Entrepreneurs hear the siren’s song and cannot resist its pull. It is the call to raise capital, to marshal human and technologic resources, to recruit payor and referring physician support, and then, ultimately, to bring all to bear in the launch of an outpatient imaging center.
Beguiling it is to the adventuresome, the lure of outpatient imaging as a business enterprise. And it is easy to understand why. For starters, most of the growth occurring in diagnostic imaging these days is on the outpatient side. Unlike the year 1980, when 95% of radiologic examinations were conducted in hospital settings, outpatient imaging’s share of the market today has passed the 30% mark, with no immediate end in sight to its ascent.
Credit outpatient imaging’s growth in part to aging but better informed and increasingly self-educated patients, suggests Frank Kyle, president and CEO of Outpatient Imaging Affiliates (OIA) LLC in Nashville, Tenn.
“Patients over 65 consume about three times as much imaging services as those under 65, and the ranks of those over 65 are going to increase as the Baby Boomers push into their retirement years,” he says. “Also, these consumers are more sophisticated about health care; they are increasingly interested in preventive care and early detection-services best and most conveniently delivered in the setting of an outpatient imaging center.”
Technologic progress too has fueled the growth of outpatient imaging. Imaging systems once so exotic they could be found only in academic sites now are commonplace enough that they even have a home in the offices of private-practice orthopedists and cardiologists. Thus, it comes as no surprise these days to find outpatient imaging centers able to equip themselves with the modalities necessary to perform all but the highest-end diagnostic studies likely to be ordered in any given market.
However, according to Joseph Paul, president of Cypress Partners LLC, Palm Beach Gardens, Fla-a company that owns outpatient imaging centers in Georgia, Alabama, and Maryland-as many as 75% of inexperienced operators of outpatient imaging centers are doomed to fail within 2 years of launching their first facility. Even seasoned owners can see their start-ups go south if they are not careful.
Still, many are willing to try, rookie and veteran alike, and not a few succeed. They manage to make a go of it. Take, for instance, Ken Bishop, CEO of Open System Imaging (OSI) in Palm Desert, Calif.
Bishop started his outpatient imaging enterprise in 1994 with one MR-only center that since has grown to encompass six others (a couple of which are multi-modality) throughout California. Bishop entered the game not as a seasoned entrepreneur, although he knew MR inside-out by dint of having been a clinical research technologist in the 1980s at a Southern California hospital participating in trials of MRI as an outpatient modality.
“As soon as the federal Food and Drug Administration approved MRI for outpatient settings, seemingly everybody wanted to open an outpatient MRI center,” Bishop recalls. “I had all this early expertise in it, so I began helping physicians develop those facilities.”
Bishop settled into a long relationship with one of those doctors. They parted ways in 1994. Faced with the choice of seeking employment with another physician-entrepreneur or starting a company of his own, Bishop opted for the latter.
That same year, low-field open MRI began hitting the market. Bishop correctly sensed that this innovation would lead to creation of a viable niche. So Bishop cobbled together a business plan and began knocking on financiers’ doors in search of capital-$1.4 million, to be precise.
“Because I hadn’t owned a business previously and didn’t have a huge asset base, it was very difficult to obtain the money for my first scanner,” he remembers.
Bishop tried hard to convince prospective lenders that his enterprise would be a worthwhile venture to fund. He even got referring physicians to write letters of support. But what actually proved most persuasive was the railing of a competitor who tried to sabotage Bishop.
“As one of the finance companies was calling around to check references, word reached my future competitor that I was attempting to open an imaging center,” Bishop explains. “The competitor proceeded to tell the finance company that giving me money would be foolish because I was destined to fail, that I was perhaps the worst risk they could ever take, and so forth. Afterward, the finance company called me to say they were giving me the money. The loan officer said it was his conversation with my competitor that convinced him to take a chance on me. He said, We were ready to deny your request, until we received that warning call from your rival. It was obvious that he was very afraid you were going to hurt his business-and from that we surmised you had what it took to be successful.'”
QUEST FOR ADEQUATE FUNDS
Of course, that was then. This is now, and a plucky soul like Bishop would be delusional to expect such a break in today’s far more chilly lending environment were he just starting out.
Says Paul, “Five years ago, some financial companies were providing, effectively, not only the money to purchase the equipment and do all the build-out and leasehold improvements, but, in many cases, the working capital needed to operate these businesses. Today, you don’t see anyone providing the working capital. And even the leasehold improvements are becoming harder and harder to obtain financing for. Generally, financial companies require you bring to the table some hard dollars. If you can’t manage that, then at least some hard guarantees.”
Capital-or, rather, an insufficient amount of it-is the leading cause of premature death among outpatient imaging centers, Kyle indicates.
“This is an extremely capital intensive business,” he says. “From the minute you open the doors of a new imaging center, 70% of your costs are fixed. That’s very, very high-but typical for this type of high-technology facility. Consequently, if you don’t have your project adequately capitalized on the front end, you’re much less likely to survive.”
Kyle discloses that his imaging centers typically are capitalized with equity to the tune of 25% of the facility’s total price tag. For example, if the planned imaging center will cost $4 million, partners in OIA-led joint ventures contribute $1 million in cash before launching the project.
Paul’s business partner and chief operating officer, Paul Cote, asserts that, to open an outpatient imaging center today, an owner needs funds to cover at least 6 months of fully loaded operating expenses. Twelve months’ worth would be better still because, as Cote notes, “these facilities do not turn out cash in their first year.”
A sure-fire formula for disaster is to scrimp on a center’s start-up and subsequent operations by cutting corners so as to hold down costs and make the bottom line look as good as possible. The problem with this approach, Bishop warns, is that the quality of service is bound to suffer and, when that happens, it will not be long before referrers and patients turn elsewhere.
“You can’t be penny wise and pound foolish when it comes to your technology and the people you hire,” he says.
By Bishop’s admission, he leans toward the other extreme and spends freely-but only on items that deliver a benefit in the form of increased patient comfort and satisfaction. Even at that, the bottom line for his company remains impressive owing to strict controls over the billing and collection processes. Also contributing to profitability is a willingness to invest heavily in technologies and structures that contribute to a more efficiently run enterprise.
“The greater the efficiency, the lower your costs,” Bishop says.
As Paul sees it, a most effective method to constrain costs is to involve the owner of the imaging center in its day-to-day financial operations.
“The way things are set up here, I know exactly how much money we spend because I sign every company check that goes out,” he says. “Additionally, I participate in the monitoring of our cash collections and the periodic review of financial terms we have with our vendors.”
Those controls were not fully in place when Paul’s first three Cypress Partners imaging centers debuted in 2000-a situation that resulted in harm at a critical stage of the company’s life.
“When we got started, we used an outside company to do our billing and collecting,” Paul confesses. “That was a huge mistake. The outside company was slow in getting claims processed, and, when there were errors, it was extremely difficult to get anyone in that company to take responsibility for correcting them. Consequently, our cash flow was not what it should have been. Six months into the launch of our venture, we required a cash call of $1 million to keep the doors open.”
Fortunately, Paul was able to lay his hands on the amount needed, and the fledgling enterprise stayed afloat.
“The most important step we took afterward to avoid a repeat of that problem was to bring the billing and collection operations in-house,” says Paul. “In time, our cash flow dramatically improved. By handling billings and collections internally, we have gained complete control over the process. There’s total accountability now.”
Cypress Partners operates 12 diagnostic imaging centers (each under a different name), with two more slated to open before the end of the year. The original trio were sites acquired from the company Paul formerly ran as CEO, US Diagnostic. Paul says he decided to leave his comfortable post with that outfit in order to oversee a far smaller number of centers and thus be better able to imprint them with his personal stamp.
“It’s hard to be closely involved in what goes on at an imaging center when you’ve got 300 or 400 of them to keep an eye on,” he says.
Paul today prefers to expand by adding sites within markets where Cypress Partners already has a presence. And when the company ventures into a new market, its favored strategy is to acquire an established facility. Cypress Partners customarily limits itself to adding no more than two or three centers a year.
In the business model embraced by Paul, his centers can be minority-interest co-owned by the radiologists who work in them. It is not a requirement that the radiologists be so invested, but Cypress Partners encourages it for the reason that radiologists with a financial stake in the success of the imaging center typically strive harder to deliver customer satisfaction.
COMES OUT SWINGING
With OIA, a similar business model is in place, except that it is OIA taking the minority position. The company is comfortable with a smaller ownership share because it insists on serving as the long-term manager of the centers it assembles de novo or acquires (almost always from a troubled seller)-an arrangement that assures OIA of a well-managed center, and somewhat compensates for the lack of a controlling ownership interest.
Kyle founded OIA in 2000, but he was among the earliest entrepreneurs in this arena. In 1982, Kyle helped start MedInc, Nashville, Tenn, a company engaged in the development and management of full-service, freestanding outpatient diagnostic imaging centers. MedInc went on to build and operate a network of 17 centers by the time Kyle left the company as its president and CEO in 1991. Kyle then launched National Imaging Affiliates (NIA), Nashville, which made its mark by acquiring and managing imaging centers of both the freestanding and hospital-based variety. HealthSouth purchased NIA in 1997.
A major thrust for OIA has been the formation of partnerships with teaching hospitals. To date, these include the University of Virginia, Thomas Jefferson University (Philadelphia), University of Texas-Houston, the University of Maryland (Baltimore), and Vanderbilt University. It also has other joint ventures with hospital medical centers, including Deaconess Associations in Cincinnati, and larger radiology practices.
OIA staffs each center with a seasoned administrator, a technical director, a business office supervisor, and a marketing manager. Through the corporate office in Nashville, OIA assumes responsibility for financial statements, payroll and accounts payable, financing, insurance administration, equipment purchases, RIS/PACS oversight, and billing and collections. This staffing model allows the on-site center staff and radiologists to focus on better serving patients and referring physicians, says Kyle.
To give itself an edge in the markets it enters, OIA comes out of the corner swinging by emphasizing customer service and patient convenience. Here again is Kyle: “We try to never say never as far as operations are concerned. If we have to extend our hours to 10 or 11 at night, we’ll do that. If we have to be open on Saturday or even Sunday, we’ll do that as well-whatever it takes to meet patient needs.”
Kyle also insists that every center staffs its front desk with multiple receptionists and schedulers so that arriving and departing patients can be attended to promptly.
“First impressions are lasting ones, and the front desk is the point of first contact for virtually all who walk in through the door,” he says. The same with answering the phones. “I tell my team never to let a phone ring more than three times. Picking up and answering right away communicates professionalism and ease of scheduling.”
At a Glance
Entrepreneurs weighing the decision to initiate the launch of an outpatient imaging center must consider many factors, including market demographics, utilization rates per 1,000 population, and growth trends. But perhaps the most critical element (after capitalization) may be the payor climate.
“The days of opening a center and knocking on the payor’s door to announce that you’ve arrived and are ready to do business are over,” says Kyle. “In fact, in some markets where there’s an oversaturation of providers, payors have closed their panels to newcomers. You need to understand before you break ground on your proposed center whether these panels are accessible. And, if it turns out they are accessible, you need to have a clear understanding as to reimbursement rates.”
In a small but increasing number of instances, payors are conditioning panel acceptance on whether the imaging center is full service. However, acquiescing to such a requirement can throw an enormous monkey wrench into an enterprise’s carefully mapped technology business development strategy. But not always, as Kyle can attest.
“We’ve always been proponents of full-service centers-and always will be,” he says of his company. “So, for us, it’s not a problem satisfying a payor’s demand that we have all modalities. One of the reasons we like full service is that it makes for an effective marketing tool. It’s no secret that offering mammography, ultrasound, and bone densitometry services are not in and of themselves highly profitable services. But they do bring women into the center, and it’s women who make most of the health care decisions for families-decisions on behalf of their spouses, children, and elderly parents.
“Plus, you gain more leverage andÂ make your technology investment dollars stretch farther when you agree to buy the full array of equipment from a single-source vendor.”
Bishop earlier set up one of his sites to be full service in order to satisfy a payor’s requirement. However, he soon wished he had not.
“The dollars available to pay for being full service did not cover the cost of the equipment necessary to be full service,” he offers, adding that, since then, he has refused all payor calls for comprehensiveness. “Usually, the payors making those demands want some sort of capitated arrangement. We’ve chosen not to participate in those because we’re not willing to bite the bullet.”
Bishop’s refusal to comport with payor expectations on the technology front should not be taken as a sign that he is not willing to keep his technology up to date. To the contrary, remaining as close as possible to state of the art is a key element of his company’s success.
“The goal is to put each center on a even footing with or ahead of the competition, which is why all of our MRI machines are leased, and for a period of 5 years,” Bishop explains. “The leases don’t all expire at once. But, as each one ends, that MRI is replaced with new, state-of-the-art technology-provided there is enough volume to support replacement; otherwise, we continue leasing the machine that’s there.
“We recently completed installing new, high-field MRIs in all of our centers. Doing so allowed us to double our volume without having to add new sites.”
Keeping current on technology is easier in markets where competitive pressures are not so intense. Nonetheless, in markets where the competition includes highly competitive hospitals, Kyle advises against getting caught up with them in what he terms “slice wars.”
“Outpatient imaging centers are much better at servicing the bread-and-butter business of radiology than they are at competing against hospitals and universities on a technology basis,” Kyle says. “Leave the cutting-edge, multi-slice technology to the major institutions.”
Although the vast majority of equipment purchased by OIA-managed centers is new, OIA is not opposed to recommending the purchase of fully refurbished equipment protected by warranty.
“Given where reimbursement rates are today in many markets, using refurbished, Gold Seal’ equipment can be a very smart way to go,” says Kyle.
Smart too is the practice of monitoring for quality. Bishop’s OSI centers accomplish that with use of patient satisfaction surveys. Also, a section of OBI public web site is accessible only by referring physicians and OSI staff: there, they may privately engage in discussions of quality control issues, such as imaging protocols and operations-related matters.
“It’s a forum for exchanging ideas about how to improve things,” says Bishop. “People can contribute insights gained from experience or simply ask questions of others who may have answers. Management at each site monitors these discussions, and that helps us get a rapid start on addressing identified quality issues.”
OSI, OIA, and Cypress Partners share many of the same operational approaches and yet are very different organizations. Each is doing well within its own markets and niches. If past performance is any indicator of future success-and if industry predictions prove reliable-these companies can expect to do even better in the years to come.
What Makes Sammy Succeed?
How an outpatient imaging venture is structured and financed plays decisive roles in determining its chances of success. No less important, however, are the character attributes of the entrepreneur at the start-up’s helm.
Among the most useful traits: courage, patience, perseverance, and good judgement. Meanwhile, integrity and honesty topped the list of Frank Kyle’s values.
“You need to be known as a person who keeps his or her word and is trustworthy, because those qualities are fundamental to being able to establish and maintain good relationships with people inside and outside your company,” says Kyle, president and CEO of Outpatient Imaging Affiliates LLC, Nashville, Tenn. “It’s all about references in this business. The biggest source of OIA leads for new projects and partners is the people who know us best-our existing partners, our vendors, our bankers. That’s one of the reasons I’m a big believer in adhering to the Golden Rule of treating people as I want to be treated.”
Ken Bishop, CEO of Open System Imaging in Palm Desert, Calif, has a slightly different take. In his estimation, an entrepreneur must deliver “strong, compassionate leadership that provides vision and then supply the tools necessary to carry out that vision. My vision for this enterprise is that everyone who comes into contact with it-patients and referring physicians alike-should feel they’ve been treated with greater caring and greater professionalism resulting in greater quality than they’ve known before.”
By vision, Bishop does not mean the tunnel kind.
“You have to be flexible enough in your thinking to be able to change course when your plan isn’t working,” he says. “You need to be constantly reevaluating situations and adjusting accordingly.”
Nor is it productive to be autocratic, a condition into which some entrepreneurs too easily slip.
“The people working for you need to feel they have a vested interest in the success of the enterprise; you lose that when the top decision-maker habitually ignores the rest of the team’s input,” he says.
Bishop is a devout Christian who runs his company in accordance with principles outlined in the Holy Scriptures. And, while he does not push his faith on others, neither does he hide it. For example, Bibles are among the waiting-room reading material and there is a box where patients can drop notes to request prayers be said for them or others. It might seem like Bishop’s decision to be up front about what he believes would be a detriment. It has not, he assures.
“We treat our patients the way Jesus would treat them-with utmost compassion,” he says. “Not too many people object to that.”
Rich Smith is a contributing writer for Decisions in Axis Imaging News.