Aug 9, 2013
Executives
Mark D. Stolper - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Howard G.
Berger - Chairman, Chief Executive Officer, President and Treasurer
Analysts
Henry Reukauf - Deutsche Bank AG, Research Division Miles L. Highsmith - RBC Capital Markets, LLC, Research Division Elie Radinsky - Cantor Fitzgerald & Co.
Christopher Owens Alan W. Weber - Robotti & Company, Incorporated
Operator
Good day, and welcome to the RadNet Inc's. Second Quarter 2013 Financial Results Conference Call.
Today's conference is being recorded. At this time, I'd like to turn the conference over to Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet Inc.
Please go ahead.
Mark D. Stolper
Thank you. Good morning, ladies and gentlemen, and thank you for joining us today to discuss RadNet's second quarter 2013 earnings results.
Before we begin today, we'd like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995, specifically, statements concerning anticipated future financial and operating performance; RadNet's ability to continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining technologists, receiving third party reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations as estimated, among others, are forward-looking statements within the meaning of the Safe Harbor. Forward-looking statements are based upon management's current preliminary expectations, and are subject to risks and uncertainties, which may cause RadNet's actual results to differ materially from the statements contained herein.
These risks and uncertainties, include those risks set forth in RadNet's reports filed with the SEC from time to time, including RadNet's annual report on Form 10-K for the year ended December 31, 2012, and RadNet's quarterly report on Form 10-Q for the 3-month period ended June 30, 2013. Undue reliance should not be placed on forward-looking statements, especially guidance on future performance, which speaks only as of the date it is made.
RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events. And with that, I'd like to turn the call over to Dr.
Howard Berger, Chairman and Chief Executive Officer of RadNet.
Howard G. Berger
Thank you, Mark. Good morning, everyone, and thank you for joining us today.
On today's call, Mark and I plan to provide you with highlights from our second quarter 2013 results, give you more insight into factors, which affected this performance and discuss our future strategy. After the prepared remarks, we will open the call to your questions.
I'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're pleased with the improvement in our business in the second quarter relative to the first quarter of this year.
Procedural volumes, revenue, EBITDA and net income increased on a sequential basis from this year's first quarter. Most significantly, our revenue increased 2.1%, our EBITDA increased 4.5% and our net income increased by over $4 million from the first quarter of this year.
In particular, we were pleased to see a significant improvement in the performance of a number of our Northeastern operations, which had a weak start to the year. Procedural volumes rebounded nicely in the East after a soft January and February and our regional operating teams report the continuation of this improvement into the third quarter.
Having said this, the operating environment industry-wide remains challenging. Private payers continue to manage utilization carefully with preauthorization processes and by engaging third-party radiology benefit managers.
Physician practices have increasingly been purchased by local hospitals and health systems, causing more patient referrals by these purchase groups to be directed into hospital imaging centers. Pricing remains under pressure by both Medicare and private payers alike.
And patients continue to migrate to high deductible plans, making them more discerning about utilizing healthcare services. Although this operating environment poses challenges to RadNet, like it does to all industry participants, we are not standing on the sidelines, sitting idle.
In many ways, this operating environment helps us to distinguish and distance ourselves from our competitors, and we are taking action to improve our business and adapt it to these dynamic times in our industry. First, the industry pressures drive consolidation.
Increasingly smaller imaging centers and radiology groups see the necessity and wisdom around becoming part of a larger, better capitalized and more professionally-run organization. This plays into RadNet's strength and our leading position as the consolidator in our regional markets.
Acquisition multiples remain in historic lows at the 3 to 4x EBITDA range, and I don't anticipate this changing anytime soon. Second, industry pressures are continuing with slow rationalization of capacity is afoot.
This includes physician-self referrals exiting the scanning business, older radiologists retiring, and struggling on non-viable imaging centers shutting their doors. This is healthy for the imaging industry as it addresses some of the overcapacity that has existed in our industry for years, and it benefits those industry participants who survive.
We expect RadNet to continue to benefit from this capacity rationalization. Third, unlike our smaller competitors, we are positioned in select markets to seek various ways to establish long-term fare pricing of payers.
For example, we continue to have constructive discussions with regional hospitals and health systems about partnership arrangements. We have approximately 10 of these types of relationships in Maryland and continue to build our partnership relationship with Barnabas Health in New Jersey.
Our regional density, cost structure, breadth of capabilities and business acumen distinguish us in this conversation. And we've recognized that many of these hospitals and health systems provide these ventures with local market negotiating strength with the payors.
Other ways we can protect our private payer pricing is for using our leverage as a scale player in select markets, where we are an integral part of the healthcare delivery system. We have had recent success in certain East Coast markets and our strategy is to continue to seek market density and relevance in other markets.
Fourth, we are positioned to grow our Capitation business, which we believe is one of the promising models of the future for controlling healthcare costs in general. Healthcare industry has been slow to adopt this model of risk-taking and risk-sharing outside of the select group of markets like California and Florida.
We find that more and more interest in these arrangements is arising in other markets as a result of exploration surrounding ObamaCare and Accountable Care Organization formation. Our 20-year experience with capitation, our substantial infrastructure related to utilization management and contract management and our regional density gives us significant advantage in these discussions relative to other industry players.
And lastly, the difficult operating environment continues to bring us opportunities to expand in adjunct areas of imaging and imaging-related operations. We are already in the information technology business with our eRAD product.
We have teleradiology capabilities and physician staffing, with our Imaging On Call subsidiary. We provide medical oncology services in select markets, particularly surrounding Breast Disease Management, with our Breastlink business.
And we recently bought 40% of a small Radiation Oncology business, which operates within 1 of our core local markets, where we have substantial Breastlink medical oncology and referrals. We will continue to seek these imaging-related opportunities that have synergy with our core business.
As you see, we have a lot to be optimistic about for the remainder of 2014 -- 2013. It should be noted that we have front loaded a significant amount of our budgeted capital expenditures in the first half of the year.
As a result, we are only budgeting to spend an additional $12 million to $15 million for the remainder of the year. Combined with projected cash interest expense in the second half of 2013 and between $20 million to $21 million, as a result of our senior term loan repricing transaction in April, we expect significantly more free cash flow generation over the next 2 quarters.
Since we were virtually undrawn on our revolver at the end of the second quarter, we expect to be accumulating a significant cash balance during the second half of 2013. This cash balance could be used for debt repayment and to enhance our flexibility to address the most expensive part of our capital structure, our senior unsecured notes, which become callable in April of next year.
Our pipeline for accretive acquisition opportunities remains active. As an example, on October -- excuse me, August 1, 2013, subsequent to the end of the second quarter, we completed the acquisition of Manhattan Diagnostic Radiology, a multi-modality operation with 4 imaging centers located on the upper Eastside of Manhattan, New York, for cash consideration of $2.3 million.
The facilities will be operated in conjunction with the Lenox Hill Radiology Group of Centers. As a part of this transaction, we expect to close 1 of MDR's facilities.
And over time, aspects of our respective Lenox Hill and MDR businesses such as patient scheduling, certain equipment and operating personnel may be consolidated with each other in ways that better serve our patients and referring physician communities and which drive cost efficiencies. This transaction will increase our breadth of services, patient capability and efficiency in Manhattan.
We continue to be excited about opportunities within Manhattan and the other New York City boroughs. Manhattan, in particular, represents a new core market for us and we believe that are further opportunities there for expansion, growth and consolidation.
Manhattan has patient density unlike any other market we have seen, and we believe we can operate there with great efficiency and strong margins. We remain optimistic about our slow, but steady migration into voice-recognition transcription services and the broad-based rollout of our eRAD radiology information systems and picture archiving communication systems, otherwise known as PACS.
As we methodically integrate these solutions into all of our centers, we gain efficiencies that allow us to reduce staffing and increase scanning throughput, operating leverage and the level of service that we provide to our patient-referring physician communities. For example, voice recognition transcription gives radiologists high productivity speech recognition that streamlines the diagnostic report production process and produces higher quality documentation for referring physicians.
The result of this integration will be substantial cost savings from eliminating more expensive transcription costs we pay to employees and outside vendors, faster report turnaround to our referring physicians, as well as certain labor efficiencies we will achieve through the streamlining of related processes. Lastly, we anticipate improving results in the second half of 2013, arising from the further financial contribution of our Barnabas Health relationship.
Last quarter, we began a utilization management contract with Barnabas to manage the imaging needs of the approximately 30,000 Barnabas employees and dependents. Additionally, during the first half of the year, we opened 2 new facilities within the Barnabas joint ventures in Cedar Knolls and Morris-Sussex, New Jersey.
We anticipate improving results from these 2 facilities, as well as the other management services we are providing to Barnabas imaging assets during the second half of the year. At this time, I'd like to turn the call over to Mark to discuss some of the highlights of our second quarter 2013 performance.
When he is finished, I will make some closing remarks.
Mark D. Stolper
Thank you, Howard. I'm now going to briefly review our second quarter 2013 performance and attempt to highlight what I believed to be some material items.
I will also 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 second quarter performance. Lastly, I will reaffirm our previously announced 2013 financial guidance levels.
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 excludes losses or gains on the sale of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains and non-equity compensation.
Adjusted EBITDA includes equity and earnings of unconsolidated operations and subtracts allocations of earnings to noncontrolling interests and subsidiaries and is adjusted for noncash or extraordinary and one-time events that have taken place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet Inc.
shareholders is included in our earnings release. That said, I'd now like to review our second quarter 2013 results.
For the 3 months ended June 30, 2013, RadNet reported revenue and adjusted EBITDA of $183.5 million and $30 million, respectively. Revenue increased $11.7 million or 6.8% over the prior year same quarter, and adjusted EBITDA decreased 1.3% or -- $1.3 million or 4.2% over the prior year same quarter.
The increase in revenue for the second quarter of last year -- from last year was principally driven by procedural volume increases from acquired entities specifically Lenox Hill Radiology, which we acquired in the last day of 2012. The EBITDA impact of Lenox Hill was offset by declines in same-center performance.
Same-center procedural volume decreased 0.3% as compared to the second quarter of 2012 and pricing declines caused our same-center revenue to decrease by approximately 5%. For the second quarter of 2013, as compared to the prior year second quarter, MRI volume increased 10.7%, CT volume decreased 0.6%, and PET/CT volume decreased 2.4%.
Overall volume, taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and other exams, increased 7.8% over the prior year second quarter. In the second quarter of 2013, we performed 1,134,982 total procedures.
The procedures were consistent with our multi-modality approach, whereby 77.3% of all the work we did by volume was from routine imaging. Our procedures in the second quarter of 2013 were as follows: 151,438 MRIs as compared with 136,770 MRIs in the second quarter of 2012; 100,693 CTs as compared to 101,322 CTs in the second quarter of 2012; 5,940 PET/CTs as compared with 6,084 PET/CTs in the second quarter of 2012; and 876,911 routine imaging exams, which include nuclear medicine, ultrasound, mammography, x-ray and other exams, as compared with 808,901 of all these exams in the second quarter of 2012.
Net income for the second quarter was $0.07 per diluted share compared to a net income of $0.07 per diluted share in the second quarter of 2012. Adjusting for the change in the presentation of the provision for income taxes as a result of the reversal of a valuation allowance against our deferred tax assets recorded in the fourth quarter of 2012, income before income taxes in the second quarter of 2013 was $5.3 million as compared with income before income taxes of $3.3 million in the second quarter of 2012.
Affecting operating results in the second quarter of 2013 were certain noncash expenses and nonrecurring items, including the following: $630,000 of noncash employee stock compensation expense, resulting from the vesting of certain options and warrants; $117,000 of severance paid in connection with headcount reductions related to cost savings initiatives from previously announced acquisitions; $192,000 loss on the disposal of certain capital equipment; $1.2 million of noncash amortization of deferred loan costs and discount on issuance of debt as part of our existing credit facilities; and $2.1 million gain on the sale of our [indiscernible], New Jersey imaging center to Barnabas Health at the beginning of the second quarter. With regards to some specific income statement accounts, overall GAAP interest expense for the second quarter of 2013 was $11.3 million.
This compares with GAAP interest expense in the second quarter of 2012 of $13.5 million. The decline in interest expense was primarily related to the repricing of our senior secured term loan, which we completed in early April.
Under the terms of the repricing, the spread above LIBOR of our senior secured term loan has decreased by 1%, from 4.25% to 3.25%. Additionally, prior to the repricing transaction, the LIBOR rate underlying the senior secured term loan was subject to a floor of 1.25%.
Under the terms of the repricing, the LIBOR floor has been reduced by 25 basis points to 1%. We project approximately $5 million per year of cash interest expense savings on the repricing transaction.
The second quarter of 2013, provision for bad debt expense, was 3.8% of our revenue compared with 3.7% for the second quarter of 2012. With regards to our balance sheet.
As of June 30, 2013, after giving effect to bond and term loan discounts, we had $583.5 million of net, which is total debt less our cash balance. And we have drawn $1 million on our revolving $101 million line of credit.
We repaid $2.5 million of notes and leases payable during the quarter. In the second quarter, we had cash capital expenditures net of asset and imaging center dispositions of $15.4 million.
Year-to-date, we have cash capital expenditures net of asset, JV, interest and imaging center dispositions of $21.3 million. Because we are budgeting to spend only an additional $12 million to $15 million of capital expenditures in the second half of 2013, we expect to benefit from increased cash flow for the remainder of the year.
We anticipate using this accumulation of cash for future debt paydown, positioning ourselves with more flexibility to address our senior unsecured notes, which are callable in April of next year. Since December 31, 2012, accounts receivable increased approximately $10.2 million and our net days sales outstanding or DSOs were $58.2 million (sic) [58.2 days], a decrease of approximately 5.1 days since year-end 2012.
At this time, I'd like to reaffirm our 2013 fiscal year guidance levels, which we released in March as part of our 2012 fourth quarter and full year earnings press release. RadNet reaffirms the following previously announced guidance ranges.
For revenue, $700 million to $730 million. For adjusted EBITDA, $120 million to $130 million.
For capital expenditures, $35 million to $40 million. For cash interest expense, $42 million to $47 million.
And for free cash flow generation, defined by the company's adjusted EBITDA less total capital expenditures and cash paid for interest, $35 million to $45 million. Confirming our guidance implies that we are experienced -- that as we experienced in the second quarter of 2013 relative to the first quarter, we are expecting continued improvement in our business during the second half of 2013.
We remain optimistic this is achievable due in part to the contribution of cost savings initiatives from our information technology implementation of our eRAD subsidiaries, radiology information system and picture archiving communication system and voice-recognition transcription solutions, as well as expected operating improvements in some of our East Coast regions, which experienced softness in the first half of 2013. I'll now take a few minutes to give you an update on 2014 Medicare reimbursement and discuss what we know with regards to 2014 anticipated Medicare rates.
With respect to 2014 Medicare reimbursement, we recently received the matrix for proposed rates by CPT code, which is typically part of the physician fee schedule proposal that is released about this time every year. If completed, an initial analysis and compare those rates to 2013 rates.
We volume weighted our analysis using expected 2014 procedural volumes. Our initial analysis shows a drop of approximately 10% for 2014 rates, resulting to us an estimated $10 million to $15 million Medicare revenue decrease for next year.
The rate decreases are heavily weighted towards MRI and CT, with declines in certain more frequent procedures in the 15% range. Declines on the routine imaging side of our business, x-ray, ultrasound, mammography, for instance, are much more nominal in nature.
Additionally, there has been discussion regarding new cost-to-charge ratios or CCR for CT and MRI proposed in the fiscal year 2014 inpatient prospective payment system rule or IPPS. Specifically, CMS is proposing to use new cost-to-charge ratios based on cost centers for those services.
CCRs or cost charge ratios are used to estimated hospital costs per study by adjusting hospital charges. The new CT and MRI CCRs are lower than the general radiology CCRs CMS has used in the DRG rate setting in the past.
There is a risk that the new CCRs for hospitals might find their way into the 2014 HOPPS proposals or Hospital Outpatient Prospective Payment System rule thus lowering HOPPS rates. As many of you recall, our pricing for Medicare is subject to the lower of the physician fee schedule and the HOPPS schedule.
At this time, we do not believe the potential lowering of the HOPPS schedule based upon the CCR approach will add significantly to any reimbursement cut to RadNet since in most cases, the physician fee schedule will either continue to be below the new HOPPS rates -- or the new HOPPS rates will partially mitigate any cuts. Of course, these proposed rates are subject to comment from lobbying in industry groups and there is no assurance the final rule to be released in November 2013 time frame will reflect these same proposed rates.
In recent years, the final rule issued in the October, November time frame decreased initially proposed cuts released earlier in the year as the initial proposal. Whether or not the final rule in November time frame is consistent with these proposed rates , we will continue to be focused on lowering our cost structure through using our scale and ability to drive our efficiencies in our organization.
For instance, we will continue to save monthly during our implementation of the eRAD, RIS and PACS products, as well as voice-recognition transcription. We will continue to seek pricing increases in regions where we are central to the healthcare delivery system, recognizing that our prices remain significantly discounted as compared to hospital settings.
We will also continue to pursue partnership opportunities with local hospitals and health systems where we think these arrangements could have a result in increased volumes and long-term stable pricing from private payors. Lastly, we will continue to acquire strategic targets at 3x to 4x EBITDA in our core geographies that further our strength in local markets and achieve efficiencies with our existing operations.
I'd now like to turn the call back to Dr. Berger, who will make some closing remarks.
Howard G. Berger
Thank you, Mark. Our strategy is to continue to the execute on the principal business tenants that will ensure our future success.
The first is scale. In our highly-fragmented industry, which is suffering immense pressures of lower reimbursement, decreasing utilization and lower availability of capital, size matters.
Our cost structure, leverage with suppliers and payors and industry relationships with powerful joint venture partners set apart RadNet from other industry players. We will continue to make strategic acquisitions in our regions, particularly tuck-in transactions, transactions of single centers and small groups.
We will also continue to leverage our scale and expertise to partner with powerful local health systems and hospitals. We are focused on free cash flow generation and positioning ourselves with more financial flexibility.
We feel this is important as we want to give us as many options to ultimately address the most expensive part of our capital structure, our senior unsecured notes either in April, when these notes become callable or any time thereafter. We expect to generate significantly more free cash flow during the second half of 2013.
The third tenant of our business focus is on efficiency cross containment and the maintaining of operating margins. As discussed earlier on this call and in previous quarters, we have key initiatives that will drive performance and continue to mitigate any reimbursement pressures that may occur in the future.
Example of these are implementation of our eRAD, RIS and PACS system-wide, voice recognition transcription, effective purchasing of supplies and equipment maintenance and the consolidation of cost and the elimination of unnecessary expenses with the respective newly-acquired operations. We will continue to identify other avenues to save costs and achieve efficiencies within our business in the future.
And finally, our strategy continues to be the diversify our capabilities. This has included our entry into radiology software, teleradiology and professional services and medical oncology niches that are heavily imaging dependent.
We are leveraging these capabilities to provide a continuum of services to joint venture partners, who seek an imaging partner who can provide solutions to all of their diagnostic needs. Furthermore, each product offering represents a unique growth opportunity in of itself and these offerings are far less capital intensive than our core business.
Operator, we are now ready for the question-and-answer portion of the call.
Operator
[Operator Instructions] We'll go first to Henry Reukauf at Deutsche Bank.
Henry Reukauf - Deutsche Bank AG, Research Division
Just on your guidance for the year, I guess you confirmed and Howard, I think you said that you were seeing volumes stable, I guess up and pretty strong thus far this quarter. You do have to have a better back half than you did the first half.
How confident you feel in those volumes? And can you discuss that a little bit in general.
Howard G. Berger
Yes. I feel very confident, both in terms of volumes that we're seeing good traction on here in the second quarter and extending into the third quarter.
But also with the opportunities that we have that Mark and I discussed about cost containment measures such as our IT technology, in which really has just begun implementation company-wide here in the third quarter. We expect significant savings from that to translate into cost reduction here in these third and fourth quarter and extending into the 2014 period.
That along with efforts that we're making in newly-acquired operations, expansion of our relationship with Barnabas Health in New Jersey as well as other initiatives that we're looking at, give me an enormous amount of confidence that our guidance at this time is comfortable and achievable. But we're focused on both sides of the P&L, revenue, but also on expenses.
As long as we're driving the revenue, we feel we have adequate capabilities inside the company to continue to find opportunities to reduce expenses, both in the cost of doing business and in potentially salaries as a result of efficiencies that we can achieve given somewhat of our unique strategic positioning in our markets.
Henry Reukauf - Deutsche Bank AG, Research Division
So I guess, if I hear this just right, to paraphrase. So volumes are good so far, but they can move unexpectedly 1 way or another, but they're good so far.
But your confidence in the guidance is just that you do think you're going t be reducing cost in the back half of the year. Can you talk about maybe the size of that reduction?
Howard G. Berger
Well, it's hard to talk about it, only because it's a slow implementation, Henry. In other words, this is not something where we can just plug-and-play and all of a sudden get the benefits overnight.
So we have to roll out the IT solutions as we've talked about both on PACS, RIS and voice recognition over a period of time. It's quite possible that our discussions in prior quarters where we expected a $10 million to $15 million savings from these initiatives are still what we're looking at.
But it will be evolving over a period of time. How much of that occurs in the third quarter versus the fourth and versus the first quarter 2014 is hard to say.
But it will be something that we can look towards and maybe in future quarters give a little bit more specificity to. We're focused on the main part of this being our voice recognition, which has immediate benefits throughout the operation, which is now being rapidly implemented and hopefully completed, perhaps by the beginning of the fourth quarter and where the majority of the savings will come from.
So that being said, it should also be recognized that these are not one-time savings. The savings that we're going to achieve from these kind of operating metrics are locked into the company's performance for the foreseeable future.
Henry Reukauf - Deutsche Bank AG, Research Division
Okay. So I think you talked about that you had cushion in the guidance from PACS, RIS and the voice recognition.
The $10 million to $15 million, you kind of confirming right now and that's yet to come, but it will be spread out over 6 months to 9 months, something like that rolling in over time.
Howard G. Berger
Yes.
Henry Reukauf - Deutsche Bank AG, Research Division
We can think about that type of expense reduction? Okay.
Howard G. Berger
Yes. I would indicate also, Henry, that very little of that savings opportunities occurred -- has occurred so far this year.
Henry Reukauf - Deutsche Bank AG, Research Division
Okay. And then just maybe on the -- 2, 1 on the HOPPS.
How much now is that above, kind of physician fees scheduled rates? And then, I guess the last question is just on your pricing with commercial contracts, you talked about how you're doing well there.
I think the comment was at you -- last quarter, you're seeing contracts maybe flat to up 1%, is that still the case? And that's it for me.
Mark D. Stolper
Sure, Henry. I'll comment on the HOPPS schedule relative to the Medicare fee schedule.
Going back to that 2007 with the implementation of the Deficit Reduction Act and making the imaging industry subject to the lower of the physician fee schedule on HOPPS, there was a huge impact on the industry because at the time when HOPPS was introduced into the equation, the HOPPS schedule was significantly lower than the Medicare fee schedule, which then drove a cut for the industry. And particularly on MRI and CT and PET/CT, meaning the more advanced imaging.
What's occurred since that time, since 2007, is a fairly steady decline in the physician fee schedule so that over the last 2 years, predominantly, all our CPT codes have been reimbursed under the physician fee schedule as opposed to HOPPS. Today, and you have to look at it by CPT code.
Today, it's not uncommon that the Medicare fee schedule is 10% to 20% lower than were HOPPS rates are. And what's actually happened over the last several years, is that HOPPS has increased each year on average by about 1.9%.
So the HOPPS schedule has kept going up, the Medicare fee schedule has kept going down. So that spread has widened.
So my comment on the reimbursement section is that this CCR approach that they've proposed in the inpatient prospective system with the hospitals, get's adopted under the HOPPS proposal that much of those declines will be mitigated by the fact that the Medicare fee schedule is already significantly below HOPPS.
Henry Reukauf - Deutsche Bank AG, Research Division
Okay. And just on commercial pricing then?
Mark D. Stolper
Commercial pricing, we've seen on average some deterioration in commercial pricing, and it's really market-by-market base. There's a couple of East Coast markets where we've actually been successful in getting price increases.
And then there has been some markets where we don't have the same type of leverage and importance in the healthcare delivery system, where we've seen some deterioration. And we felt -- we've also felt some deterioration in pricing because of sequestration and certain health plans specifically those that are tied to Medicare such as the Medicare Advantage plans, automatically because they're getting reimbursed from CMS, passed through those pricing declines to us.
So we've had some whittling away on average of our private payor contracts over the last several years. But it really is market-by-market specific but I would tell you, it's in the 1% to 3% range.
Henry Reukauf - Deutsche Bank AG, Research Division
Okay. And how many of your contacts -- how much are your payments come from Medicare Advantage?
Mark D. Stolper
It's relatively small. I don't have that percentage.
We don't -- it's part of our bucket of commercial contracts because it's driven and managed by the managed care players, which is 56% of our revenue. But of that 56% of our revenue, it's a very, very small minority.
Operator
We'll go next to Miles Highsmith with RBC.
Miles L. Highsmith - RBC Capital Markets, LLC, Research Division
Howard, I wanted to go back to -- there's an old topic around pre-authorization, but just to ask a little more on your comments around the pressure there. Is this -- we've been seeing this and hearing about it for, I guess, close to 10 years or at least in my mind.
I'm curious, is the pace of this pressure getting worse? Or is it that this has existed then it just continues to be there?
And then I got a couple of follow-ups.
Howard G. Berger
Specifically, Miles, which pressure are you talking about?
Miles L. Highsmith - RBC Capital Markets, LLC, Research Division
Around the pre-authorization, on the part of the commercial guys, and the RBMs.
Howard G. Berger
Yes, I think that pressure has been there probably -- I think, you're right, maybe in the 10-year period here. I think it is becoming more visible, not so much because more people are doing it.
But if you've seen more recent reports coming out from the GAO, one for imaging that I think came out earlier this year and then within the last 30 days, one that came out for radiation therapy, that just excoriated the whole self-referral issue, regarding non-radiologists that own imaging and radiation therapy centers has now brought utilization to the forefront. And I think, long-term will be beneficial for the legitimate providers of these services.
So I think we've all seen it out there. Most of the larger commercial payers have had some kind of pre-authorization process for years.
But I think the issue of self referral and overutilization is now being spotlighted in the area that it should be and that is the financial gain that it is inherent in somebody owning imaging assets and controlling where those patients go and benefiting from it. So this is outside of Stark, which the Stark, which prevents people from being an investor.
This goes directly to the heart of those practitioners that have sought to put imaging and radiation therapy into their practices and gain from the benefit of procedural -- procedures that they're really not competent to perform, but more importantly, that have financial incentive written all over it. And particularly in radiation therapy, where this report came out in last 30 days, was quite eye-opening, at least as it pertains to neurologists that get into radiation therapy for prostate cancer.
So I think your perceptions there -- it's a long winded answer, Miles, I apologize for that. But I think your perceptions are accurate, but I think that the focus has changed to a national scale that relates not so much just utilization, but really the overutilization that comes from inappropriate self referral.
Miles L. Highsmith - RBC Capital Markets, LLC, Research Division
Okay. Great.
That's very helpful. And then a couple of unrelated questions.
I guess, it's been 1 year or 2 that you sort of had a heightened focus around maintaining commercial rates and not wanting to take a reduction in commercial rates. And I think you just illustrated some broader ranges as to what that commercial pricing is doing right now.
I'm curious about how much are you finding you need to use your leverage? Are these negotiations more contentious and there have to be threats on both sides before you can get 1% to 3%?
Or is that not been that you've had to use that -- your market share for the lack of a better tool to -- in that negotiation? And then my final question is, as it relates to the physician fee schedule proposal.
In the comment period, are there any specific things you -- the lobby is focused on? Either definitionally in the way they've proposed things or for a broader perspective that you think might give you some chances to see reduction in the final.
Howard G. Berger
The answer to the first part of your question is, I don't think I can recall a single instance where a commercial payor has come in and offered to raise our reimbursement. Somehow or another, that's not built into their DNA.
So it does require us to have a more aggressive conversation with them that I believe we are uniquely capable of having because of the strong presence that we have and relevancy, if not, essential delivery to imaging services and markets. And yes, the conversations have often taken -- the tone is that if we can't negotiate our pricing and reimbursement, we're prepared to opt out of the networks.
And that seems to have resonated. And what's interesting is that, when you have those conversations, even though they may start being focused on reimbursement, they really quickly change to that kind of things that payors should be concerned about is and that is access.
Again, we all got rather swept up in what we get paid for with our MRIs and CTs. But as we have pointed out in every quarter, which Marks statistics today continue to amplify, close to 80% of the business that we do is routine imaging and that's one of the reasons why we are a multi-modality provider.
And it's the routine imaging that the payors have to really be in mind -- or mindful of, I should say, that creates their problems if in fact, providers like RadNet or others decide to pull out of networks. Where people get those services is far more of concern to referring physicians and patients than where they get their MRIs and CTs.
So we have, I think, astutely built our business around the routine imaging so that we can get the benefit of the advanced imaging as a result of these relationships. And in the 2 markets, meaning Maryland and now in New Jersey, with our Barnabas Health partners, we are having conversations that would have been impossible before.
Some of it related to just access that's necessary. Some of it related to that there are other providers in those marketplaces that are not necessarily first choice for a variety of reasons to the payors.
And thirdly, because there is no way that any hospital or hospital system itself can provide the necessary access for all of the imaging demands that are out there. And the health systems that are quick enough to embrace that and understand it, will be reaching out to people like RadNet to augment their delivery system, not only for the access they need, but to partner with us perhaps in the formation of newer and alternative reimbursement methodologies, some of which we've talked about casually like ACOs, accountable care organizations, or what's creeping back, which I am delighted to see into the radiology lexicon is the word capitation.
I think capitation or some iteration of capitation is -- are conversations that we're beginning to have outside of California and which I think are becoming more and more recognized as a form of risk-taking and risk-sharing that has tremendous upside potential with radiologists and radiology groups that are prepared to oversee the delivery of quality radiology services. So I'm not -- again, long-winded answer on the first part of your question.
The second was, again?
Miles L. Highsmith - RBC Capital Markets, LLC, Research Division
Yes, that's all very helpful. And the second was just, on the fee schedule proposal, are there any specific angles you're pursuing?
Are those docile industry at the lobby is pursuing in hopes of seeing that potentially dialed back especially on the higher-end side?
Howard G. Berger
I think on some level, Medicare and the federal government is just another payor like everybody else is. And we are very seriously considering and will have dialogue with the appropriate representatives, congressional representatives, both in the House and the Senate, about what the consequences are of this continued assault on reimbursement for imaging.
And the possibility that much like many other physicians, non-radiologists throughout the country and in some of our markets that are beginning to opt out of Medicare as being a participating provider. There are other ways to manage Medicare enrollees and participants and you don't always have to just bend over and take what they're giving you.
So I believe that, again, emphasizes the strategy that we have about being the consolidator in the market and in particular, in the markets that we're in. And that dialogue may be no different than it is with other commercial payors about the need to maintain access and the consequences of that access being potentially limited or not available.
Operator
We'll move next to Elie Radinsky with Cantor.
Elie Radinsky - Cantor Fitzgerald & Co.
First question really is going back to the capitation issue. Do you believe that this could be a material expansion of your business or are these a migration to capitation?
And with capitation, are you insisting on a relatively large co-pay?
Howard G. Berger
I think the opportunity for capitation or some iteration of capitation, we tend to use that word a little bit too loosely, but if capitation implies some other form of reimbursement that involves risk-taking and risk sharing, I would say the upside opportunity on that is unlimited and I think it is a very active conversation, either that we're having or other people are having. The key to that again though, is access.
It isn't completely about what you're willing to take in the form of bundled payments or capitation, but the very first question that is always asked and the one that we continually focus on is we can only do this if we provide the kind of access that avoids disruption to the payors, enrollees. I don't care what kind of price you're offering them.
If they're going to be forced to send patients, particularly in markets where either the transportation itself is costly or may not even be possible, access will be the first line that they will avoid crossing if they feel that you can't provide that. So again, I think that speaks to our strategy.
We don't have to own every center and every market. We are very capable of doing network development ourself for this delivery or we're capable of opening centers if we find pockets where we can fill those centers with some of these new contracts.
It could be that with the opportunities, primarily on the East Coast, the amount of business that we are willing to do risk sharing and at-risk could dwarf what we have right now in California. So the upside on this to me is unlimited and it's simply a matter of being able to deliver not the pricing, but the access that people need that makes them comfortable that they can avoid disruption to the service side of the delivery.
Elie Radinsky - Cantor Fitzgerald & Co.
The second part of that question is, do you insist upon a relatively large co-pay of that population?
Howard G. Berger
The co-pay is very small. If you get into capitation, much like we have here in California, the co-pay -- because this is primarily here in California an HMO product, the co-pays are very small, probably in the $10 to $15 range per visit.
And that's distinctly different than the co-pay that commercial payors generally charge their enrollees, which tends to be in the neighborhood of 20-plus-percent for a participating provider of the cost of that procedure. So you could be talking about $100 to $200 for an MRI.
When you get into these kind of co-pays, generally speaking, it's relatively nominal.
Elie Radinsky - Cantor Fitzgerald & Co.
How do you manage utilization under a capitated arrangement if it's only a $10 or $15 of co-pay?
Howard G. Berger
The utilization really has nothing to do with the co-pay, per se. It's a matter of us having the responsibility for doing pre-authorization or recommendation for the procedure before it's done and utilize the tools that we've set up in order to screen and make certain that, not only is the procedure necessary, but it's the right procedure being done.
So in a typical population, about 50% of all the imaging that's done is -- excuse me, of the cost of imaging that's done is advanced imaging, as opposed to only representing 20% of the volume. So we focus on those more expensive procedures by requiring the referring physicians to give us the clinical information that then we can determine whether or not the procedure needs to be done and are they doing the right procedure.
So at end of the day, what we provide is not just good utilization, but good medicine. Because most of the people who refer these exams of are not necessarily your specialist, but your general practitioners and internists that tend to be less familiar with the clinical indications and appropriateness of doing the advanced imaging.
Elie Radinsky - Cantor Fitzgerald & Co.
Okay. Are you in the number of states that are going to be fully participating in the Affordable Care Act.
I'm just wondering your thoughts on utilization in the next 2 quarters going into the Affordable Care Act. Are we going to see weaker utilization because certain people are then going to be expected to gain insurance under the Affordable Care Act?
If you just talk about your thoughts on utilization in the next 2 quarters. And then once the Affordable Care Act goes into full effect on January of 2014, what potential benefits that may have for you?
Howard G. Berger
Well, they're almost both same kind of answer, Eli. What will happen in our estimation as a result of -- assuming any of this gets implemented, by the way.
What we see happening are primarily people who are otherwise healthy and who have pretty much elected not to have healthcare because of the cost, moving into healthcare programs whether it's something directly from the government or possibly some of the healthcare exchanges -- insurance exchanges. We believe utilization will actually go up, but what's interesting is we don't expect that utilization to necessarily go up in advanced imaging.
When you look at the demographics of people that are currently not insured, they tend to be younger and healthier people. In other words, not necessarily more of the senior vintage that tends to be sick or needs more of these services.
As these people start to get insurance, things like mammography or ultrasound or x-ray are likely to be more frequently utilized because they're going to see a doctor more regularly. Generally speaking, unless they have a more serious illness, they're not going to get the advanced imaging.
So in our situation, we expect there to actually be an increase in routine imaging, not necessarily in advanced imaging. But ultimately, it's the routine imaging that will bring us more referrals throughout the organization.
So we look at the Affordable Care Act as one that will drive revenue, and we expect that potentially to start ramping up in the fourth quarter of this year as more and more of the companies are faced with the decision making of how they're going to supply insurance when they were previously not.
Operator
We'll go next to Daniel English with Heights Capital partners.
Christopher Owens
This is Chris Owens, standing in for Dan. My first question pertains to the balance sheet.
It looks like that receivables consumed $23 million worth of cash in the first half of the year. Is that trend going to continue or do you expect some relief on that?
Mark D. Stolper
Yes, there's always or usually, I should say, an AR increase in the first half of the year as it relates to deductibles and sort of -- and the delay of collecting cash in the first half of the year. And as patients -- essentially, as we bill their insurance companies and they have a patient portion responsibility because of the deductibles that we didn't have to go after the patient for that.
So it delays collection of cash. Another increase in that AR is the result of our acquisition of Lenox Hill, which added a significant amount of AR from last year.
So it's a little of both of those. And we would expect a fair amount of that to reverse in the second half of the year from a cash standpoint.
Christopher Owens
Okay. So it's fair to say that you expect accounts receivable to be a net consumer of cash?
And if so, how much for the year?
Mark D. Stolper
No, I'm saying what we would expect is in the second half of the year, we often see -- if it's consumed cash in the first half of the year, we often see a reversal.
Christopher Owens
So in other words, you should be -- if accounts receivable don't consume cash in 2013, you should get an operating cash flow benefit of $23 million in the last 6 months of the year?
Mark D. Stolper
Yes, theoretically. But as we grow the business, we generally see some consumption of cash due through build-up of AR.
Christopher Owens
Okay. I guess my question is, how much cash do you expect accounts receivable to consume this year?
Mark D. Stolper
We don't know. We -- it's highly dependent upon DSOs, highly dependent upon credentialing holds and other things that are normal delays of cash if we have new doctor groups and we have to credential them or new doctors come in.
So it's not something that we can predict very accurately, which is why we don't put it in our guidance.
Christopher Owens
Okay. But you would think that working capital will decline in the second half of the year?
Given the seasonality that you mentioned?
Mark D. Stolper
Correct.
Christopher Owens
Okay. And then the second question and you guys mentioned this 10 and 3, it's -- on that callable in April of 2014 and your intent to refinance it, if the financial resources are there at that time.
And you mentioned that, that is the most expensive part of the capital structure. I guess, I would disagree.
If you look at your -- the midpoint of your free cash flow guidance and your current market capitalization, the free cash flow yield on the stock is over 30%. So my understanding is that you have $25 million available under the covenants to repurchase the subordinate part of your capital structure.
And I'm just wondering what your thoughts are on purchasing equity at this point? Repurchasing equity.
Mark D. Stolper
Sure. I agree with you that our equity cost of capital per se because of the free cash flow yield is the most expensive part of our capital structure.
In my prepared remarks, there's really discussing the balance sheet as it relates to debt side of our capital. And so I want you to be clear on that.
We do have a bucket, as you said, in our credit facility that allows for us to repurchase junior capital with cash on hand or revolver, which means that we could repurchase either our senior unsecured notes and/or equity. We have had those discussions at the Board level.
Obviously, at this point, we haven't done either. But they continue to be ongoing discussions.
Right now, our bonds are trading at 1.065, which is a consideration when we're looking at the yield on putting that capital to work by repurchasing our bonds. But it's an ongoing discussion as to what the best use of our capital is.
We also feel like certain acquisitions when we can buy them at 3x EBITDA, it has an extraordinary return on equity in those cases. So we're in a very good position here where we think we're going to be accumulating cash in the second half of the year, and we have a number of outlets for that cash, which I think will be accretive to shareholders, whether it's being put to repurchase shares, whether it's being put to repurchase debt or whether it just positions ourself to call our bonds at some point and refinance those at a much lower rate.
Christopher Owens
Yes, I just -- personally, as an owner of part of the company, if I had -- for instance, if I had 2 mortgages on my house and 1 mortgage paid 10 and 3/8 percent and was tax-deductible. And 1 mortgage I had to pay 31% on and was not tax-deductible, I would pay down the 31% mortgage as fast as possible.
And I think that's the best and highest use of capital for the company, in my opinion, so.
Mark D. Stolper
I appreciate the perspective. Thank you.
Operator
And we'll take our next question from Alan Weber, Robotti & Company.
Alan W. Weber - Robotti & Company, Incorporated
One question was, when you talked about the routine imaging, can you talk about in the core market share in the East, what percent is done in independent centers like RadNet compared to 5 years ago or 10 years ago? I'm just trying to understand kind of that trend.
Howard G. Berger
When you say what percentage is done by RadNet?
Alan W. Weber - Robotti & Company, Incorporated
Not RadNet specifically, but independent, your competitors. In other words, you made a comment several times in this call that the importance of being able to provide the routine test and being accessible is very important.
But I'm just trying to understand, over the last 5 or 10 years, in volumes, how -- what direction that has really gone?
Howard G. Berger
Well, the direction over the last 5 or 10 years has been a movement of these procedures out of the hospitals and into freestanding imaging centers, both because of access and also because of cost. That trend is continuing.
Now primarily because of the differential between what hospitals generally get reimbursed versus what outpatient imaging centers. When you get to certain modalities, for example, like Mammography, probably 90% of all Mammography is done outside of the hospitals.
As you tend to look at other procedures, it may not be quite that extensive. But certainly, for routine imaging, the vast majority of all imaging is done outside of the hospitals.
Alan W. Weber - Robotti & Company, Incorporated
And if that -- and what percent of that is done in the doctor's office or by -- I know if there's a conflict there, but it still takes place.
Howard G. Berger
Well, generally speaking, most doctors, if they're doing any kind of imaging, it's limited to just x-ray. You do have certain specialties like orthopedic surgeons and oncologists that may get MRI scanner or CT scanners.
But non-radiologists doing imaging are primarily limited to x-ray and mostly to people like internists and general practitioners. But that seems to also be a trend which is slowly being run out of the system.
Alan W. Weber - Robotti & Company, Incorporated
Which is a positive for RadNet?
Howard G. Berger
Yes, a big positive. It's also a positive for the industry, and healthcare in general, because most of the time when these are done in non-radiology centers, they're not done with the quality and with the capabilities that people who specialize in this part of the industry are capable of doing.
Alan W. Weber - Robotti & Company, Incorporated
Okay. My other quick question was, when you talk about the second half of the year, how much of a positive impact does Barnabas have in EBITDA?
Because on the first quarter call, I think you mentioned a few kind of centers that was under construction with Barnabas that I guess were losing money that should become up and running in the second half of the year. I'm just curious if it's meaningful or not?
Howard G. Berger
The 2 centers that we have that will be joined by other centers in the second half of the year are now positive in terms of their profitability and are doing extremely well. But the Barnabas relationship goes into more than just the ownership of centers.
It goes into other management services that we're providing to some of their hospitals and imaging centers themselves, as well as I discussed a whole utilization management program that we're doing with them on their self-insured employees that the employees and their dependents are now benefiting from and which we are able to benefit from also. We expect that to be a constant opportunity for improvement as the existing operations get better, but also, as the opportunities expand within Barnabas for initiatives that we are constantly looking at with them.
Alan W. Weber - Robotti & Company, Incorporated
Okay. Great.
I guess my last comment was the previous caller talking about buying back stock. And I think his comments will all make sense and hopefully, you really do kind of put the numbers on paper just to see really how much more beneficial buying back stock.
If what you talked about turns out to be correct over the next 5 years is compared to just the benefit of what you might save in refinancing. And I"m not saying that refinancing isn't the right thing because I don't think they're mutually exclusive.
So.
Howard G. Berger
Yes. I agree with you, Alan.
And as you would hopefully predict, we are looking at all options at all times.
Operator
And we'll go next with Robert Felix with JPMorgan.
Unknown Analyst
Just a very brief question. I seem to think that things that the eRAD rollout internally was supposed to have been completed sooner than it appears.
Can you comment on that?
Howard G. Berger
Sure. You're right.
It was supposed to be done sooner, but it is a complicated and a very important part of our future business needs. And we decided to dial it back, do it a little bit more slowly because we've gotten a number of comments internally from our radiologists and our employees about enhancements or things that you can only really start appreciating once you begin testing the system.
So while I think we could have rolled it out faster, I think that, that would have been ill advised for us and going the slower route will ensure longer term success and be less disruptive. That being said, we're pretty engaged in this right now in a very aggressive manner.
And while we can't make up for the lost time, we have a whole lot more confidence that the product when it rolls out, will be fully functional as we unfold it. And we expect this process to be complete probably within 9 months.
Unknown Analyst
That's a long pushback, considering the fact that you were, I think, if my memory serves me, going to save about $4 million a year, which considering the numbers, those are significant numbers.
Howard G. Berger
Well, it is significant numbers, but I'm concerned about almost $800 million of revenue more than I am with $4 million of savings. The savings will be there, but we can't afford it to be so disruptive that we endanger protecting the revenue side of this.
Unknown Analyst
That makes all the sense in the world. In other words, what you're saying to me is, you can't roll out the system and enhance it as you go along, as there are criticisms or suggestions.
Because it's been my impression that this was a fully-functional system, that you have been enhancing from day 1?
Howard G. Berger
Actually, that's only partially true. There's 2 primary -- well, 3 primary components to this.
One is the Picture Archiving side, that's PACS and that was a full product when we bought it about 3 years ago. Its counterpart, which is the RIS system, Radiology Information System, which you use for scheduling and transcription and demographics, et cetera was nonexistent.
And that we have been building now for a little over 2 years. And the third part of it is related to voice recognition, which we bought the engine for that from a company called Multimodal or M modal, and which is being integrated into this product, and which we don't have complete control of the technology and the ability for it to achieve the opportunities that we know it's capable of.
So we've been working with the company with that and then that has to get integrated into our RIS system and our PACS system. It's a rather large substantial undertaking to say the least, and also the company has been growing so we've been adding more centers and having to deal with how do we fit in all of our centers into to some cogent and operationally-intelligent rollout plan.
Operator
And that does conclude today's question-and-answer session. At this time, I'd like to turn it back to management for any closing remarks.
Howard G. Berger
I would again, like to thank, everybody, 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 and with appropriate return on investments for all stakeholders.
Thank you for your time today. And I look forward to our next call.
Good day, everybody.
Operator
That does conclude today's conference. Again, thank you for your participation.