Suppose a new structure for radiology could be implemented that would provide greater autonomy and compensation for radiology staff and managers, enhanced job satisfaction, improved patient service, reduced unit costs and increased profitability, access to capital for needed equipment and facilities, security and income for radiologists, and greater market penetration and success for the hospital. Many forward-thinking hospitals will accomplish all of the above by adopting a new model, the medical imaging business subsidiary (MIBS). Before delving into how and why a MIBS can provide these benefits, it is important to understand what it takes to make radiology a successful business. See Table.

Keys to Success

The radiology services in hospitals must evolve to a much more efficient and competitive model in order to maintain their historical contribution margins. As Miller, Jennings, and Matema said in their recent book, Changing Health Care: Creating Tomorrow’s Winning Health Enterprise Today, “Few organizations today can survive and prosper in the midst of the health care revolution without undergoing transformation, without creating entire new businesses, without inventing new processes, new management systems, and new ways of seeing the future.”

Those who survive in the hospital-based radiology field will have achieved three key goals. First and foremost, they must become more efficient. Efficiency is not only a hallmark of the most profitable organizations, but also a critical component of superior customer service., Southwest Airlines, Dell Computer, and Federal Express are but a few of the best in business today, each delivering added value at a reasonable cost. Companies we associate with top-notch customer service are also models of efficiency. Efficiency drives unit cost reduction and increased profitability. It is also a key contributor to employee satisfaction and morale by leveling workload and reducing unnecessary tasks. Radiology services are finally realizing an integrated information systems solution that will create the opportunity for increased efficiency and accuracy. Picture archiving and communications systems (PACS), digital imaging, voice recognition technology, radiology information systems (RIS), Internet, and telecommunications are combining to streamline the diagnostic pipeline. Efficiency is the razor’s edge that always needs sharpening.

Second, hospitals must create and market a consistent competitive advantage for their services. To do this, they must understand and examine their products. Product differentiation is absolutely critical to success as a competitive business. Radiology, however, is fast becoming a commodity in today’s competitive health care marketplace, causing the continual compression on pricing. How do you differentiate a commodity product? It is enhanced service that creates real value to the customer. In radiology, service is not just the report or image produced but rather the whole customer experience from scheduling through having the procedure to reporting the results.

One of the realities of the US health care delivery system is its regional competitive nature. At least for now, this means a local hospital does not have to compete with German engineering, Japanese or Taiwanese costs, or even the Mayo Clinic definition of quality. It only has to be better than its neighboring competitors. How much better? In order to overcome loyalty to the competition, a radiology department must be able to demonstrate and sustain superior service, quality, and value. This is product differentiation. In radiology this means ease of scheduling, convenience, no-hassle service, facility aesthetics, current technology, friendly and efficient staff, prompt reporting and consultation, and an accurate and professional diagnosis.

Is that the way it is in most hospital radiology departments? Delays in scheduling with backlogs in many modalities, interminable phone waits, poor access, outdated facilities, long patient waits in registration or radiology, retakes, employees with bad attitudes, inconsistent interpretation, and long reporting delays often characterize the experiences of patients and referring physicians. Hospital information systems are usually not designed to improve customer service, identify market opportunities, or enhance throughput. Rather, these systems are designed to capture charges, pass accreditation surveys, and produce voluminous financial and statistical reports that go unused.

The third key to ensure success is autonomy. The administrator and radiologists need full responsibility and accountability for the business to succeed. Capital resources may be needed to compete effectively, as well as properly trained personnel who can accept and deliver on the commitment to quality, efficiency, and service. Does such a business environment exist in your department today? Probably not. In all likelihood, you are fighting for capital and living with staffing cuts that always result in diminished customer service and loss of radiology revenues. The competition for capital resources is cutthroat within many organizations regardless of the potential for increasing revenue or reducing costs. Hospital staff in finance, marketing, payor contracting, and information systems are always elsewhere working on the big picture.

A New Model for Hospitals

Our analysis of hospital revenue and cost information identified the average radiology department as generating approximately $12 million in charges and $7 million in net revenue. Larger departments generated $20 to $60 million in net revenue from technical fees alone. What business of this magnitude would ever be allowed to run without the necessary resources to succeed?

In order to change the paradigm, radiology administrators and radiologists must rethink their approach to their business. If ever there is a case for thinking outside the box, this is it. Hospital-based radiology is big business, by some accounts as much as $75 billion per year, and should be treated as such. The MIBS model is an innovative way to structure a successful radiology business. MIBS changes the provision of radiology services by establishing a service business that is separate from the hospital.

There are a variety of reasons for such an approach, including improved accountability, better capital access, and the autonomy to deliver the most cost-effective and value-driven service. The MIBS will market directly to consumers (referring physicians and patients) and relationships are developed with physician practices and other hospitals to provide direct technical, professional, and/or management services.

The objective of setting up a MIBS is to dominate the market by providing the majority of all radiology services, regardless of service location. This means contracting, acquiring, developing, and managing the strategically important business segments. What has been seen as competition for hospital-based services should now be seen as an opportunity to acquire or manage. Physicians enamored with the additional income potential of radiology services may soon look to you for assistance in managing their service or even to have you acquire the imaging component when things go wrong or costs spin out of control.

The focus of the MIBS should be solely on growing the diagnostic imaging business in order to optimize efficiency and gain economies of scale. This focus on growth requires a marketing plan and a dedicated marketing staff to develop both inpatient and outpatient referrals. Maximizing the use of high-cost equipment is essential to profitability in radiology services, because the net income per procedure increases dramatically once volume covers the fixed costs.

Management requirements

The MIBS management should be committed to the business of radiology with sufficient staff to properly manage its growth and costs. A dedicated chief operating officer, financial officer, information systems officer, marketing director, and medical director are essential to proper management. This is a business that has many informational and operational needs as well as financial complexities that require the attention and undivided focus of dedicated managers to succeed. The radiology department has long been a victim of a leave well enough alone mind-set among administrators. Unfortunately, well enough is not a viable strategy in the health care market in which most hospitals compete.

The management of the new MIBS should be accountable to a board of directors with representation from hospital administration, radiologists, referring physicians, and business leaders from the hospital’s board of trustees. A business plan with appropriate budgeting and achievable goals is mandatory before implementing this model. Market share penetration, reimbursement, and competitive forces should be clearly understood with strategies planned and measurable objectives adopted. Performance standards are essential as a benchmark for physicians and staff alike.

The MIBS can provide for profit sharing and innovative compensation arrangements for staff and managers based on productivity, profitability, and customer service. Managers in most for-profit businesses are rewarded on the basis of the performance goals set by the board. However, in hospitals, this approach has not been used because of the difficulty in establishing performance standards among the diverse departments, some of which are cost centers and others of which are revenue centers. The MIBS model allows technologists, as well as managers, who may have reached their salary caps in hospitals to continue to benefit and grow in a competitive environment. In order to promote teamwork, productivity, and superior customer service, all employees should participate in some form of incentive program so that everyone can benefit from working together as a team.

An integrated model is important because the MIBS cannot be a stand-alone business. Information interfaces with the hospital information system will still be required. Inpatient and outpatient services need to be jointly managed to maximize utilization of resources, reduce conflicts of interest, and serve the patients in an efficient and caring manner. Service to departments such as nursing, the emergency department, and the intensive care unit must be improved and those departments should be treated as customers. Relationships with other hospital departments such as purchasing, finance, and housekeeping can continue as long as they function to improve service and control costs.

Access To Capital

Access to capital is critical to the MIBS model. If access to capital is blocked for operational expansion or new equipment and facilities, the mission will be compromised. Each capital decision should meet three tests: 1) will it improve patient care or service, 2) will it strengthen the bottom line, and 3) will it pay for itself in an acceptable time frame? Traditionally, radiology has been a big consumer of capital and has often used a significant share of the annual, hospital-wide budget just to remain current and competitive. But in most cases, for at least the last quarter century, those capital dollars have generated an impressive return on investment.

According to the December 1999 Phoenix Lending Survey, “The health care industry has sunk to a new low in the eyes of commercial lenders, with 85 percent saying they would not lend to a health care concern.” For a MIBS, however, capital may be more readily available. Health care financiers, including lessors and banks, look for opportunities to lease or finance new equipment and facility improvements and will often provide additional capital for operating and start-up costs. The MIBS must show a history of revenue, cash flow, and income performance in order to support a financing proposal. Usually financing can be structured off the balance sheet of the hospital, even if it is a wholly owned subsidiary. This allows access to capital separate from the capital budget of the hospital, freeing up resources for other system needs.

The MIBS can, and probably should, include radiologists as investor partners. This serves to align financial incentives, involve radiologists in planning and capital decisions, and improve commitment to patient service and bottom-line performance. Radiologists and hospitals can structure their arrangement in a variety of ways so as not to run afoul of Stark II rules. In addition, the organizational relationship for providing hospital services must be carefully planned with legal counsel to avoid Medicare and IRS prohibitions.

Hospitals have been slow to adopt new ways to deliver service unless the benefits clearly outweigh the costs and risks. This model offers the tools to show that the benefits do outweigh the risks. Maintaining the status quo may be the worst possible path for radiology departments, radiologists, and hospitals. Often administration does not understand the value and contribution of the radiology service to the organization as a whole. The benefits must be demonstrated for all concerned.

By setting up a MIBS, the hospital does not lose the value of or income from the radiology service. The MIBS financial statement will continue to be consolidated with the hospital’s financial statements just as would those of any other controlled entity. In fact, its value will be enhanced if the new entity is planned and executed properly. Radiology is a front-door service that will often generate other patient services and income (eg, laboratory, physical therapy, surgery, and admissions) based directly on the results of diagnostic testing.

The MIBS forms a win-win structure that provides security and income for radiologists while achieving greater market penetration and success for the hospital. Obviously, this is not an overnight process. Nor is it an all or nothing proposition. Any efforts to begin to treat the radiology service as a business, even though not a separate one, is a positive move because it will increase autonomy, access to resources, and commitment to a more financially and professionally rewarding future. Discussions of this model among radiologists and administrators can lead only to a greater awareness of how radiology should operate to stay competitive and profitable.

Robert A. Maier [[email protected]] is president & CEO of Regents Health Resources, LLC, a medical imaging consulting and development firm with offices in Brentwood, Tenn, and Oakdale, Calif, and a former hospital CEO and CFO.

Willis S. Sanders III [[email protected]] is chief operating officer for Regents and is a former hospital CEO and radiology practice administrator.