f01a.jpg (14534 bytes)Radiology departments constantly face a series of intertwined challenges — the demand for increased efficiency and productivity in a climate of cost-containment, personnel shortages and across-the-board problems with reimbursement from third-party payors.

Since Aug. 1, hospital outpatient radiology departments have had to come to terms with additional hurdles posed by Medicare reimbursement guidelines from the Health Care Finance Administration (HCFA). The statutes target all outpatient services and dramatically affect imaging procedures. Considering that many hospitals rely heavily on revenues generated by radiology services reimbursement, the issues potentially could affect the entire healthcare endeavor.

Effective strategic planning is critical for responding to implementation of the Hospital Outpatient Prospective Payment System (HOPPS) mandated by Section 4523 of the Balanced Budget Act of 1997.

A new target

Prospective payment systems are nothing new. Medicare reimbursement based on diagnostic related groups (DRGs) began in 1983. Since then, prospective payment systems have been developed for outpatient freestanding radiology, and then for laboratories and durable medical equipment. Now, hospital outpatient services are the target.

“Prior to Aug. 1, hospitals were paid for outpatient services under a blended rate, which was a blend of a fee schedule and their actual costs,” says Bill Sanders, vice president of operations for clinical services consulting firm Regents Health Resources LLC (Brentwood, Tenn.). “They would not know until they did their cost report how much they had been paid for their outpatient services.”

The APC (ambulatory patient classification) system is different from DRGs, because APCs are grouped by function rather than by diagnosis. APC codes cover a wide array of outpatient services, including emergency room charges and laboratory services, as well as radiology examinations.

A general concern among industry leaders is that there are two different systems in place — HOPPS and APCs. HOPPS was required by legislation, while APCs were developed as the tool that complies with that legislative action. A hospital billing department is not required to determine the APC code for reimbursement.

“HCFA has a grouper. You bill using CPT (current procedural technology) codes with modifiers and HCPC (health care procedure codes) codes [for equipment], and then HCFA assigns the APC,” explains says Cherrill Farnsworth, president and CEO of HealthHelp (Houston). “You don’t have to find the APC and assign it.”

From a practical standpoint, there are some specific imaging studies that are very negatively impacted by the new regulations. For example, MRI studies done with or without contrast. If both studies are done in a single session, it takes twice as long as a plain study without contrast. From the standpoint of APC codes, a double MRI study (with and without contrast) is considered a single study and reimbursed at a $388 rate.

“Medically speaking, for certain things you absolutely need [contrast MRI],” says Robert Poliner, M.D., vice president of Desert Radiologists (Las Vegas). “They’re good for all the malignancies, either primary brain tumors or metastatic disease, inflammatory conditions, meningitis, encephalitis and multiple sclerosis. Some people are touting that for aggressive stroke evaluation.”

If you consider these studies to be essential for stroke management — a disease that directly affects thousands of Medicare recipients — it raises the stakes in reimbursement issues.

“It is not so much of a problem for people who have a true stroke and who are admitted to the hospital,” Poliner continues, “but if you have a TIA (transient ischemic attack) with a question of a stroke, then you’d better have money.”

Fortunately, there is a safeguard built into the HOPPS through the use of “transitional corridors” until 2004 to insure that hospitals do not experience catastrophic declines in revenues. The formula for determining APCs was based on a ratio of 1996 cost reports to payments received.

“Everybody has a different cost report, a different mix of procedures and a different mix of Medicare to other payors,” says Sanders. If 1996 was not a particularly successful year financially, or if a hospital has shifted imaging equipment and the procedure mix dramatically, those factors can skew APC calculations.

“The volume in outpatient has grown tremendously since 1996 across the country,” Sanders concludes.

HOPPS review

HOPPS are under continuing review and revision. When the original regulations were devised, comments and recommendations poured in from a variety of sources, such as the National Coalition for Quality Diagnostic Imaging Services (NCQDIS) under the direction Farnsworth, who serves as president.

“Because of the way APCs are written, I think there is a way to say something optimistic. They encourage innovation,” Farnsworth adds. “If you could not have billed this technology in 1996, then it’s carved out for APCs. There’s every reason for manufacturers to bring out new drugs…or supplies or modalities that they didn’t develop in the past, because it was duplicative or there wasn’t a need.”

Farnsworth notes that from the provider side of the equation, if the only contrast agent that will be reimbursed is the newest one, then that’s the one to purchase.

Strategic planning is essential to determining the direction an institution should pursue in response to these new governmental reimbursement guidelines. There are critical considerations in possible restructuring to develop a joint venture, or a freestanding imaging center or to change other dynamics to the ways a hospital generates reimbursement revenues.

For example, Farnsworth explains that the only way a hospital falls under APCs is if the facility uses a provider number for the billing.

“If you start to bill under your radiologist’s number, you’re not going to fall under APCs, and that’s not much of a structural change,” she adds. “If I’m a billing company and I’m billing on your behalf under my number, I’m not a hospital, so I’m not going to fall under APCs.”

Farnsworth cautions that when a facility “carves” itself out of APCs, the hospital also carves its costs from its Medicare cost report. “So, a hospital CFO needs to make sure that it doesn’t affect [the bottom line],” she says. “If radiology adds a lot of money to a Medicare cost report, they may need those figures for other reasons.”

Legal concerns

Some hospitals have moved toward restructuring outpatient radiology departments to configure them as a joint venture or as a freestanding imaging center. Legal ramifications can be serious.

“The areas that have to be looked at are fraud and abuse issues and tax exemption issues,” says Norton Travis, senior partner at the law firm Garfunkle, Wild & Travis (Great Neck, N.Y.).

“Fraud and abuse issues are not as significant as in other hospital/physician joint ventures, primarily because radiologists are not deemed to be referral sources,” Travis adds. “However, this is frequently overlooked … fraud and abuse issues relating to the hospital as a referral source. For example, if you are dealing with a community hospital where all the physicians are voluntary attendings, you tend to have less of a concern. But, when you have larger institutions or institutions where physicians are employed and under the supervision and control of the hospital, referrals from those physicians could be imputed to the hospital. It doesn’t mean the structure can’t be done. It is just an issue that has to be looked at.”

Many hospitals are chartered as not-for profit entities with charitable missions. When considering a restructuring to make the outpatient radiology department a joint venture with entrepreneurs or radiologists, tax exemption issues come to the forefront.

“Will the revenue the hospital derives out of the joint venture be tax-exempt revenue?” Travis questions. “If not, will the receipt of that revenue — which is referred to as unrelated business income (UBI) — be sufficiently significant that it may impact the hospital’s continued tax exemption for its entire operation? Within its corporate structure as a not-for-profit, [a hospital] can have profitable lines of business. As those activities are being conducted in furtherance of the hospital’s charitable mission, that remains tax-exempt income.”

Difficult questions arise in a joint venture where one partner is an entrepreneurial taxpayer. These issues can be addressed, but require careful analysis. For example, the newly structured imaging center also could provide charitable care.

“If the operations of the imaging facility as a whole are structured so it remains consistent with the hospital’s charitable mission, the fact that a portion of the profits may be going to a tax-paying, for-profit member does not necessarily preclude the hospital getting its share on a tax-exempt basis,” Travis concludes.

HOPPS provisions

“Under this law, every Medicare patient is going to have to be told what his or her co-pay portion is,” Farnsworth says. “Even if it’s paid for under a Medicare supplement policy, you still have to disclose, because that’s their policy they pay for and they have to know how much is being billed.”

In addition to the disclosure policy, hospitals now may discount the amount of the

co-pay. However, Farnsworth notes that if a hospital chooses to discount the co-payment, it must be discounted for every patient, without exception. Therefore, analysis of this decision is crucial to overall fiscal management. Decisions about whether or not to discount the co-pay must be made by Dec. 1 of each year to be locked in for the following year.

“One of the problems for hospitals is that imaging centers will begin to market against hospitals,” says Sanders. “Even if no hospital in town discounts, the imaging center will say, ‘Why pay $150 co-pay for an MRI out of your own pocket, when you can come here for $78 and get the same scan and better parking?’”

Apart from the issues in HOPPS, Medicare has historically caused other reimbursement headaches for administrators.

“Payment for procedures that Medicare deems experimental but most of medicine sees as a standard of care,” is one problem Monte Clinton, administrative director of radiology at Dartmouth-Hitchcock Medical Center (Lebanon, N.H.), describes along with its twin “Procedures that Medicare deems are reimbursable only as an inpatient.” The latter group is outlined in the APC Guideline Addendum E.

While most administrators are focused on addressing the issues raised by the new HOPPS guidelines, there are other ongoing challenges faced by those involved in generating revenue.

Medicare Local Review Policies (LMRPs): Administered by a local committee, LMRPs include an appropriate diagnosis list that radio-logy departments must follow to have reimbursement approved. LMRPs are not uniform across the country. What may be reimbursed in one region may not be reimbursed in another.

“On the LMRP, they list signs and symptoms,” explains Donna Miller, director of billing and compliance for Desert Radiologists. “Unfortunately, the approved diagnosis list doesn’t always include signs and symptoms. One ex-ample we have is the LMRP for MRI lumbar spine, which does not include low back pain. From our experience, probably 85 percent of all our referrals for lumbar MRI, the reason they’re here is for low back pain. Medicare patients either need to have more signs and symptoms, or they have to sign a waiver and be responsible for [payment of] those exams.”

Third-party payors: insufficient and non-payment of fees

“I’ve done a cost analysis of all of my procedures, and I know just about to the penny what they’re going to cost me to do, because I look

at managed-care contracts,” says DiAnne D. Wallace, R.T. (R), FAHRA, director of imaging services at Fayette Medical Clinic (Fayetteville, Ga.). “You’re going to have the overhead, no matter what. When [managed-care companies] give me their fee schedule, it wouldn’t even meet my costs. That’s the part that scares me, not even meeting my costs.” Besides problems with insufficient fee payment, she also experiences non-payment or slow payment of claims.

Loretta McIsaac, data management and information director at the Radiology Business Management Association (RBMA of Laguna Beach, Calif.), echoes the latter concern.

“The biggest concern I hear is that third-party payors just don’t pay,” adds McIsaac. She says that when personnel follow-up on a claim that has not been paid, the insurance company responds that they did not receive it. Resubmitting a claim is expensive.

“Third-party payors are not regulated and it has gotten to the point where Medicare is the gold standard!” she says. “We know that Medicare is going to pay a clean claim in 31 days, but you can’t say that about anybody else.”

McIsaac has the opportunity to review the processes and experience of a number of radiology practices.

“The work is a lot more intensive to collect the same amount of money as it used to be,” she says. “I would suggest that most of the offices that are doing their own [billing] are probably running about 10 to 12 percent of their collections. It’s costing them that much to do the billing.”

Wallace agrees. “We do more paperwork now than we’ve ever done to get less money than we’ve ever gotten,” she adds.

There are many exams where it is not economically feasible to go through multiple claims submissions in the billing process — to the point where they just write off payment for that study. Obviously, there are broader implications for radiology departments that are either barely meeting expenses or making a very small margin of profit.

“We cannot buy a new CT scanner, for example, because our dollars are limited,” Wallace concludes. “We get refurbished, re-manufactured equipment because of this.”

Reimbursement challenges

Within the context of the new HCFA reimbursement guidelines, Sanders describes a scenario for a hospital that is in a precarious financial situation prior to the institution of the HOPPS schedule.

“They didn’t intend this, but some hospitals will go out of business over this. What we found over the past several years is that radiology for most hospitals is the most significant contributor to the hospital. The radiology department may contribute $12 million and the hospital made only $3 million. If there’s an impact in radiology, it’s going to be serious for hospitals. In any market, there will be hospitals that will respond to this and be ready to capture the market share when the other hospitals don’t respond. I suspect that some hospitals in many cities around the country will close.”

Hospital survival is not the only consideration. The inability to purchase appropriate equipment because of low reimbursement rates will impact the overall radiology industry.

“I think an important observation is that if hospital reimbursement on the technical component side [is reduced], that could have a negative impact on radiologists, especially those who practice at the larger teaching hospitals,” says attorney Travis.


Given the numerous problems with radiology reimbursement, it takes vigor to stay afloat. The new HCFA regulations caught a number of administrators off guard, because they didn’t anticipate the guidelines would be implemented on time.

“The vast majority of radiology professionals want to do things right. We’re not out there to get something not due us,” says Dartmouth’s Clinton. “This is a very cumbersome, complicated process. Many people are fearful that they will be targeted for a simple mistake that was not intentional that was just a pure simple mistake. That’s the difficult part.”