters or other external events beyond our control can adversely affect our business, financial condition or results of operations.

Our operations can be subject to external events beyond our control, such as the effects of earthquakes, fires, floods, severe weather, public health issues, power failures, telecommunication loss, and other natural and man-made events, some of which may be intensified by the effects of climate change and changing weather patterns.

Our corporate headquarters and over 100 of our radiology centers are located in California, which is subject to wildfires, blackouts, and potentially damaging earthquakes.

In addition, several of our centers located in parts of the east coast have suffered from weather events that caused us to temporarily close centers.

These or other similar events could cause disruption or interruption to our operations and significantly impact our employees.

Any disruption to our services may result in decreases in revenues or increased operating and capital expenses.

Historically, when we have experienced a reduction in business due to inclement weather or external events for a period of

time, our operations have returned to a normalized level, but we have not experience a significant increase of procedures that would fully compensate for the revenues lost during the slower periods.

Changes in the method or rates of third-party reimbursement could have a negative impact on our results

A significant portion of our business is derived from federal and state reimbursement programs such as Medicare or Medicaid.

From time to time those programs implement changes designed to contain healthcare costs, some of which have resulted in decreased reimbursement rates for diagnostic imaging services that impact our business.

On November 22, 2022, Centers for Medicare and Medicaid Services (“CMS”) released the 2022 Medicare Physician Fee Schedule final rule, which contained significant payment reductions effective January 1, 2023 for radiology services as a result of changes to relative value units, redistributive effects of the CMS proposed clinical labor pricing update and statutorily mandated budget neutrality rules.

The Consolidated Appropriations Act of 2023, enacted on December 29, 2022, mitigated to a certain extent the reimbursement cuts, but did not completely eliminate them.

Furthermore, absent further and more permanent intervention from Congress, CMS could propose and impose similar or more significant reimbursement cuts in the months and years ahead .

One of the principal objectives of health maintenance organizations and preferred provider organizations is to control the cost of healthcare services.

Managed care contracting has become very competitive, and reimbursement schedules are at or below Medicare reimbursement levels.

The expansion of health maintenance organizations, preferred provider organizations and other managed care organizations within the geographic areas covered by our network could have a negative impact on the utilization and pricing of our services, because these organizations will exert greater control over patients’ access to diagnostic imaging services, the selections of the provider of such services and reimbursement rates for those services.

Relatedly, reimbursement rate cuts may be pursued as a cost-saving measure by third party payors resulting from the implementation of the federal No Surprises Act (H.R.

133) and similar insurer-provider payment dispute laws, which also may negatively impact our revenue.

Any reduction in the rate that we can charge for our imaging services under these programs will reduce our net revenues and our operating margins per procedure under those reimbursement programs.

Unless we can secure additional procedure volumes, increase utilization of our equipment, or change the overall mix of service procedures that we provide, a decline in reimbursement rates will reduce our net revenues and results of operations.

We experience competition from other diagnostic imaging companies and hospitals, and this competition could adversely affect our revenue and business.

The market for diagnostic imaging services is highly competitive.

We compete for patients principally on the basis of our reputation, our ability to provide multiple modalities at many of our centers, the location of our centers and the quality of our diagnostic imaging services.

Our competitors include independent imaging operators, such as Akumin, Inc., which recently acquired Alliance Healthcare Services, and smaller regional operators, as well as hospitals, clinics and radiology groups that operate their own imaging equipment.

Some of our competitors may have, now or in the future, access to greater financial resources than we do and may have access to newer, more advanced equipment.

If we are unable to successfully compete, our business and financial condition would be adversely affected.

Technological change in our industry could reduce the demand for our services and require us to incur significant costs to upgrade our equipment.

The development of new technologies or refinements of existing modalities may require us to upgrade and enhance our existing equipment before we may otherwise intend.

Many companies currently manufacture diagnostic imaging equipment.

Competition among manufacturers for a greater share of the diagnostic imaging equipment market may result in technological advances in the speed and imaging capacity of new equipment.

In addition, advances in technology may enable physicians and others to perform diagnostic imaging procedures without us.

Our scale in both the number of our locations and the number and types of imaging equipment we offer is one of our competitive advantages.

If the development of new technologies accelerates the obsolescence of our current equipment, we may lose some of our competitive advantage.

We may also be required to accelerate the depreciation on existing equipment and incur significant capital expenditures to acquire the new technologies.

We may not have the financial ability to acquire the new or improved equipment and may not be able to maintain a competitive equipment base.

Business Risks

If our contracted radiology practices terminate their agreements with us, our business could substantially diminish.

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The radiology groups are party to substantially all of the managed care contracts from which we derive revenue.

Under the terms of our management agreements, these radiology groups must use their best efforts to provide medical services at our centers as

well as any new centers that we open or acquire in their areas of operation.

Under the terms of our management agreements, these radiology groups must use their best efforts to provide medical services at our centers as well as any new centers that we open or acquire in their areas of operation.

Although our management agreements are for multiple years, the radiology groups have the right to terminate the agreements if we default on our obligations and fail to cure the default.

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The termination of a management agreement with a radiology group could result in both short and long-term loss of revenue and adversely affect our performance and competitive position in the markets served by the departing radiology group.

If our contracted radiology practices, including the Group, lose a significant number of their radiologists, our financial results could be adversely affected.

We are dependent on the ability of our contracted radiology practices, including the Group, to hire and retain qualified radiologists.

At times, there has been a shortage of qualified radiologists in some of the regional markets we serve.

In addition, competition in recruiting radiologists may make it difficult for our contracted radiology practices to maintain adequate levels of radiologists.

Competition in recruiting radiologists may make it difficult for our contracted radiology practices to maintain adequate levels of radiologists.

If a significant number of radiologists terminate their relationships with our contracted radiology practices and those radiology practices cannot recruit sufficient qualified radiologists to fulfill their obligations under our agreements with them, our ability to maximize the use of our diagnostic imaging centers and our financial results could be adversely affected.

Increased expenses for the Group will impact our financial results because the management fee we receive from them, which is based on a percentage of their collections, is adjusted annually to take into account their expenses as applicable.

We are experiencing tighter labor conditions in some of the markets we serve.

As a result our contracting radiological practices have experienced increased salary and professional services expenses.

Increased expenses for the contracting radiological practices, including the Group, impacts our financial results because the management fee we receive from them, which is based on a percentage of their collections, is adjusted annually to take into account their expenses.

Neither we, nor our contracted radiology practices, maintain insurance on the lives of any affiliated physicians.

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We depend on unaffiliated physicians and other third parties who have no contractual obligations to refer patients to us for a substantial portion of the services we perform.

If a sufficiently large number of these physicians and other third parties were to discontinue referring patients to us, our scan volume could decrease, which would reduce our net revenue and operating margins.

If a sufficiently large number of these physicians and other third parties were to discontinue referring patients to us, our imaging procedure volume would decrease, which would reduce our net revenue and operating margins.

Further, commercial third-party payors have implemented managed care programs that could limit the ability of physicians to refer patients to us.

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Any claim made against us that is not fully covered by insurance could be costly to defend, result in a substantial damage award against us and divert the attention of our management from our operations, all of which could have an adverse effect on our financial performance.

In addition, successful claims against us may adversely affect our business or reputation.

successful claims against us may adversely affect our business or reputation.

Although California places a $250,000 limit on non-economic damages for medical malpractice cases, no limit applies to economic damages and no such limits exist in the other states in which we provide services.

Even if we purchase professional liability insurance we are dependent on the creditworthiness of the insurance provider.

For a period of time ending in July 2017 we purchased professional liability insurance from Fairway Physicians

Insurance Company, A Risk Retention Group (“Fairway”).

For a period of time ending in July 2017 we purchased professional liability insurance from Fairway Physicians Insurance Company, A Risk Retention Group (“Fairway”).

Fairway experienced financial hardship.

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We may not receive payment from some of our healthcare provider customers because of their financial circumstances.

We contract with commercial insurance and managed care providers to provide diagnostic images services to their members.

We contract with commercial insurance and managed care providers to provide diagnostic imaging services to their members.

Some of our healthcare provider customers do not have significant financial resources, liquidity or access to capital.

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If we are not successful in forecasting demand patients or enrollees covered by these contracts require more frequent or extensive care than anticipated, or if we are not efficient in managing the utilization of services under these capitation arrangements, we would incur unanticipated costs not offset by additional revenue, which would reduce operating margins.

Changes in the method or rates of third-party reimbursement could have a negative impact on our results

From time to time, federal and state reimbursement programs such as Medicare or Medicaid implement changes designed to contain healthcare costs, some of which have resulted in decreased reimbursement rates for diagnostic imaging services that impact our business.

On July 13, 2021, Centers for Medicare and Medicaid Services (“CMS”) released the 2022 Medicare Physician Fee Schedule proposed rules, which proposed significant payment reductions effective January 1, 2022 for radiology services as a result of changes to relative value units (RVUs), redistributive effects of the CMS proposed clinical labor pricing update, phase-in implementation of the previously finalized updates to supply and equipment pricing, and statutorily mandated budget neutrality rules.

The Protecting Medicare and American Farmers from Sequester Cuts Act, enacted on December 10, 2021, mitigated the reimbursement cuts, reducing their impact in certain respects and delaying implementation of certain portions of the cuts, but the act does not completely eliminate the cuts.

Furthermore, absent further and more permanent intervention from Congress, CMS could propose and impose similar or more significant reimbursement cuts in the months and years ahead.

One of the principal objectives of health maintenance organizations and preferred provider organizations is to control the cost of healthcare services.

Managed care contracting has become very competitive, and reimbursement schedules are at or below Medicare reimbursement levels.

Relatedly, reimbursement rate cuts may be pursued as a cost-saving measure by third party payors resulting from the implementation of the federal No Surprises Act (H.R.

133) and similar insurer-provider payment dispute laws, which also may negatively impact our revenue.

Any reduction in the rate that we can charge for our imaging services under these programs will reduce our net revenues and our operating margins per procedure.

Disruption or malfunction in our information systems could adversely affect our business.

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The future success and growth of our business depends on streamlined processes made available through information systems, global communications, internet activity and other network processes.

Our information technology systems, and those of our third-party service providers, have been and may again in the future be vulnerable to information security breaches, acts of vandalism, computer viruses and interruption or loss of valuable business data.

Our information technology system is vulnerable to damage or interruption from:

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• power losses, computer systems failures, internet and telecommunications or data network failures, operator negligence, improper operation by or supervision of employees, physical and electronic losses of data and similar events;

• computer viruses, penetration by hackers seeking to disrupt operations or misappropriate information and other breaches of security.

We maintain multiple layers of security measures and are continuously enhance our security technologies to address new threats.

• computer viruses, security attacks and breaches, coordinated attacks by hackers or activist entities seeking to disrupt operations or misappropriate information and other breaches of security;

• acts of vandalism or theft, misplaced or lost data, programming or human errors and similar events.

These threats are constantly changing, increasing the difficulty of successfully defending against them or implementing adequate preventive measures.

We maintain multiple layers of security measures and are continuously enhancing

our security technologies to address new threats.

Our defenses are monitored and routinely tested internally and by external parties.

Despite these efforts, our facilities and systems have been, and may in the future be, vulnerable to privacy and security incidents;

security attacks and breaches;

acts of vandalism or theft;

computer viruses;

coordinated attacks by activist entities;

emerging cybersecurity risks;

misplaced or lost data;

programming and/or human errors;

or other similar events.

In addition, these threats are constantly changing, thereby increasing the difficulty of successfully defending against them or implementing adequate preventive measures.

Emerging and advanced security threats, including coordinated attacks, require additional layers of security which may disrupt or impact efficiency of operations.

We suffered an unauthorized access to our network and could again face attempts by others to gain unauthorized access through the Internet or to introduce malicious software to our information technology systems.

If a malicious hacker gains unauthorized access to our systems and network, it could have a material adverse impact on our business or operations.

Such incidents, whether or not successful, could result in our incurring significant costs related to, for example, rebuilding internal systems, defending against litigation, responding to regulatory inquiries or actions, paying damages, or taking other remedial steps with respect to third parties.

An extended interruption in our information technology system’s function could significantly curtail, directly and indirectly, our ability to conduct our business and generate revenue.

If our network was compromised, it could give rise to unwanted media attention, materially damage our payor and physician relationships, harm our business, reputation, results of operations, cash flows and financial condition, result in fines or lawsuits, and may increase the costs we incur to protect against such information security breaches, such as increased investment in technology, the costs of compliance with consumer protection laws and costs resulting from consumer fraud.

We have in the past experienced unauthorized access to our network and could again face attempts by others to gain unauthorized access to information or to introduce malicious software to disrupt the operation of our information technology systems.

Any unauthorized access to our information technology systems could have a material adverse impact on our business or operations.

Responding to such incidents could require us to incur significant costs related to rebuilding internal systems, defending against litigation, responding to regulatory inquiries or actions, paying damages, complying with consumer protection laws or taking other remedial steps with respect to third parties.

An extended interruption in our information technology system’s function could significantly limit our ability to conduct our business and generate revenue.

If our data storage system was compromised, it could also give rise to unwanted media attention, materially damage our payor and physician relationships, and harm our business reputation.

While we maintain cyber liability insurance, our insurance may not be sufficient to protect against all losses we may incur if we suffer significant or multiple attacks.