RadNet, Inc. Q3 FY2021 Earnings Call

Good day, and welcome to the RadNet Third Quarter Financial Results Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet’s third quarter 2021 financial 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, our forward-looking statements within the meaning of the safe harbor. Forward-looking statements are based on 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, 2020. Undue reliance should not be placed on forward-looking statements, especially guidance on future financial 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. 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 the highlights from our third quarter 2021 results, give you more insight into factors which affected this performance, and discuss our future strategy. After our 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. Before we start, I would like to say on behalf of myself and the entire team at RadNet, we hope all of you and your loved ones are healthy and staying safe. We are truly grateful for all of our stakeholders, including our employees, business partners, lenders, and shareholders, and wish you all well during this challenging time. Let's begin. I'm very pleased with our performance this quarter. Our financial and operating metrics in the third quarter demonstrate continued strengthening and improvement in our business that began in the third quarter of last year. A number of factors are driving improving performance. First, the cost-saving measures that we implemented during the COVID-19 period in 2020 and further cost containment actions this year have lowered operating expenses and created efficiencies within our regionally clustered centers. Second, our procedural volumes have substantially recovered as many of the municipalities and states in which we operate have loosened COVID-19 restrictions. Lastly, investments we made last year and during the first three quarters of this year, both with respect to capital expenditures and tuck-in acquisitions, are beginning to contribute to our financial results. We discussed previously the extraordinary investments we made in upgrading our mammography systems during 2020 to 3D digital mammography, otherwise known as tomosynthesis. While mammography volumes have not fully recovered from COVID-19 impact, we are experiencing enhanced reimbursement from the volumes we are now performing and these newly upgraded 3D systems. Additionally, during the first three quarters of this year, we acquired 15 facilities within the New York Metropolitan market, New Jersey, and California. The newly acquired facilities had unique cost savings and consolidation opportunities with existing RadNet facilities. We expect significant improvements from their results in the coming quarters, when we have completed their integration processes. As a result of all these factors, our results during the third quarter were the best of any third quarter in our company's history. As compared with last year's third quarter, which was more heavily impacted by COVID-19, revenues increased 14.0% and EBITDA more than 19.2%, even after deducting a $7.7 million benefit we had from payroll tax forgiveness during this year's third quarter. I am particularly proud of the margin improvement we were able to demonstrate, achieving an EBITDA margin of 16.4%, higher by 0.7% from the third quarter of 2020. The margin improvement is the result of both the return of our procedural volumes to a more normalized level, as well as many of the cost-saving measures we have put in place, which have included consolidating underperforming sites and changing key operational processes, both at the center level and within our corporate support departments. Adjusted earnings were also very strong in the quarter. We've recognized adjusted net income per share during the quarter of $0.21, which favorably compares to the adjusted net income per share in last year's third quarter of $0.15. As a result of the strong performance in this year's first three quarters and the confidence we are feeling for the remainder of the year, we have elected to again increase certain of our key financial guidance levels for 2021. Mark, in his prepared remarks, will review the increases we made to our EBITDA and free cash flow guidance levels, which were outlined in our earnings press release this morning. We are particularly proud of our performance this quarter in light of the ongoing challenges from COVID-19 and its variants on our business and the entire healthcare delivery system. While we may have experienced steady quarterly improvement in our procedural volumes since the height of COVID-19 last year, certain modalities and geographies remain impacted. For example, our mammography business, which is the procedure we performed that is the most elective in nature, continues to lag behind our projections for the year. Additionally, our New York metropolitan region, which is showing improvement, continues to be more heavily-affected than other geographies and was further impacted in the quarter by hurricanes, Henry and Ida. We are optimistic that as COVID-19 continues to diminish, patients will more frequently visit referring physicians and feel more comfortable addressing health issues that necessitate the use of diagnostic imaging. Furthermore, challenges in the workforce and staffing in this difficult labor market continue to be factors in our performance. We discussed on the last financial results conference call some of the difficulties we are experiencing in hiring and retaining staff at the center level and within administrative functions. We continue to experience a tight labor market, where demand for talent is outpacing supply. Additionally, many potential workers, who were laid off, have chosen to remain unemployed. So as several subsidization of employment benefits have ended, we continue to experience difficulties in staffing. This has restricted our ability to expand hours in certain locations to work through patient backlogs and has increased the cost of recruiting and retaining staff. We are looking to address labor issues in various creative ways. This includes establishing stronger relationships with technical schools, offering special workforce incentives to acquire new talent, and implementing technologies, automation, and protocols that use labor more efficiently. Lastly, before I hand the call over to Mark, I'd like to provide an update on our efforts in artificial intelligence. In April, we announced that our artificial intelligence subsidiary received FDA clearance for its artificial intelligence mammography triage software, Saige-Q. Saige-Q is a screening worklist prioritization tool that enables radiologists to more efficiently manage their mammography cases with the use of artificial intelligence. With over 1.5 million mammograms performed annually in our markets, we are in the process of deploying this technology to our breast images nationwide. Additionally, we are also working towards the submission of a more advanced AI diagnostic mammography tool called Saige-DX, which we remain hopeful about submitting to the FDA for review prior to year-end. This tool has the promise of assisting a radiologist in detecting cancer up to two years earlier than the radiologists might be able to diagnose in the absence of this AI tool. Additionally, we believe this advanced tool will make our radiologists more productive and accurate. Outside of mammography for breast cancer, we continue to evaluate further areas of AI that can both decrease our costs and drive new revenue streams through providing innovative screening programs to large insurance companies who are interested in population health models to improve patient care. As we have communicated in our past, our interest in breast cancer lies with AI tools that can screen for the other most prevalent cancers, such as prostate, lung, and colon, and could branch out into the diagnosis of other chronic diseases. We believe that AI will make the screening tests more accurate and cost-effective, thus making them attractive to health plans seeking to create large-scale screening programs for their membership, akin to what exists today with mammography and breast cancer. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our third quarter 2021 performance. When he's finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our third quarter 2021 performance and attempt to highlight what I believe 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 third quarter performance. I will also provide an update to 2021 financial guidance levels which were released in conjunction with our 2020 year-end results in March and which we amended in both May and August upon releasing our first and second quarter financial results. 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 and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishment, and non-cash equity compensation. Adjusted EBITDA includes equity in earnings and unconsolidated operations and subtracts allocations of earnings to non-controlling interest in subsidiaries. And it's adjusted for non-cash or extraordinary and one-time events taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet Inc., common shareholders is included in our earnings release. With that said, I'd now like to review our third quarter 2021 results. For the third quarter of 2021, RadNet reported revenue of $332.7 million and adjusted EBITDA of $62.3 million. Revenue increased $40.9 million or 14% and adjusted EBITDA increased $16.5 million or 36% from the third quarter of 2020. Adjusted to remove the one-time $7.7 million benefit from the forgiveness of deferred federal payroll taxes, adjusted EBITDA was $54.6 million, an increase of 19.2% from the third quarter of 2020. The significantly improved results from last year's third quarter is a result of increased procedural volumes, cost reductions instituted during the COVID-19 period, additional revenue from our migration to 3D digital mammography, and the contribution from tuck-in acquisitions we completed during the past few quarters. Adjusted earnings, which are adjusted for one-time events during the periods for the third quarter of 2021 were $11.2 million, or $0.21 per diluted share, as compared with adjusted earnings of $8 million or $0.15 per diluted share for the same period in 2020. Unadjusted for one-time items, net income for the third quarter of 2021 was $16.2 million, or $0.30 per diluted share. This compares to net income of $6.2 million, or $0.12 per diluted share in the third quarter of 2020. These per share values are based upon weighted average number of diluted shares outstanding of 53.8 million shares in the third quarter of 2021 and 52.0 million shares, diluted shares outstanding in the third quarter of 2020. Affecting net income in the third quarter of 2021 were certain non-cash expenses and non-recurring items including the following: $4.4 million of non-cash employee stock compensation expense, $163,000 of severance paid in connection with headcount reductions related to cost savings initiatives, $2.6 million loss on the disposal of certain capital equipment, $1.6 million of non-cash gain from the interest rate swaps, $7.7 million gain on the forgiveness of deferred federal payroll taxes and $649,000 of amortization expense of deferred financing costs and loan discounts related to our existing credit facilities. For the third quarter of 2021, as compared with the prior year's third quarter, MRI volume increased 18.4%, CT volume increased 13.4%, and PET/CT volume increased 6.6%. Overall volume, taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography, and all other exams increased 15.6% over the prior year's third quarter. On a same-center basis, including only those centers which were part of RadNet for both the third quarters of 2021 and 2020, MRI volume increased 11.2%, CT volume increased 7%, and PET/CT volume increased 4.8%. Overall, same-center volume, taking into account all routine imaging exams increased 10% from the prior year same quarter. In the third quarter of 2021, we performed 2,185,956 total procedures. The procedures were consistent with our multimodality approach whereby 76.4% of all the work we did by volume was from routine imaging. Our procedures in the third quarter of 2021 were as follows: 314,870 MRIs, as compared with 266,049 MRIs in the third quarter of 2020; 189,444 CTs as compared with 167,005 CTs in the third quarter of 2020; 11,600 PET/CTs as compared with 10,886 PET/CTs in the third quarter of 2020; and 1,670,042 routine imaging exams compared with 1,446,216 of these exams in the third quarter of 2020. Overall GAAP interest expense for the third quarter of 2021 was $12 million. This compares with GAAP interest expense in the third quarter of 2020 of $11.1 million. Cash paid for interest during the period, which excludes non-cash, deferred financing expenses and accrued interest was $7.6 million in the third quarter of 2021, as compared with $8.4 million in the third quarter of last year. The lower cash paid for interest in this year's third quarter is the result of the timing of interest payment and our lower costs of capital, mainly due to the refinancing transaction in April. With regards to our balance sheet, as of September 30, 2021, unadjusted for bond and term loan discounts, we had $619.9 million of net debt, which is our total debt at par value less our cash balance. This compares with $633.3 million of net debt at September 30, 2020. Note that this debt balance includes New Jersey Imaging Network’s debt of $48 million, which RadNet is neither a borrower nor a guarantor. As of September 30, 2021, we were undrawn on our $195 million revolving line of credit and had a cash balance of $151.3 million. At September 30, 2021, our accounts receivable balance was $152.4 million, an increase of $49.2 million from year-end 2020. The increase in accounts receivable is the result of the significant increase in our procedural volumes and revenue relative to 2020 revenue, which was impacted heavily by COVID. Our days sales outstanding, or DSO, remains near the lowest levels in the company's history. Despite the increase in aggregate accounts receivable, our DSO was just 38.6 days at September 30, 2021. Through September 2021, we had total capital expenditures net of asset dispositions and sale of imaging center assets and joint venture interests of $77.9 million. This excludes capital expenditures at our New Jersey imaging network joint venture of $10.8 million. At this time, I'd like to update and revise our 2021 fiscal year guidance levels, which we released in conjunction with our fourth quarter and year-end 2020 results originally, and amended twice after reporting our first and second quarter 2021 results. For total net revenue, our original guidance was $1.250 billion to $1.300 billion. We've increased that to $1.3 billion to $1.350 billion. For adjusted EBITDA, our original guidance levels were $180 million to $190 million, while our newly revised guidance levels are $210 million to $220 million. For capital expenditures, our original guidance was $70 million to $75 million, while our new guidance is $85 million to $90 million. For cash interest expense, our original guidance level was $39 million to $44 million, while our revised guidance level was $35 million to $40 million. Lastly, for free cash flow, our original guidance levels were $60 million to $70 million, while our revised guidance range is $80 million to $90 million. As noted, we have increased this quarter our guidance ranges for both adjusted EBITDA and free cash flow. Additionally, this quarter we raised our capital expenditures level to reflect additional investments and growth opportunities we have identified in several of our core regional markets. I'll now take a few minutes to give you an update on 2022 reimbursement and discuss what we know regarding the anticipated Medicare rates for next year. As a reminder, Medicare represents about 22% of our business mix. With respect to Medicare reimbursement in July, we received a matrix for proposed rates by CPT code, which is typically part of the physician fee schedule proposal released around that time every year. As discussed on our second quarter earnings call, we completed an initial analysis and compared those rates to 2021 rates. We volume-weighted our analysis using expected 2022 procedural volumes. Our analysis of the proposal in July implied that on roughly $1.3 billion of revenue, we would face approximately a $13 million revenue hit in 2022. Upon receiving the final rule from CMS last week, we updated this analysis. The analysis shows that the cut in the final rule will be smaller than originally proposed. Our updated analysis shows that we will face an approximately $10 million negative impact on our revenues from this cut in 2022. While this news is better than what we reported in July, we remain hopeful, just like last year, that Congress in December will partially or fully mitigate this cut, particularly in light of the continuing COVID-19 and Delta variant situation. We are optimistic, however, for this possibility as a significant portion of the cut is the result of CMS decreasing the conversion factor in the Medicare reimbursement formula, which impacts all medical specialties, not just radiology. As a result, there are many lobbying groups from various medical specialties aggressively opposing the cut, in concert with the lobbying forces of the radiology industry. We hope to have more to update you about this matter in mid to late December when Congress meets. I'd now like to turn the call back to Dr. Berger, who will make some closing remarks.

Thank you, Mark. The healthcare landscape is changing rapidly. Healthcare is consolidating. New payment models are taking shape to include risk-taking and the financial alignment between payers and providers. Vertical integration is accelerating among health plans and providers, and large retailers and drug store chains are testing new models and physical locations for patient care. As the healthcare landscape changes, RadNet's business, payment models, and service offerings must also adapt. We continue to be on the attractive side of the cost curve and assist the payers in driving patients outside of the more expensive hospital environments. While it is important to create solutions to address the cost of healthcare, we are also endeavoring to impact the health and well-being of our population. For example, our interest and pursuit of artificial intelligence solutions is as much about offering widespread screening programs for the most prevalent cancers and chronic diseases as it is about increasing our own efficiency and cost savings. A big part of the future of value-based care will be tied to the ability of providers to keep large patient populations healthier and disease-free. This can occur through the design of screening programs or models of care that will both prevent disease or detect disease earlier, so that patient outcomes are materially improved and the costs of the healthcare system are effectively lowered. While mammography for breast cancer is an excellent example of a successful program, it still can be improved with better compliance and technology. We run similar programs for many of the other most common occurring cancers. This is an example of where RadNet is positioned today. I'm certain that creating these cost-effective diagnostic solutions will dynamically change the way large patient volumes are managed while driving significant new patient volumes and revenue streams into the RadNet operations. In the coming quarters, we will continue a number of initiatives to drive our growth and efficiency. Our activities will include moving the eRAD platform onto a cloud-based architecture that will benefit our workflow and create enhanced operational efficiency for our staff and contracted radiologists. We will continue to preserve health system joint venture opportunities, both newly created ones and expansion of existing relationships. We will be consolidating call centers and scheduling functions for the convenience of our patients and referral sources to create regional cost savings and efficiencies while investing in technologies that will shorten scanning times, improve the patient experience, and automate processes that are currently manual, thus allowing us to utilize our labor force more efficiently. Our strong free cash flow, significant cash balance, and low leverage and cost of capital in our company's history afford us the ability to continue our growth path. Strategic tuck-in acquisitions will continue to be an important aspect of our growth. Today, the arbitrage between RadNet's enterprise value and the multiples for which we can purchase targets is more attractive than ever. While larger targets might cause us to stretch beyond these valuation levels, they usually afford us more operating class synergies that, once achieved, serve to lower the acquisition multiples into this range over time. In conclusion, we are excited and enthusiastic about the opportunities that lie ahead for RadNet, and we look forward to updating you further in the coming quarters regarding our progress. Operator, we are now ready for the question-and-answer portion of the call.

And we will now take our first question from Brian Tanquilut from Jefferies.

Congratulations on a strong quarter. Mark, I'd like to begin with the guidance. Looking at the guidance and the Q4 slide, we typically observe a sequential increase in earnings from Q3 to Q4 due to seasonal patterns. I'm curious if this is a matter of conservatism or if there are any factors we should consider regarding the sequential trend.

No, I don't think there's anything in that which raises concerns about our fourth quarter results. The business has been strong and has been improving throughout the year, and we expect a strong fourth quarter, assuming there are no significant changes with the Delta variants or COVID stay-at-home restrictions. There might be some built-in caution in our outlook.

Okay. As I consider 2022 and beyond, what insights can you share about your outlook for 2022 at this stage, without providing specific guidance? Also, how do you view your potential to increase EBITDA? Furthermore, regarding the longer term, margins were notably strong in 2021. Do you believe you can improve margins from the current level?

We haven't established our guidance levels for 2022 yet since we are still finalizing our internal budget process. This involves analyzing from both a center-by-center and a top-down perspective, taking into account changes from 2021. We are experiencing strong growth in same-store sales. Historically, we've indicated that we expect same-center performance to grow by 2% to 4% annually over the long term, and we have surpassed that expectation this year, even compared to 2019, which was unaffected by COVID. Overall, we are optimistic about our business. However, as mentioned earlier, some areas are still influenced by COVID, notably our mammography volumes, which are about 10% to 15% lower than anticipated for this year. Mammography is particularly elective since it is a screening service, and we've observed that women are not consistently attending their annual screenings due to concerns about COVID or not visiting their healthcare providers who usually advise them. We hope for recovery in this area next year. Additionally, a specific region, the New York metropolitan area, is not meeting our budget expectations for 2021. We see potential for considerable growth there. As we prepare for next year, we expect strong same-center performance driven by the complete contributions from our acquisitions this year, especially in New York and Summit, California. We are also anticipating around $10 million in Medicare cuts, which we aim to counter with growth. We're optimistic that Congress will intervene again, as they did last December, especially since the majority of these cuts arise from a reduction in the Medicare fee schedule's conversion factor. There are concerted efforts to reverse this cut. These are initial thoughts on what next year may bring. We also won't benefit from the $7.7 million payroll tax deferral next year, leading to various influences on our results. In March, when we provide our 2022 guidance, we plan to thoroughly explain the transition from 2021 to our stakeholders.

Got it. And then, Mark, just since you touched on volumes. Just curious, are you starting to see kind of like increasing efforts again by the payers? I think some of the payers paused their efforts to shift logs out of the hospitals during the height of the pandemic. So are they resuming those efforts at this point? Or anything incremental that you can share with us, if there's a way you're seeing in that regard?

Brian, it's Dr. Berger. I'll take that one. I think we're seeing considerable renewed interest from the payers to shift the volumes away from more expensive hospitals. It's occurring in ways that might be somewhat subtle, but nonetheless, they have ramped up. For example, I can look at many of the payers, such as United, through their Optum division. And just the end of last week, CVS and Aetna announced that they're going to be ramping up the hiring of primary care physicians and increasing their in-store operations, all of which are designed to better control patient costs, not only at the diagnostic level but at the specialty level. Then we have efforts from companies like Walmart that are taking a big leap into the healthcare delivery system, both by already having contracted or bought primary physician groups and looking to expand nationally here. When you look at the overall efforts here, they are ramping up as most of these payers want to drive costs away from the hospitals and move towards vertically integrated healthcare delivery systems. Additionally, patients themselves, along with the continuing presence of COVID, are driving more patients into freestanding facilities where, arguably, the ability to provide effective safety measures is much easier. All these factors, although not leading to overnight successes, are significant changes in outpatient referral patterns.

And we'll go ahead and move on to our next question from Sarah James with Barclays.

I wanted to dig a little bit more into the staffing challenges. So have they gotten to a point where they've affected volumes? Or have you guys had to change your acceptance of appointments? And then if you could break out how you look at the costs between enhanced hourly pay bonuses or temp staff pressure, that would be really helpful.

Thank you, Sarah. It's Dr. Berger again. We have faced challenges that have required us to reduce or limit our operational hours to manage demand and backlogs. I believe there are several strategies we can implement to address this issue, which is not just a temporary problem affecting many businesses today. Staffing constraints have limited our revenue generation. Unlike other companies, we have more effective long-term solutions. One of these involves leveraging technology, including our transition to cloud-based systems and newer tools from equipment manufacturers that shorten patient scan times and enhance the experience. This will improve throughput on our current equipment without extending our operational hours. Additionally, we plan to use more efficient contact centers and online scheduling to optimize patient appointments. We are also considering partnerships with vocational schools to increase the number of trained technologists and patient service representatives at our imaging centers. The personnel we need are currently in short supply or just entering the workforce. We believe this trend will persist, but our efforts will ultimately tackle these challenges effectively. In the long run, this will enhance our revenue and margins. This is a long-term commitment from the company, with full support from both our East Coast and West Coast centers.

Can you quantify the impact that it's had, either in the third quarter or this year, either on revenue or cost side?

Well, it's hard to quantify when there's also an impact from COVID and other issues that we faced in the third quarter in particular, like the hurricanes in the New York and Northern New Jersey marketplace. My guess is that the impact in the third quarter could easily have been as much as about 2% of our overall revenue. So we believe that notwithstanding climate issues and improving volumes, we are seeing some improvement in our ability to hire people. I believe we can see that trend already turning here in the fourth quarter, which we expect to reflect in our budgets for the 2022 calendar year.

Great. And last clarification. You guys have talked about in the past the improved efficiency that your AI adds for your radiologists, and it’s truly very impressive. Do you have any stats like that about the other technology that you just mentioned, the cloud computing, the shorter scan cycles, how that might affect efficiency or the amount of staffing that you need?

It’s a little bit early. We still are waiting for the FDA approval on what we believe will be the more important impact on our efficiency tools, and that would be the mammography product that we hope to submit for FDA approval before the end of the year. We hope to get approval sometime in the first half of 2022. That, along with the cloud computing move to that kind of architecture, which will probably take another year or so, could have a dramatic impact on our radiology efficiency and will allow our radiologists perhaps 20% to 25% improved efficiency and throughput. This means that they’ll be able to handle more volume. Part of that will come from the cloud computing because we will get our prior exams almost on demand as opposed to needing to create special systems for pre-fetching those exams or having to call them on demand. Sometimes, right now, with our existing IT infrastructure, this can be very slow and lessen our radiologist productivity. These will be tools that I believe not only RadNet but the imaging industry as a whole will need in order to meet the other challenges we have, which from a staffing standpoint include not only our technologists and patient service representatives but also the hiring of radiologists. The place we find ourselves in is the ability to invest in all of these tools, which I think can be very transformative in the entire imaging industry but particularly for RadNet here within the next year to 18 months.

We'll go ahead and move on to our next question from John Ransom with Raymond James.

I have a small follow-up question. Was there any offsetting relief? Do you expect any regarding your capitation contracts due to the decrease in utilization? Or is the utilization issue specific to New York, meaning there's no offset in California?

When you mention offset, John, are you referring to the impact of lower utilization and increased profitability? In New York, the area I mentioned that is geographically affected, we have around 150,000 to 200,000 lives enrolled in the Emblem Health subsidiary, AdvantageCare Physicians. This year, I have not observed any significant changes in that specific contract regarding utilization. Last year, we experienced a notable positive effect from our capitation customers in both California and New York, as the utilization of healthcare services was so low that we were compensated roughly the same for delivering fewer services. However, this year, the utilization has returned to more typical levels. Since about 1.7 million of our approximately 1.9 million capitated lives are in California—which appears to be recovering more quickly than the Northeast, particularly the New York metropolitan area—we did not benefit significantly from our capitated utilization this quarter. Moreover, New York's size does not contribute enough to make a real difference.

Great. And just a quick question on labor. What percent of your workforce is vaccinated? And how much – assuming the CMS vaccine mandate holds, is that going to be something, hopefully not, but new to worry about next year?

We estimate, because it’s not easy for us to determine who is vaccinated and who isn’t, that at this point, somewhere around 75% to 80% of our workforce is vaccinated. As far as the mandate is concerned, that’s something we will approach towards the year-end. I’m not sure that the final word on that has really been written. I think particularly regarding healthcare workers, it’s an even more complicated issue given the difficulty in staffing and the workforce right now. I believe we’ll address the need for that, which we already have with safety measures and other systems that we’ve had in place for quite some time, as we move further into the year. We’re seeing, much like the rest of the country, improved or increasing compliance with vaccinations, and we’re ramping up our efforts to get as many people fully vaccinated as possible.

And we'll go ahead and move on to our next question from Mitra Ramgopal from Sidoti.

First, I'm curious about Saige-Q. How many locations has the software been deployed in? Additionally, how significant do you think Saige-DX could be for your mammography business, assuming it receives FDA approval?

At the present time, we have it implemented in probably about two-thirds of all of our centers. We expect, if not by the end of the year, then by the first quarter, to have all of our mammography systems onto the new platform, meaning the Saige tool or triage tool. The value proposition there is that once we get the CADx tool or the Saige-DX tool approved, that will be a much easier process for us to completely ramp up, and we are attempting to prepare for that at this time. Hopefully, the benefit that will come from that improved productivity as well as improved diagnostic capabilities will allow us to address some of our backlog we have for screening mammography, as well as it being a substantial competitive advantage in all of our markets. I believe we will have more to report on that probably by the second quarter of next year.

Okay. And then if you could just give us an update on Arizona. It's been about a year since you entered that market. I'm curious if it's in line with your expectations or doing even better. And if better, are you more inclined now to maybe evaluate some new geographies?

Arizona has been challenging for us, particularly because the centers that we bought there needed substantial capital investment, which we anticipated when we went in. The additional need we have had to staff our facilities and build new facilities has taken us a little longer than we anticipated. We're still extremely bullish on that market. We are working very well with our partner, Dignity Health, part of the common spirit system, and everyone is very optimistic about the 2022 time period. I'd say we're a little bit behind but not significantly in our ramp-up. We knew going into this new market would take time, but I believe all the elements are in place so that by the second or third quarter of next year, we expect it to be performing at the levels we originally anticipated.

And then finally, maybe on JV or M&A opportunities, if you're seeing more as a result of the still challenging environment with respect to COVID and labor pressures.

Yes. I think we are starting to receive more inbound calls, and there is a greater recognition within the healthcare community and the health systems that there are significant efforts from payers and others to move business away from the traditional bricks-and-mortar of hospitals. A number of our existing partners have other regions in which they would like us to work with them, as well as potentially new systems, and these are all part of our 2022 efforts to continue moving more of our centers into joint ventures. As I said on prior calls, we would hope that within the next couple of years, perhaps as many as half of our imaging centers will be part of joint ventures with hospital systems, as opposed to the roughly 25% or 30% that are right now. This is as important a part of our strategy as any other aspect that we work on.

And it appears we have no further questions at this time.

Okay. Again, I would like to take this opportunity to thank all of our shareholders 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 I look forward to our next call.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.