“Diagnostic imaging, like health care in general, is a local business. We do not believe there are any significant synergies that accrue from being a national company. Once a company is of sufficient size, it receives better pricing from equipment manufacturers.” —Research Report, Jefferies & Company Inc, April 2004.

The analysts for the Wall Street brokerage firm that released the report referenced above are optimistic about growth in the radiology industry over the next few years. They see the business currently as being composed 60% of outpatient diagnostic imaging, and the rest as hospital-based imaging. They see outpatient-imaging revenue currently amounting to $60 billion annually, with the total imaging pie pegged at $100 billion. They project industry growth at 8% per annum over the next 10 years if not longer. 1

The size of the imaging pie is large enough that diagnostic imaging companies, whether they are privately held or publicly traded entrepreneurial ventures, or if they are large group-based radiology practices, are trying to slice off as much of a share of the pie as they can. For the top 20 diagnostic imaging center (DIC) operators, the combined number of US centers in operation in November 2002 was 1,140, a 31% increase over the 869 centers operated by the top 20 companies as of November 2001. 2 A 2004 report from the Health Care Advisory Board, citing statistics from Verispan LLC, Newton, Pa, puts the number of freestanding imaging centers in 2003 at 4,773. 3

The big companies are growing, but what sort of radiology are they doing? Do economies of scale, system-wide protocols, and state-of-the-art information technology systems give these companies such an edge that the smaller competitors are outclassed? What about the apparent disadvantages to sizebureaucratic cracks for things to fall through, inertia in both its senses? And what about more sensitive issues like brokerage and cherry-picking of superprofitable market segments?

Understandably, when confronted with questions like these, most of the top 20 companies approached for this story, chose to say nothing. Why roil the waters? But a handful of the larger companies did respond. This is their view of the imaging industry, mostly on the outpatient side, and what bigness in the industry means.

ECONOMIES OF SCALE

Economies of scale are the most apparent advantage to being big, and they occur on many levels and take many forms. Equipment purchasing power is an obvious example.

Karen Davis is president of the diagnostics division of HealthSouth Corp, the second largest operator of DICs in the country. HealthSouth has been consolidating. Two years ago, it operated about 140 centers, but it still owns 105 freestanding DICs, according to Davis. That is enough to get HealthSouth optimal pricing on equipment.

“Sure there are economies of scale,” says Davis. “We not only have diagnostic centers but we have rehab hospitals, surgery centers and outpatient rehab centers. Because of our size, we are able to develop strategic relationships with equipment vendors. We work very closely with the vendors to determine what is the right [modality] fit for a particular market. Then we work with those vendors to develop a communications program to get the information out to our referring physicians. We are able in advance of the delivery of equipment to communicate what the enhancement is going to be that we had not previously had the opportunity to provide.”

Davis says that last year HealthSouth completed about 920,000 diagnostic imaging procedures at all its centers. The diagnostics division employs about 1,400, not counting the radiologists with whom it contracts for interpretations.

Robert V. Baumgartner is CEO of the Center for Diagnostic Imaging (CDI), a Minneapolis-based company that operates 30 imaging centers in eight states across the country. The centers are run either in partnership with radiology groups or in joint ventures with hospitals. In either case CDI retains at least a 51% share in each center, but it encourages a 49% participation from its co-owners, Baumgartner says. He emphasizes that CDI, which is privately held, is owned by radiologists.

Baumgartner agrees that the purchasing power of a large network gives it an advantage when equipment prices are negotiated. “We have an up-to-date knowledge of the prices in the marketplace, and we know how to secure the best deal,” he says. “That’s one of those advantages where size does matter.” He also points out that CDI can secure optimal financing from vendors.

But that does not mean that equipment purchasing is imposed from the top down, he adds. “We have some preferred vendors, but we do listen to our local partners if they’ve got an equipment preference. That is really the determining factor. We just want to negotiate the best deal on their behalf.”

On the nonprofit side, some of the best deals are negotiated by high-profile, prestige entities that get cutting-edge equipment at reduced cost if they are willing to act as a test site for the manufacturer.

Michael T. Modic, MD, is chairman of the division of radiology at Cleveland Clinic Foundation (CCF). The foundation operates 28 imaging centers in nine states, including five hospitals and nine outpatient centers grouped near the main Cleveland location. Modic says about 450,000 examinations are done yearly at the main Cleveland campus, while system-wide CCF conducts about 1.3 million examinations annually. About 100 radiologists interpret in the network, he adds.

Modic says CCF attracts “a lot of the latest and greatest” equipment from manufacturers trying to perform alpha and beta testing. “Something might be here for 2 years before it’s ever commercially available,” he says. CCF gets a double advantage in such an instance, he says, because the equipment that the alpha and beta modalities replace can then be sold to CCF’s outlying centers.

Reprinted with permission from Verispan.

“It works for everybody, the main campus gets the latest stuff and the community gets something at less cost. You are your own secondary market, so you can take advantage of capital assets,” Modic says.

But he emphasizes that despite its size, CCF must carefully justify its equipment purchases.

“If I want a piece of equipment, I have to make the case that it will improve clinical care and that the purchase will be financially responsible, so I have to develop a business plan that is peer reviewed. The big advantage we have in radiology is that if we can show that it makes sense on the care level, it is almost certainly going to make money. Radiology would be hard-pressed to think of something that wasn’t financially sound.”

Still, as an example of thoroughness, says Modic, CCF has carefully analyzed its delivery of mammography in order to highlight those locales where conversion to digital imaging can pay for itself, and those places where it is not practicable.

“We are making the case that screening can be performed better with digital mammography where there is high throughput, and we have converted all our chest rooms to DR. But in other places, we are using film and CR,” he says.

Supplies are subject to the same economies of scale as equipment.

Ronald Lissak is owner and CEO of Integral PET Associates, a New York-based company that operates 35 PET and nuclear medicine centers in five states, many of them as joint ventures with hospitals.

“We become a low-cost provider because of our size,” he says. “We have been able to get lower costs on our isotopes, as well as equipment.”

Still, he says, Integral must market its PET machines intensely. “PET is still the unknown modality,” he says. “We have 11 representatives that market to physicians similar to the farmer model. PET is not something that you install and they come. You have to market it to them.”

Lissak says he will not open a center without a local ally. “It’s all a local business, it doesn’t matter where it’s controlled from. I want a champion when I open a center. If you don’t have that local champion, you won’t succeed.”

MARKETING AND CONTRACTING

It is hard at times to separate what might be called an economy of scale from simply an advantage assignable to size. Marketing of services and negotiating contracts with payors are areas where size likely does convey an advantage. And the two can go hand in hand.

What is interesting is when the marketing strategy of one provider attacks the efforts of another.

Fred Gaschen, MBA, is executive vice president of Radiological Associates of Sacramento (RAS). RAS is a privately held, for-profit company that operates 18 imaging centers and six radiation oncology centers, and interprets for six hospitals in north central California. Built around a radiology group, RAS owns the technical component of most services it provides, including MR, CT, PET, nuclear medicine, general x-ray, ultrasound, and mammography. It has about 70 radiologists in its network and employs roughly 800 people.

Gaschen says many competitors have tried to focus solely on high-end modalities like MRI and CT, and to siphon that lucrative business out of the Sacramento market, which contains about 2 million potential patients. RAS has designed a countering marketing strategy that emphasizes its breadth of services, Gaschen says.

“There are a lot of payors out there being hit up by the [MRI and CT] broker networks,” Gaschen says. “We point out to insurers that what they really need is the full complement of services.”

He says competitors often offer MRI and CT at rates less than 100% of Medicare reimbursement, in an attempt to corral that market segment. RAS points out to insurers that the alternative is that they have to go to a hospital for the other radiology services. Rates for those services will be much more expensive, the insurers are told.

“I tell them I’ll sell them MRI and CT at the same rates, as long as they pay me 125% of Medicare for mammography, plain film x-ray, ultrasound, and the other modalities,” Gaschen says. “But I tell them I will do that only if they give me 100% of their business.”

Gaschen says the payors counter by offering to pay 100% of Medicare for all services. “But then they’ll take MRI and CT elsewhere, leaving me with 100% of Medicare for all the other. That doesn’t cut it, because I lose money. It costs me more to deliver this low-margin or no-margin business. I’ll give them a rate they’re comfortable with to get all their business. Then I make money on all my lines of business.”

What makes this strategy work for RAS is that it can offer the payors subspecialization. “I can guarantee that 95% of their neurological imaging is read by a neuroradiologist,” Gaschen says.

“Surprisingly, quality does count!”

But Gaschen points out that big companies can be at a disadvantage with single-magnet entrepreneurs who attack small market segments.

“Size means a better infrastructure,” he says, “of which marketing is a part. So larger networks have more money to spend on marketing. However, some of the smaller MRI/CT centers have an advantage here in that they are marketing to a very focused group of referring doctors. Most of the small groups have one marketer per magnet, and they develop relationships with a small number of referrers who feed the machine. They get in an office once a week, whereas maybe we get in once every 3 weeks.”

HUMAN RESOURCES AND IT

But, as Gaschen infers, big companies probably do have an edge in the sheer numbers of marketing people they deploy to sell advanced marketing concepts. More employees translate into more talent, and that is a common theme with the big companies when it comes to not only operations but also delivering patient care.

“All of our marketing representatives participate in weekly conference calls,” says HealthSouth’s Karen Davis. “You’re learning from people who come to the table with a different skills mix, and for that reason we are able to share good ideas and develop educational classes that are important to our [referring] physicians.”

Size attracts talent too. Davis calls it a “depth of resources.” “You have incredible talent if you’re looking for policies that go across the different areas, whether it’s patient care or vendor policies or whatever. Our division is truly a team, and we formulate policy from a grassroots standpoint, so you do have a lot of resources to pull on.”

CDI’s Robert Baumgartner makes the same point with regard to administration. “As you get larger, each of your administrative areas can be a little stronger,” he says. “You can hire a good CFO and a good IT department to support that infrastructure. You can develop a common-theme marketing effort that you customize for the local market.”

Cleveland Clinic Foundation’s Michael Modic says size creates its own momentum. “Size is at some level an enabling factor. We are forced to invest in systems that are scalable (demand-sensitive) in a flexible infrastructure. If we are going to work with another imaging center, we can extend our infrastructure, both administratively and in IT, on an incremental basis,” he says. “By that I mean PACS, the archive, telecommunication. We can extend on a reasonable incremental basis our processes, so that all the different hospitals and the outpatient centers adopt and develop the same infrastructure. It is more productive, efficient, and cost-effective.”

Indeed, the big companies count their PACS networks and other IT installations as advantages not only in administration and billing but in patient care, because of the obvious benefit of subspecialized interpretation and the rapid delivery of images and reports to referring physicians.

Baumgartner says CDI is careful to maintain local autonomy in most areas, but it imposes on all its centers the same centralized PACS/RIS information system. Individual centers can order modalities based on local need, but they can not set up their own IT systems.

“We do use the same IT system throughout the company, and it’s totally integrated,” Baumgartner says. “We use the same central archive for all 30 centers. It has double redundance and it never goes down.”

PATIENT CARE

IT systems, subspecialized reads, the latest equipment, local focusall reasons the big companies say they deliver optimal patient care.

“In Sacramento, there’s only one organization that provides CAD at all its mammography sites, and that’s us,” says RAS’s Fred Gaschen. “There is literature that says CAD can detect 20% more cancer, so we use CAD on every single mammogram that we do. So again, quality does figure in insurer’s decisions.”

The big providers argue that the same ability to deploy imaging on a broad scale gives them the ability to deliver the best care on a broad scale.

Patricia Whelan is vice president of information technology for Shields Healthcare Group, which operates 18 outpatient DICs in Massachusetts and a single center in Rhode Island. Shields concentrates almost entirely on offering MRI, often in joint ventures with hospitals. It has 10 radiologists on staff but uses the services of about 90 others, Whelan says. It completes about 140,000 examinations per year.

“We have an e-business strategy,” says Whelan. “We have an express link that sends reports and images via the Internet. But we also offer online CMEs, and research links and images. We can invest in technology and in people. It’s our ability to send people to SCAR meetings and to training classes and seminars. A lot of big companies like us develop models of best practices…We have developed center procedures. We have documents that cover everything from breaking ground for construction all the way to opening day.”

Whelan says Shields markets to referring doctors by using a research focus rather than a “pounding the pavement” approach. “We do a lot of lunch ‘n’ learn programs, where we teach the latest advancements like breast MR and PET.” Shields operates a single mobile PET van in addition to its MRI units and a handful of CTs.

PONDEROUS BEINGS

If the big companies have a disadvantage, say those who run them, it is that they are less flexible than small entities. Change is more difficult for them because responses have to flow through so many levels of personnel. Staff turnover, inevitable for big companies, presents problems that small entrepreneurial companies may not face.

“We lose our mom-and-pop ability to take care of all our customers,” says RAS’s Gaschen. “The single imaging center, they can change. For me, I can’t do that. I’ve got bureaucracy, I’ve got policies, I’ve got 45 receptionists and 35 schedulers. You do start to lose your ability to provide personalized services. In the end we can’t compete with the single center in giving the referring doctors exactly what they want. If the single centers are at 95% [meeting demands], we’re at 90%.”

CCF’s Modic agrees that there are disadvantages for big companies “in changing the way you do things, and dealing with issues of scale.” Big companies are “a very complex operation,” he adds. Yet, he makes the case that big companies can survive and prosper because of size also.

“We make decisions as an enterprise,” he says. “One of our mottos is Act as a Unit. We have a modified communism here. Those areas that are revenue winners are used to supplement the patient-critical areas that are revenue losers.”

This is an instance in which size does deliver on the patient care side, Modic says. “You can be more efficient if you have size. To me, it’s all about systems. There are inherent advantages to consolidation in health care, and imaging is part of health care. One of the inherent advantages is better care.”

GROWTH AND THE FUTURE

Like the Wall Street analysts quoted at the beginning of this story, all those who responded to this story see imaging as continuing to be a growth industry, despite the rush of entrepreneurs and nonradiologist doctors onto the landscape.

“There are local dominant companies, and now we’re living in a world of regional dominants,” says Shields’ Whelan. “I don’t see that [same domination] taking place on a national level. The ones that have tried to establish national chains have had difficulty. There is something to be said for understanding the local culture, having somebody who knows the way to the center. Trying to make radiology look like the airline industry is going to be hard to do.”

Even the big players are cautious about how they grow. “We’re not in this to lose money,” says CDI’s Baumgartner. “We do look at profitability by modality, and if a particular modality doesn’t add to our whole offering, then we will consider if we want to continue offering it. We won’t continue to offer a service just to offer that service.”

HealthSouth’s Davis characterizes the industry as having good growth and bad growth.

“Every insurance payor that I go to talks about the increasing cost of radiology and imaging services,” she says. She tells payors that some of the growth in imagingan element of what she calls the good growthis saving them from paying much higher bills for surgery, employee downtime, and the like because high-tech imaging and correct diagnoses have cut those costs.

But Davis says there has been bad growth in imaging because of a too high rate of utilization, brought on, she contends, by nonradiologist doctors doing their own imaging and sending their patients in for that imaging. Studies have shown, she says, that “diagnostic procedures by radiologists” have grown at a 3% rate, while procedures and costs by nonradiologist imagers have gone up at a 40% rate.

“The physician who has ownership in a facility also has the ability to order a procedure, that’s where you’re seeing the growth come from,” Davis says. “My radiologists couldn’t order a procedure if they wanted to. We’re not the ones driving the costs up.”

Nonetheless, she says, payors remain focused on utilization and on driving down reimbursement rates to cope with the increase in utilization. This presents a threat to all health care companies, including a big company like HealthSouth, Davis says. “Payors are wanting to cut costs, and they’re wanting to do it by fees per scan or reimbursement per scan, when my costs don’t change. Driving down a reimbursement number, that’s not the way. You need to look at utilization and control costs through utilization.”

Despite hurdles like this, imaging companies, even the big ones, have to find a way to keep growing, or they might fade away.

“I don’t know that big is what dictates your survival,” says Davis. “I think it’s quality of care and delivery of service… It will be interesting to see, because as capital dollars continue to dwindle down, I don’t know who will be in it in 5 years. It’s a whole different group of players for the most part than what were here 5 years ago.”

The pressure is on everyone. “We don’t grow to survive, we try to survive growing,” jokes CCF’s Michael Modic. “But any business is built on simple economics. Expenses will increase unless you can drive costs down and quality up. But health care has such a small margin. A good hospital is making a 6% margin. A traditional business wouldn’t look at that. With that small a margin, you have got to grow.”

Productivity Prudence

Productivity of radiologists, how fast they may be asked to interpret images in order to maximize patient flow, is a sensitive issue.

Most of the representatives of big companies interviewed say their radiologists are on contracts that pay by the read and that the radiologists can work at their own speed.

“I wish we were so busy,” says Integral PET’s Ronald Lissak, when asked if his company sets productivity standards.

Cleveland Clinic Foundation’s Michael Modic says there is simply too much variability in image type and the individual radiologist’s style to make such standards practical.

“Different people read at different speeds,” he says. “The difference in RVUs (relative value units of production) may change by a factor of five between the specialties.”

Even at Radiological Associates of Sacramento where radiologists are on salary, productivity standards do not come into play. “Some radiologists can relate to referring physicians especially well, and they help to keep the practice going by keeping our business,” says RAS’s Fred Gaschen. “Their productivity may be less than their peers in the group, but they may actually be performing to a better standard.”

But Gaschen suggests another reason why it is dangerous for a company to officially state or impose productivity standards. If a radiologist operating under the pressure of productivity standards makes a mistake in diagnosis, lawyers will jump all over it.

“There are no publicly recognized adiologist productivity standards,” he says. “If you could develop standards, it might open you up to medical malpractice lawsuits based on overwork. Also, there are too many variables in a radiologist’s workload to be able to compare one to another. Do they have PACS? What is a work day? 8AM to 5PM, or 7AM to 6:30 PM? Call?

The “K” Word – Kickbacks

Both the American Medical Association and the American College of Radiology have ethical sanctions concerning kickbacks. Radiologists should not pay referring doctors a hidden fee when imaging business is sent to them.

Yet, “don’t-quote-me-but” stories about kickbacks in radiology are not unusual to hear.

“There are suspect arrangements,” says Shields Healthcare Group’s Patricia Whelan. “Maybe you don’t see straightforward kickbacks, but there are certain arrangements I question if they are legal. They say, ‘We pull a magnet up to your building, you send us patients, and we’ll give you 10% ownership.’ They say they leased time to the building, but who is sharing in the technical component?”

At HealthSouth, which is weathering many legal storms, diagnostics division president Karen Davis wants to talk about kickbacks.

“That’s something that’s very important for us to address,” she says. “The point is that we absolutely do not do them. We have a very strong corporate compliance policy that regulates exactly what we can do for a [referring] physician. We have a lot of physicians who will say, ‘If I send you scans, what can you give me?’ The response is ‘I can give you a quality scan back that you can use to diagnose your patient.'”

Davis says HealthSouth may host a “bagel breakfast” at which referrers learn about new imaging products or procedures, but she is adamant about the fact there are no kickbacks.

“We don’t do anything,” she says. “It’s real hard, because I cannot say that’s the behavior that is honored and respected by everyone and in every market. But if a kickback is the only way I can get a physician’s referral, then I don’t want it.”

Davis contends that physician service agreements in which referring doctors pay radiology companies fees for time on a magnet up front and then bill payors for technical services on the imaging are ethically questionable and akin to kickbacks.

“I don’t know if it’s a kickback, but it allows a physician to make money off a scan when he doesn’t have the risk of the equipment. He buys it from the vendor who performs the scan and sells it to the insurance company. He has no risk in there. But he bills a larger amount than what he paid for it,” Davis says.

“That’s just not something that we do,” Davis says, “and it’s not something that the insurance carriers want.”

George Wiley is a contributing writer for Decisions in Axis Imaging News.

References:

  1. Radinsky EJ, Lepore TJ. Diagnostic Imaging Companies Industry Fundamentals. High Yield Research Corporate Report. New York: Jefferies & Company Inc; April 2, 2004.
  2. Verispan Diagnostic Imaging Center Profiling Solution, November 2002
  3. Packard SD, Koppenheffer M. Future of Diagnostic Imaging: Strategic Forecast and Investment Blueprint. Washington, DC: Health Care Advisory Board, The Advisory Board Co; 2004.