PET/CT: Market & Business Models for Ownership

PET/CT of ovarian cancer patient acquired with Siemens Medical Solutions’biograph16TM.

From stand-alone PET imaging centers to mobile units that serve rural hospitals, the PET/CT imaging business looks bright. With oncology solidly aboard and cardiology applications about to expand, some forecasts of growth in PET/CT deployment are almost mind-boggling.

Richard W. Townley is president and chief executive officer of AGI Healthcare Group, San Francisco, a radiology analysis and consultancy company that he founded in 1991. Townley says some projections for PET/CT see the modality proliferating during the next 5 years by two- or threefold over current levels of deployment.

When it comes to the number of PET/CT procedures being performed nationwide, however, Townley says that quantity is almost impossible to gauge. “There is some very suspect PET data that may not represent what’s going on because of the huge growth curve and the delay in data reporting,” he says.

Markus Lusser is vice president of global marketing and sales for Siemens Molecular Imaging, Hoffman Estates, Ill. He says the manufacturer is projecting about a 10% annual growth rate in sales of new PET/CT scanners. He says growth in patient procedures is projected at about 20% per year.

Lusser declines to divulge the company’s figures, but he says there is also a considerable market for PET/CT scanners to replace earlier deployments of PET-only scanners. The clinical case for PET/CT is so strong that virtually all experts interviewed here agree that PET-only scanners are going the way of the passenger pigeon and the dodo bird.

“PET is not the kind of thing that if you install it, they will come. It’s not the standard of care yet, even for oncology.” —Ronald Lissak Integral PET Associates LLC

“The market for dedicated PET scanners is dead,” Lusser says. “It doesn’t exist anymore. The market now is a 100% mix of hybrid [PET/CT] scanners and SPECT.”

Lusser says PET/CT is not particularly daunting to install or operate. “PET/CT is a much less-complicated [technology] than you would assume,” he says. “Now you can buy ready-made pharmaceuticals. Complexity barriers will not prevent success with the business models. The software now is much more integrated.”

As for the PET/CT business models themselves, Lusser says there are many, and they take many shapes. “We see a broad spectrum,” he says. “No one model seems to be more successful than another. What’s always important is the implementation. If the operators and the health care providers are professional, then they will succeed.”

Scott Schubert is national manager of PET/CT sales and marketing for GE Healthcare, Waukesha, Wis, another manufacturer of the machines.

As with Lusser, Schubert sees a strong growth market for PET/CT, more so than for older modalities like MR and CT, where deployment is already so broad that nearly all patients have easy access.

“What we see in most core diagnostic imaging modalities is maturity,” Schubert says. “PET is still the fastest-growing market segment for imaging.”

Schubert estimates the growth for PET/CT at 15% to 20% annually, along with matching growth rates in the number of procedures being done. More and more referring physicians, he says, are making use of PET/CT, and countless others will soon join the ranks.

Like many in the PET/CT world, Schubert appears confident that the National Oncologic PET Registry (NOPR)—which is an effort to expand the cancer indications for which PET imaging will be reimbursed by Medicare—will lead to PET/CT being more widely used than it is now.

Schubert says 90% to 95% of all PET imaging is now performed on oncology patients, noting PET’s four primary roles: diagnosis, staging, restaging, and tumor monitoring. Of indications in these areas, PET reimbursement from Medicare has been approved for only about 20%, Schubert adds; however, under NOPR, about 80% of the relevant procedures may be reimbursable.

Schubert also says cardiac indications for PET, like stress profusion studies, will lead to more PET/CT applications, as will indications in neurology for Alzheimer’s and other diseases.

“Right now, for dedicated cardiologists, there is a lot of interest,” Schubert says. “As cardiac CTA [CT angiography] proliferates, they’ll start to ask the question, ‘Does it make sense to do a combination study in both pieces of the exam?'” The potential cardiology uses of PET/CT add to the modality’s upside as a good business model, he says.

The Models

Ronald Lissak is CEO of Integral PET Associates LLC, New York, a company that forms partnerships and what Lissak calls “relationships” with hospitals and other health care entities to deploy PET/CT units. Lissak has focused particularly on forming relationships with university medical schools to offer PET/CT services. Integral PET operates 22 PET or PET/CT centers, including five mobile units, Lissak says, and the company performs procedures on about 35,000 patients per year.

“Our business models are always different,” he says. “We do relationships with universities and hospitals that don’t have the capital structure [to deploy PET]. In most settings, PET is not a big monetary gainer, but we have economies of scale.”

Lissak says that 12 marketers at Integral PET continually promote PET to physicians and health care entities.

“PET is not the kind of thing that if you install it, they will come. It’s not the standard of care yet, even for oncology,” he says. “If you go through the guidelines [at various institutions], it’s in some and not in others. Only a million PET procedures were performed last year in the United States. How many CTs were performed? Probably 20 million.”

Although the business models for PET/CT are varied, according to experts, they are essentially comprised of:

• hospital installations, including inpatient and outpatient PET/CT imaging;
• joint ventures between various entities on outpatient PET, including hospitals, radiologists, and other subspecialists—primarily oncologists;
• freestanding imaging centers that include PET/CT along with other modalities—often these might be classified as independent diagnostic testing facilities (IDTFs);
• oncology practices that provide PET/CT;
• stand-alone centers that offer only PET/CT, but these are rare;
• leasing and/or time-sharing arrangements that might involve several players, primarily radiology centers leasing to oncology practices; and
• mobile PET/CT units that serve many clients, but especially rural hospitals that do not have the volume to justify a PET/CT of their own.

“Most of our clients are hospitals and radiology groups, often doing joint ventures, and almost always off campus,” says AGI’s Townley. “Of what we do, 90% are freestanding centers.”

Townley says it is rare now that a freestanding imaging center offers only PET/CT. “We haven’t put in any stand-alone PET/CT except for an oncology group or a hospital-owned on-campus service,” he says. “It would be hard to justify. I can’t imagine putting in PET/CT in a freestanding center and not putting in an MR and other modalities. … We believe in referring entities like the one-stop shopping approach, where there are synergies. The days of stand-alone PET/CT are limited, except in the case of self-referring groups such as oncology practices.”

Townley does see a continuing need for mobile PET/CT operators, at least in the near term. “They have a place to help build volume loading and while the fixed site is built out,” he says. “There may also be a benefit with the mobile in CON [certificate of need] states. The mobile operator often will already have that CON in place.”(See “Conference Presentation Triples Mobile PET/CT Patient Volume”)

PET/CT clinical oncology image acquired on the Discovery ST PET/CT system from GE Healthcare.

Townley also cautions those who are eyeing PET/CT installations to avoid growing too dependent on referrals from a single large oncology practice when designing a business model. “The more valuable they are as referrers, the more risk you face that they will buy their own machine or want you to do a leasing arrangement,” he notes.

According to Townley, the referral volumes needed to break even financially on a PET/CT are two or three PET referrals per day over the course of a 5-day week, at least for now, using the most recent CMS reimbursement pronouncements. Other sources agree with Townley’s estimates.

The coupling of PET and CT into a scanner with a single gantry was designed to let quick, accurate attenuation correction be performed on PET images using the CT energy. However, with the current dual-gantry machines featuring multidetector CT, there is nothing to prevent the CT from being used for studies that have nothing to do with PET. The CT business as an independent revenue source, Townley says, is something that needs to be analyzed in developing a PET/CT business plan.

He points out that another advantage of PET/CT is that two scanners can be installed at the price of one imaging room, although a PET service will require an uptake room and hot laboratory. He recommends that someone intending to pursue a CT business with that half of the scanner, independent of the PET use, ought to order at least a 16-slice CT to be coupled with PET.

Saturation

Although PET/CT generally has plenty of growing room, some locations could be approaching saturation. And, as will be seen, by next year, there likely will be downward pressures coming into play for PET/CT profitability across the board.

Lynn Elliott is CEO of Radiology Associates of Tarrant County (RATC), Fort Worth, Tex, a radiology group that operates two fixed-site PET/CTs and is about to install a third at a new location in nearby Irving. But that is the only PET/CT expansion RATC has on the books—at least for now.

“It’s a little unclear how much our market is growing,” Elliott says. “In the past two and a half years, there has been an influx of competitors, and our business has flattened out. It does seem the market is growing. We’re flat, but the competitors are soaking up volume.”

Elliott says that RATC performs about 10 PET studies per day between its two current locations. “But we also lease slots out to specialist groups in town. They do four or five procedures a day on our equipment.”

He adds that the competition is coming both from oncology groups that have installed scanners and from PET/CT entrepreneurs. “The hospitals in Tarrant County haven’t installed PET, because we initially captured the market,” he says. RATC first bought a mobile PET scanner in 2000, he says, but abandoned it 3 years later in favor of fixed sites. “Our business plan changed. We wanted the flexibility to take the mobile on the road, but as it turned out, the market was so big that we never moved the mobile. We didn’t have time to take it out on the road.”

NOPR, which began patient registrations this past May, could improve PET volumes, Elliott says. But he is looking at the low end rather than the high end of estimated increases in procedures. “I’ve heard estimates of 25% to 100% growth in the market,” he says. “We’re expecting to grow on the lower end of that.”

As of now, Elliott says his company’s PET market is saturated. “Among the large-market guys,” he adds, “not many are talking about new PET opportunities.”

Standing Alone

Ruth Tesar is executive director of the Northern California PET Imaging Center (NCPIC), a not-for-profit facility sponsored by two Sacramento-area hospitals. Tesar also has her own consulting business, ImageMed Group LLC, which helps plan and manage PET/CT ventures nationwide.

Tesar notes that NCPIC may be one of the last stand-alone PET-only imaging center of its kind, because most centers have more than one modality. The NCPIC center has four scanners: two dedicated PETs and two PET/CTs, one of which is a 6-slice unit on a mobile van that visits surrounding clinics.

Well into its second decade, NCPIC has more capacity than it uses—”like almost every PET center in the nation,” she adds. She says that in a 10-hour day, a scanner could handle 16 to 20 procedures, but a lot of them get by on about four.

Although oncology indications like lung, colorectal, lymphoma, and breast cancers account for the bulk of procedures, Tesar says that cardiology indications for PET/CT are a second source of patients.

“You could essentially do three cardiac studies—a stress and rest perfusion study to see how vessels perfuse the heart with blood; a myocardial viability study with FDG that shows if there is living tissue, which has bypass surgery implications; and then the CT portion is the CTA.”

Tesar says her impression is that most PET is performed in outpatient settings. “Most PET procedures are single encounter,” she says. “The patient has only one thing done that day, and that’s a PET scan, which is more conducive to outpatient imaging.”

Market Forces

Despite saturation in some areas and excess scanner capacity in others, the outlook for PET/CT is one of growth, as PET/CT vendors and others noted earlier.

The opportunities to add scanners occur locally, but national market forces are at work that could both encourage and discourage the expansion of PET/CT.

The NOPR, by adding more approved PET indications to the Medicare reimbursement list, might increase volumes.

“I think the NOPR will give us a boost,” Tesar admits. She says Medicare will reimburse providers enrolled in the registry for PET examinations when the referring physician fills out NOPR forms before and after the PET examination. The reimbursement will take place after both forms are received and acknowledged by Medicare.

“It’s been difficult for referring physicians, because not all of their patients have [reimbursable] access to PET,” Tesar adds. Under NOPR, she says, many more indications will be Medicare reimbursable, and many more patients will, presumably, be referred for PET scans.

Tesar says that the intent of NOPR is to allow Medicare to develop evidence—via the pre- and post-scan reports—about the management decisions made by referring physicians as a result of the PET scan. Once the data is analyzed, then CMS will make a determination as to what should or should not become a routine PET indication. The NOPR is far too new, however, for its impact to be known.

Stark Laws

A second market force yet to be gauged is the inclusion of nuclear medicine, including PET, under the already-existing Stark physician self-referral laws.

According to AGI’s Townley, this CMS-mandated change will become effective at the start of 2007. For radiology, the change will most likely be a benefit, because it could prevent some nonradiologists from installing PET/CT scanners and then referring patients to them.

“We like it,” Townley says. “It gets health care focused on those physicians who are referring studies.”

Thomas W. Greeson, JD, is a partner in the Falls Church, Va, office of law firm Reed Smith LLP; he specializes in representing radiologists and diagnostic imaging providers. Greeson says the inclusion of PET under Stark will mean that at least some physician-owned nonradiology practices offering PET/CT will have to be restructured.

“But it should not prove the death knell of most of these centers,” he says. “Either the owners will divest, or they’ll make other restructuring changes. They might sell right back to the imaging center or to other investors. Most such facilities will not be shut down. You’re not going to see a fire sale on PET centers.”

NEMA Makes DRA a Priority

Along with the American College of Radiology (ACR), the National Coalition for Quality Diagnostic Imaging Services (NCQDIS), and about 30 medical groups and associations representing nearly 75,000 physicians and uncounted numbers of employees, the National Electrical Manufacturers Association (NEMA) in March sent a letter to Congress urging that legislators reconsider the deep cuts for imaging services mandated by the DRA. “We are particularly concerned that these cuts were included without any public deliberation by either body of the Congress,” the letter said in part. “There has been no analysis of the potential impact of this change in payment policy, and we fear that these cuts will have numerous unintended consequences, including potentially diminishing access to imaging services outside the hospital setting.” Bob Britain is vice president for medical products at NEMA, Washington, DC. He says the effort to roll back the DRA, or to somehow adjust the imaging cuts it calls for, could go on for a while. “All I can tell you is that this is a priority going forward the rest of this year,” he says. “This could affect where people go to have procedures. The patients might need to travel 60 miles and wait in queues.” He says the DRA was passed too abruptly. “Congress, in its need to make drastic cuts, came up with this easy solution, without any data and without any opportunity for public comment. It was done quickly behind locked doors at 1 am. It took us by surprise and blew us away.” Britain says equipment manufacturers, including PET/CT makers, are indeed afraid that sales will fall because of the DRA, although he says he cannot, for now, put a number on potential lost sales. “We’re developing a strategy on how we can work with Congress,” he says, “but there isn’t any strategy we can share right now. We’re trying to figure out what to do.” Britain says the solution could turn out to be something other than the DRA altogether. “It might be that the real solution is CMS revisiting the whole payment system. Maybe they need to relook at the whole thing and come up with a fair reimbursement system, but hopefully one that’s based on data. That might be the whole game between now and [2007]—making sure that we get the right data. Is the current cost structure well understood, and is it fair? If it turns out to be reasonably fair, then what Congress did was unfair.” But Britain says that NEMA is under no illusion that rectifying the impact of the DRA on imaging and PET/CT is going to be easy. “The reason why it’s going to be difficult,” he says, “is that if Congress wants to do something for us in imaging, and if it still wants to maintain the overall [health care] spending cap, then some other medical equipment fees or medical services will have to be lowered.” —G. Wiley

Greeson says most physician-owned centers that offer PET would typically offer other imaging modalities and have, therefore, already worked around the Stark law restrictions. Moreover, even if they have not met Stark already, many may try to find ways to qualify for the in-office exemption to Stark, Greeson adds.

Oncologists whose group practice owns a PET/CT scanner, for instance, would not have to divest if they have an office in the same building where the PET is located. The oncology group could simply change its billing to make sure the bills emanate from their group instead of from the PET center, Greeson says.

Although the inclusion of PET under Stark might not help radiologists greatly, Greeson says radiologists can still profit by making PET/CT part of the mix of services in their imaging centers.

“I haven’t had anyone tell me that the PET market is saturated, and the clinical indications for PET continue to grow,” he says. “I still believe it’s important for radiologists to have a technical component in their business model rather than professional component services alone.”

The Dreaded DRA

What worries Greeson and many others far more than the inclusion of PET and other nuclear medicine services under Stark is the projected reduction in technical fees for nonhospital imaging paid under the Medicare Physician Fee Schedule as mandated by the Deficit Reduction Act of 2005 (DRA), set to take effect at the beginning of 2007. Under the DRA, payments for outpatient imaging services are being scaled back in line with the lesser payments normally reimbursed to hospitals.

“The impact is dramatic,” Greeson says. “The Congressional Budget Office projected the cuts at $2.8 billion over 5 years. The ACR [American College of Radiology] has projected the cuts to be as much as $6 billion over the same period.”

Radiology centers are being punished for the excesses of nonradiologist imagers who self-refer, Greeson says. “Radiologists and operators of IDTFs have done nothing to encourage self-referral and the growth in imaging utilization,” he says, “but they are the ones taking the big hit. Congress really shot the victim—not the culprit.”

AGI’s Townley says that the proposed DRA cuts will reduce overall Medicare PET/CT reimbursement in 2007 by 10% to 20%. “In a capital-intensive business like PET/CT, a dollar less revenue falls to the bottom line,” he adds.

Because the technical fees for outpatient PET/CT are substantial, a cutback under the DRA could hurt PET/CT’s bottom line more than it does other modalities.

At NCPIC, where all the income is based on PET, Tesar is particularly worried. “It’s a disaster for everybody, but PET took the biggest hit,” she says. She estimates that the technical fee for a PET procedure could drop from about $2,400 down to $1,400 once the DRA goes into effect.

“That’s huge,” she says. “Most imaging centers don’t have profits in the 40% range. This is going to be difficult to absorb. We will have to change dramatically to be able to continue to provide care. This is going to be extremely painful.”

Tesar says the only thing that can forestall the DRA is if Congress reverses course and passes counterlegislation to stop it.

Although the law applies to Medicare only, Tesar is fearful that private payors will follow the government’s lead. “Payors look at Medicare and use that as a guide. It won’t be just Medicare; this [reduction] will happen for most of the population.”

Tesar says that patients will suffer in the long run because there will not be as many imaging providers to serve them, and the latest equipment will not be affordable for the providers that do survive.

“Without adequate payment, it will be difficult for many providers to buy new equipment,” she says.

“I haven’t had anyone tell me that the PET market is saturated, and the clinical indications for PET continue to grow. I still believe it’s important for radiologists to have a technical component in their business model rather than professional component services alone. —Thomas Greeson, JD Reed Smith LLP

On this point, she is joined by equipment manufacturers, who have helped launched an effort through their trade group, the National Electrical Manufacturers Association (NEMA) to roll back the DRA. (See “NEMA Makes DRA a Priority”)
Beyond pointing to NEMA, however, PET/CT vendors are reacting to the DRA with tight lips.

“I would just say that our activities are principally organized through NEMA,” says GE Healthcare’s Schubert.

At Siemens Molecular Imaging, Lusser is cautious too. “Our overall strategy is to provide solutions that reduce cost and improve quality,” he says. “We basically are in line with what the legislators are trying to do, but if we only limit reimbursement, that’s not getting at what we want. Early diagnosis saves money and lives. This is where PET/CT comes into play. Between all vendors, we are jointly trying to educate those who are making decisions. We support NEMA, which is lobbying to go against those [DRA] cuts.”

There are already cases where radiology groups have put a moratorium on new purchases until the impact of the DRA can be gauged.

At RATC, Elliott says if only Medicare enacts the DRA discounts, PET revenues will fall around 16%. But if managed care payors follow suit, the impact will be more like 30%. That, he adds, “is profound.” So Elliott’s group is treading water until the impact of the DRA becomes clear. “We really are going to minimize capital expenditures until we see how this shakes out,” he says. “We’re putting our capital expenditures on hold.”

Still, as Integral PET’s Lissak notes, “Until it’s published and the fat lady sings, nobody knows where the DRA is going to end up.”

Pamela Kassing, the ACR’s senior director of economics and health policy, says it is not clear yet if PET or PET/CT will be affected by the DRA at all. Medicare, she says, has left the pricing of the modality up to the agency’s local agents.

“We think the locally priced procedures might be exempt from the legislation—we’re not sure yet. We’re in discussion with Medicare about what we think will be included and what won’t be included [under the DRA],” she says. “We really won’t know until the proposed rules for ’07 come out this summer.”

In the meantime, PET/CT providers are waiting to see, as Lissak put it, if and how the fat lady does sing.

Tesar at NCPIC says she waivers between hope and apprehension. “Everything was going really well for PET with the new indications coming on board, and then all of the sudden, we get hit with this,” she says. “In my most optimistic moments, I want to believe that this legislation is going to be fixed. I believe in sensibility and that logic will prevail—and then, if that doesn’t happen, I’m planning for the worst.”

George Wiley is a contributing writer for Axis Imaging News.