In the past, when patients needed imaging, such as an MRI, the test was done and diagnosis performed within a hospital. The expensive overhead associated with hospital-based radiology, however, makes the industry ripe for disruption, and a small company called RadNet (RDNT 1.54%) is taking advantage of that opportunity. It already operates over 300 freestanding offices, but it's also winning business by teaming up with hospital systems, providing them with on-demand staffing or off-site diagnosis, as well as technology tools that allow them to easily share imaging in the cloud.

In this clip from Industry Focus: Healthcare, host Shannon Jones and Motley Fool contributor Todd Campbell consider whether RadNet is a stock worth buying.

A full transcript follows the video.

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Shannon Jones: Next up, let's talk about another company in the space, RadNet, ticker RDNT. In comparison to Teladoc, relatively small in scale. Also, telemedicine makes up a very small percentage of their actual business. Todd, what can you tell us about this company?

Todd Campbell: It's interesting, I hadn't spent any time learning about this company up until prepping for this show. So, I wasn't very familiar with the story. Digging into it, it's quite interesting.

What they do is, they operate freestanding diagnostic imaging centers in the United States. Historically, getting radiology or imaging done, that occurred in a hospital environment, which, of course is expensive. What they're doing is partnering up with health centers and hospitals to create freestanding units where they're majority owners, and maybe these health centers own a small minority interest in them, with the goal of being able to deliver the same service faster, better, at a lower cost. And so far, it seems to be working. They've got 341 different outpatient imaging centers that they're running right now. About 86 of those are held in joint ventures with health system partners, but they're looking to try and boost that to 50% over time.

The company does a pretty good business. The most recent quarter, $242 million in revenue. Over an $800 million run rate for the company, in terms of sales. But Shannon, the sales really aren't growing very quickly.

Jones: No. When you look at the company itself in the past, it has quadrupled in size since 2006. This has been through acquisitions, but also, it's got some organic growth. But the company is guiding for about 1-3% organic growth over the long-term. This is not going to be your high-growth stock if you are looking for one.

To your point, Todd, it's got some really interesting strategic components about it. You mentioned that it's building out the network of freestanding alternatives, which I love, especially as you have more price-conscious consumers. Think about the millennials, who are looking at prices. And now, more than ever, you have consumers who before they go into a physician, are looking at, "What kind of diagnostic test will I need, and how much will it cost? Can I compare costs from place to place?" I think this is a company that's at least starting to fill that gap, and allowing for this free-standing, lower-cost, ambulatory setting environment will help to mitigate some of that.

It's a big behavioral shift, it's a huge shift to turn, if you think about it. We're used to, when we need diagnostic imaging, MRIs, CT scans, we're typically going to go to the hospital to get that done. Going to these freestanding clinics that aren't associated with the hospital, I think there's some of that behavioral adjustment that's needed. And of course, as you know, in healthcare, any sort of behavioral change takes time. So, I think the story is compelling with RadNet, but it'll be a much slower compelling story to watch.

Campbell: Yeah. And they don't have a lot of pricing pressure, because so much of their business comes from the Medicare crowds, so they're at the whims of whatever the Medicare reimbursement rates are going to be for that next year. As far as turning that freighter, again, that's why they want to boost a lot of these joint ventures with these little hospital systems. You mentioned integration earlier, and how a lot of these different companies are trying to integrate across the whole spectrum. You've got hospital systems buying up private practices. If they're buying up those private practices, who do you think that the doctors are going to end up referring imaging to? They're going to refer to the hospital system. As a stand-alone operator, that could be a competitive disadvantage.

Now, an advantage from RadNet's perspective could be that, "We're relatively big fish in this independent, free-standing marketplace. There are a lot of small, fragmented companies that could be struggling much more than we are. We can go in, acquire these that at a relatively good price, then figure out new ways to work with these different health services providers in that area to drive sales growth."

But, again, guiding for 1-3% growth. 6% growth last quarter year over a year. Most of that's coming from acquisitions. If you look at procedure volume, on the aggregate, their procedure volumes were up 3.5%. But, again, because of acquisitions. If you look at same-center procedure volumes, it rose less than 1%. I think this is one of those steady-eddy things. Demand will increase over time because, again, aging baby boomers are going to demand many more healthcare services, including imaging. But I wouldn't expect this to be able to deliver the same breakneck growth that, say, a Teladoc might.

Now, as far as telemedicine goes, they have two products or solutions that they offer that fall within that telemedicine camp. The first is their eRAD product solution. It creates web-based cloud solutions that helps hospital systems manage their medical imaging workflow and their communications with their patients. Basically, taking that hardware and all that data out of the hospital, putting it up in the cloud so that people can more easily share and review images between different facilities or locations. Then, they also have Imaging On Call. Imaging On Call is teleradiology. They work in a couple different ways. For example, let's say that you have a hospital system that usually does its own stuff in-house, but it's got some staffing concerns it needs to fill or it gets really heavy volume in a certain period of time and they need to ramp up their ability to read through these images that they're taking. Then, they can reach out and remotely have RadNet's radiologist analyze the imagery and provide feedback. And they can do it relatively quickly. The average turnaround time is about 17 minutes, which is pretty rapid. Again, that can help hospital systems overall reduce costs by outsourcing some of that image-reading.

Jones: Absolutely. That's why you see some of the private payers becoming more aggressive in sending patients to these freestanding sites, particularly Anthem and UnitedHealth. One interesting thing that you probably won't see in the near-term, but something interesting to watch here, is that this company is actually investing heavily in artificial intelligence. For healthcare investors, you probably already know, radiology is one of the areas where AI is being invested in the most heavily. I read one stat, over 50% of the funds being invested in AI in the healthcare space are just in radiology alone. The company plans to talk more about this, and you'll probably see some acquisitions happening into 2019 and beyond. But I think this will be a really interesting space. Think about it, Todd. If I can go get a diagnostic tool like an MRI, CT scan, AI then analyzes that scan, then sends a detailed report over to my physician -- that not only saves time, but it also saves money.

Campbell: Absolutely. That's potentially pretty disruptive. We could be a little bit ways away on that, but it's one of these advances that you may actually end up seeing. And if that were to happen, if they were to launch something like that, it would certainly make me want to take another look at this company from a growth perspective, and see whether or not it becomes more intriguing to me. If you look at what they're expecting for sales this year, they came into the year expecting sales of $950-975 million for the year. They're actually now, because of a weak first quarter, because of sicknesses and weather and all sorts of things in the first quarter, they now expect $945-970 million. That's up from $922 million the prior year. Again, not gangbusters growth, but really intriguing. A company to keep your eye on.