High volume and low costs will help defray slimmer margins.
In late 2005, Congress passed the Deficit Reduction Act (DRA), and in early 2006, President Bush signed it into law. This new law took effect on January 1, 2007. Although there were many aspects to the new law, the changes it brought to radiology have forever changed the basic landscape of imaging.
From 2000 until 2005, general inflation was running at about 3.4% per year, but overall health care spending was inflating at about 5.5% per year. In 2005, MedPAC reported to Congress that imaging expenses were growing twice as fast (more than 10% per year) as general medical services. In fact, imaging expenses were growing much more rapidly than any other service paid under the Physician Fee Schedule (with “high-tech imaging” such as MRI, CT, ultrasound, and nuclear medicine leading the pack). A recent report (based on 2002 data) indicated that government (national, state, and local) currently is paying about 56% of our society’s total health care expenditures. With the 77,000,000 Baby Boomers starting to receive Medicare in 2011, our unfunded future obligations for Medicare alone have been estimated (in 2008 by the Heritage Foundation) to be about $36,300,000,000,000. In 2007, the International Monetary Fund estimated our Gross Domestic Product at $13,800,000,000,000. Simply put,it would take 3 full years of our entire Gross Domestic Product merely to fund our future unfunded obligation for Medicare. This is not realistic.
There are many definitions of bankruptcy, but one of those definitions is that when your future obligations exceed your future ability to meet these obligations, you are functionally bankrupt. Using this as a definition, we as a nation are currently bankrupt from Medicare alone (without even talking about Social Security and other entitlement programs). Our politicians have clearly promised more to the voters than they can actually deliver.
The status quo for Medicaid is clearly unsustainable, and someone will have to take a significant hit. There are only three candidates potentially available to take that hit:
1) Taxpayers—Payroll taxes would have to be increased.
2) Beneficiaries—Benefits would have to be reduced.
3) Providers—Reimbursement for medical services would have to be cut.
With these sobering facts in mind, Congress looked at the situation in 2005 and decided to cut reimbursement for outpatient imaging. One of the mechanisms they chose was the Deficit Reduction Act. Unfortunately, most commercial payors will follow Medicare’s lead and also cut reimbursement for outpatient imaging.
What the DRA Actually Does to Imaging
Prior to the DRA, outpatient imaging done in a physician’s office or freestanding imaging center was paid under the Medicare Physician Fee Schedule (MPFS). This fee schedule is based on the resource-based relative value units (RVUs) initially described by Professor William Hsiao, PhD, and developed by the Relative Value Update Committee (RUC) of the AMA with input from national medical specialty societies.
Payment for imaging done in hospital-owned outpatient imaging centers was done under an entirely different mechanism, using the Hospital Outpatient Prospective Payment System (HOPPS). This is a straight fee schedule and is not based on relative value units. In general, the HOPPS payment for the technical component (TC) of imaging procedures is similar to the Medicare Physician Fee Schedule except for CT, MRI, ultrasound, and nuclear medicine. In these four modalities, the payments made using the HOPPS fee schedule are typically less (but not always) than payments made using the MPFS.
The DRA states that payment for the TC of all imaging will be the same in physician’s offices, independent diagnostic testing facilities (IDTFs), and hospitals. That payment will be the lesser of the MPFS or the HOPPS. Radiologists tend to think that HOPPS payments are always less than MPFS payments, but this is not universally true. In some cases, the HOPPS payment is higher than the MPFS payment, so that hospitals will also be negatively affected by the DRA. The implementation of the DRA has led to signifi cant reductions in Medicare payment for the TC for these modalities. The American College of Radiology has estimated the payment reductions for specific modalities to be as follows:
These are, of course, overall estimates. Depending on your payor and procedure mix, you may see greater or lesser reductions. Further bad news is that commercial payors are starting to pick up on these reductions. We are already beginning to see commercial payors (in markets where payments are made with a conversion factor on a per RVU basis) with a lower conversion factor and a separate fee schedule for the TC of these modalities. In markets where payment is made as a percentage of Medicare payment, these reductions are built in.
Make no mistake about it, these changes mark the beginning of the end for resource-based relative value payments. Contiguous body part scanning reductions and additional future CMS reimbursement cuts also will reduce imaging center reimbursements.
What the DRA Has Done to Imaging Centers
The DRA was implemented in 2007 and the effect on imaging centers is diffi cult to predict, since each of these centers has a different mix of procedures, each is seeing changes in volumes that are unrelated to the DRA, and the commercial payors have not yet all incorporated DRA methodology into their payment schemes. I have spoken with many imaging center managers, and it is virtually impossible to separate the effects of the DRA from the numerous other factors influencing their centers. The overall effect has been a definite reduction in payments to imaging centers. Having said that, however, I have taken national data published by the ACR and combined it with anecdotal data from actual imaging centers to come up with a “bestguess” estimate.
That is, imaging centers have seen a decrease in reimbursement of about 10% to 15% in 2007 as a direct result of the DRA. That percentage could rise as high as 20% in future years. These numbers can vary considerably from locality to locality.
The Good News
The news is not all bad for freestanding imaging centers. CMS and many commercial payors have identified self-referral as a leading cause of soaring imaging utilization and expenses. As a result, numerous efforts to rein in self-referral imaging have been undertaken:
1) As of October 2008, United Health Care will require all sites receiving imaging reimbursement from them to be accredited by either the American College of Radiology or the Intersocietal Accreditation Commission.
2) Highmark Blue Cross/Blue Shield of Pennsylvania requires that all imaging centers have a radiologist on-site and offer at least five modalities.
3) For the 2009 MPFS, CMS is proposing that all freestanding imaging centers become IDTFs and meet the tougher standards imposed on IDTFs. They are also proposing adding an antimarkup provision for 2009.
All the reimbursement changes outlined above (with more sure to follow) constitute a direct frontal assault on self-referral. The radiology benefits management companies are currently advertising to insurance companies that unnecessary scans are wasting $30 billion per year. With this type of pressure, it will become increasingly difficult for self-referring MRI and/ or CT centers to continue to operate at a profit.
Other good news for imaging centers is that older patients require more medical imaging than younger patients. With the aging of the Baby Boomers, we can expect to see more medical imaging in the future. With elimination of the higher reimbursement for physician-owned imaging centers, we can expect to see more hospitals developing imaging centers (perhaps as a joint venture with their radiologists). With more and more imaging costs being transferred to patients (through increasing deductibles, HSAs, etc), we will see a greater demand for customer service, pricing transparency, and lower pricing.
In short, radiologist-owned imaging centers can expect to see higher volumes in the future and greater opportunity to collaborate with their hospitals on mutually owned imaging centers.
The Net Result
As a result of all the expected changes described above, radiologist-owned imaging centers are likely to see higher utilization, but lower reimbursement. This is a classic case of volume pricing, and the business literature is full of entire books describing how to deal with the situation. As Ahmed Zaki Yamani has so beautifully said:
“The first law of economics is that when price goes up, consumption comes down. This is a divine law.” The converse of this is that when prices come down, consumption goes up.
One of the great conundrums of retail is: If you want to make more money, do you raise prices or lower prices?
As imaging center managers and owners, we don’t have to struggle with the complexities of developing a pricing strategy since the government has already done this for us, by lowering our reimbursement. We must, however, develop a strategy to deal with these decreased reimbursements. Such a strategy should include the following components:
• Some imaging centers will disappear, but others will emerge. We must develop an internal customer service strategy to deal with this change. Radiologists must become more visible. Typically, the radiologist is in the back room reading studies and is invisible to the typical patient. Scheduling of studies must become more prompt. “Two weeks from next Thursday” simply won’t do. Reception and technical staff must become more customer friendly. Reports must be in the hands of referring physicians promptly. And we must develop data that address the cost-saving aspects of medical imaging.
• Suggestion by the referring physician as to where to get an imaging study remains the leading reason for a patient coming to a particular center. These referring physicianstend to value the accuracy and clarity of the written report as well as the ease of scheduling and promptness of receiving the results of a study.
• Patients’ perceptions are the next most important reason people go to a particular imaging center. Location and perceived reputation of the imaging center are high on their list.
• Pricing will have to become more transparent. With the advent of increasing deductibles and HSAs, patients will do more “shopping around” for the best deal in imaging that they can find. The total cost of a particular procedure can be difficult for a patient to uncover. We must be prepared to answer the question, “How much does it cost?”
• Radiologists must become more efficient. This may be at odds with the need for radiologists to become more visible,but a balance must be struck.
• Above all, imaging centers must cut costs. Facility costs must be kept to a minimum. Staff usage and efficiency must be improved. And equipment purchase and use must be optimized. The DRA and other changes in health care reimbursement will produce both challenges and opportunities for freestanding imaging centers. These changes are and will continue to be monumental. Business as usual is no longer a viable option for a freestanding imaging center. Only those centers having high volume and low costs will survive these slimmer margins.
John Boyes, MD, MBA, is the executive director of Washington Managed Imaging, a statewide radiology IPA, and a director-at-large for the Radiology Business Management Association.