The Deficit Reduction Act (DRA) of 2005, if implemented as currently written, holds the promise of reshaping the landscape of outpatient imaging in the U.S. -- and not for the better. The proposed five-year, $2.8 billion Medicare imaging reimbursement cuts begin in 2007, which will also see the initiation of a 50% discount in multiple procedure payments.
The act will cut compensation for out-of-hospital imaging studies by capping the technical component reimbursement for physician-office imaging to the lesser amount of either the Hospital Outpatient Prospective Payment System (HOPPS) or the Medicare Part B Physician Fee Schedule (MPFS). Depending on an imaging center's payor and procedure mix, this element alone could reduce annual revenues by 30% or more.
Figure in the cuts for the technical portion of MR, CT, and ultrasound exams on contiguous body parts in the same session over the next two years, and the road ahead looks very bleak for outpatient imaging practices.
Lawsuits seeking to void the DRA have been filed, and intense lobbying efforts to repeal portions of the act are under way by organizations such as the Reston, VA-based American College of Radiology (ACR) and the National Coalition for Quality Diagnostic Imaging Services (NCQDIS) in Washington, DC, but imaging centers have begun to prepare contingency plans to deal with the drastic cuts in revenue.
The good news from the front lines is that no one is ready to throw in the towel and surrender their practice. The bad news is that those who provide many of the goods and services in the radiology market can expect their bottom line to take a hit as well.
New England re-evaluates
One of the oldest independent radiology practices in the U.S. can be found in Trumbull, CT. Advanced Radiology Consultants (ARC) celebrated its 100th anniversary of providing radiological services to residents of southern Connecticut last year. According to executive director Darlene Zase, the firm has neither merged with nor acquired another practice in its history, and will find a way to adapt to the new reimbursement reality.
"The DRA 2005 is an opportunity to take a real hard look at how your practice is run and what you should be doing differently," she said.
For the group, this means that capital investment in new imaging equipment may well be on a slower purchasing track.
"I think that it has given us pause to consider those investments," Zase said. "What we're doing now is evaluating new modalities much more carefully. By that I mean that everybody now wants a third or fourth or fifth look at what we need and why we need to do it."
Expansion of existing facilities, as well as the acquisition of new properties has been put on hold as ARC adjusts its business model. The practice's healthcare information technology (IT) infrastructure is firmly established, so Zase does not foresee any major investments that will need to be made in this area in the near future.
The group is planning a strategic retreat next month where all the issues that DRA 2005 is expected to impact will be examined, Zase said.
"The strengths, weaknesses, opportunities, and threats assessment will be looking at what we want to do, how we want to do it, can we do it with our current infrastructure, should we be looking at a different kind of infrastructure, and should we be looking at different business lines," she said.
"We're realizing that only the strong may survive," she noted.
Multicenter operators
In early February this year, radiology imaging center operator Radiologix was one of the first publicly traded groups to sound the alarm over the DRA 2005 proposed reimbursement reductions. The Dallas-based firm believes the implementation of the DRA 2005 reimbursement reductions will have significant effects on its business, financial condition, and operations results.
For the fiscal year ended December 31, 2005, Medicare revenue from its imaging centers represented approximately 26% of the firm's total outpatient center revenue. On that basis, the firm forecast a $13.3 million reduction in revenue for 2007.
Capital expenditures for the company will be on a slower track for the current year and the future as a result of DRA 2005, according to Radiologix vice president Paul Streiber.
"One of the things the Deficit Reduction Act caused us to do was to re-evaluate our cap backs for '06 and into '07 and beyond," he said.
Facility acquisition and expansion will continue on pace for the current fiscal year, as will the company's healthcare IT deployments, according to Streiber.
"Those projects were developed independently and prior to the DRA, and the dollars had already been set aside for those projects," he noted.
But the DRA 2005 is forcing the company to re-examine its capital and cost structure, Streiber said.
"We're assessing our capital structure in terms of the DRA going into effect," he said. "We run a pretty tight ship as it is, so there may not be a lot of room for a great deal of change in the cost structure."
From a marketing standpoint, the firm is doing what it can to capture as much of the medically necessary diagnostic imaging market share as possible between now and January 1, 2007, Streiber said.
"We're doing our best to help our referring physicians understand that we are their preferred provider by doing a tremendous job for them and for their patients," he said.
Showdown in the old pueblo
Radiology Ltd. is one of the largest physician-owned group practices in Tucson, AZ, and has been providing diagnostic imaging services to Southern Arizona for the past 60 years. The group owns 10 imaging centers throughout the area and employs more than 500 professional, technical, clerical, and administrative personnel.
The practice provides a wide mix of services including interventional radiology and neuroradiology, nuclear medicine, cardiac radiology, a dedicated 3D lab, and a full compendium of diagnostic radiology procedures and modalities. It is also very concerned with the potential impact of DRA 2005, according to Jim Palmer, the group's chief operating officer.
The practice has put new equipment purchases on hold in response to the DRA 2005, and is moving modalities around to populate a new imaging center, he said.
"We put a new 1.5-tesla MRI on hold and took a unit out of another facility, which reduced its MR capacity by half, and moved it to our new facility that is scheduled to open later this summer," Palmer said.
That imaging center, which was already in the 2006 budget and development plan, will be the last new building project for the practice for a while, Palmer said. With the cuts proposed under DRA 2005, he doesn't foresee any additional expansion in 2007.
Radiology Ltd. is planning on implementing planned upgrades to its healthcare IT systems, including PACS and RIS, he said. It is, however, putting new hires onto a slower track.
"We're looking at every way we can to improve our productivity with existing staff, and we're not replacing some folks who leave," Palmer said.
The practice will also be scrutinizing its payor contracts for areas of improvement, promoting existing services such as coronary CT, and examining new business opportunities.
"We will look at services that are not impacted by these Draconian cuts, and unfortunately that may mean that we have to focus on non-Medicare volumes," he said.
Like Zase, Palmer also has a strategic retreat planned with his practice next month to formulate approaches for mitigating the effects of DRA 2005.
"I've spoken with a lot of people around the country," he said. "I haven't heard anybody that's got any great ideas at this point as far as what we can do. But we certainly know the impact of this, and these revenue cuts are pretty drastic -- there's no profit in outpatient imaging the way we've looked at them."
California challenges
Radiological Associates of Sacramento Medical Group (RAS) is the largest privately held imaging provider in the U.S. It serves the Sacramento, CA, community of 2.1 million lives through 16 imaging centers, seven radiation oncology centers, six hospitals, 74 physicians, and nearly 850 employees. Fred Gaschen, executive vice president for the group, said he is facing the challenges of DRA 2005 head on.
"Everybody that's in our business should look at this and realize that it's not going to be as it was before, so they need to ask: How am I going to have to change in order to maintain the income that I used to have?" he said.
Gaschen said that RAS has no plans to change its equipment acquisitions for 2006, as the practice had already conducted its business pro forma analyses and committed to its capital budget allocations for modality upgrades prior to the passage of the DRA 2005. Going forward, the group plans to carefully scrutinize any new equipment purchases in light of the new reimbursement rules.
"We don't put in a new piece of equipment or a new service without doing a pretty exhaustive pro forma," he said. "When we made our final pro formas (for 2006), we revised them to include expected reductions in the Medicare component of reimbursement. We did not reduce reimbursement from private insurance. My argument there is when a private insurer can show me that they're part of the federal government budget deficit, then they can start utilizing their logic. But until they do that, we're not going to accept it."
For new facility construction and the expansion of existing locations, the firm typically projects its needs three to five years in the future, Gaschen said. With the looming implementation of DRA 2005, the practice will be putting these projects on a slower track.
"I'm not going to sit here and say right now that we're just going to go forward," he said. "All I'm going to say is that we're going to take more time for evaluation. Whereas in the past we might be able to take on more projects in a year, realizing that the breakeven wasn't until the second or third year, maybe now the breakeven becomes the third or fourth year, so we'll slow down and do fewer projects."
Gaschen is thankful that RSA already has its healthcare IT infrastructure in place, because the DRA 2005 cuts would make adopting a new information system difficult. He is cognizant that the existing systems require updates, and said that the group has resolved to stay current with its technology.
The practice has created its own spreadsheets that incorporate the DRA 2005 cuts and utilized these to forecast its revenue and staffing requirements, he noted. Last week, the ACR published a series of spreadsheet templates for its members that help radiology practices analyze the impact of the DRA 2005 Medicare imaging reimbursement cuts. The spreadsheets confirmed the data that the group had developed, Gaschen said.
"We're already looking to 2007 as to how we might change our operations from a support staff perspective," he said. "We're also looking at labor-saving devices from an equipment side. We might be adding imaging assistants to help get more patients through in order to get more volume."
Gaschen said he is looking at new business opportunities in 3D ultrasound and digital radiography.
"DR prices have come down, so the pro forma is now beginning to make sense," he said.
The practice is also looking at other forms of business that are not dependent on the whims of Congress, Gaschen said. These may include workers' compensation and personal injury liens, as well as executive physicals and boutique medicine.
"I would suggest to your readers that they should systematically try to find these other sources," he said. "You've got to separate the wheat from the chaff."
Although the future for outpatient diagnostic imaging is not as bright as it was a year ago, Gaschen feels that RSA is positioned as well as it can be.
"I think we're positioned as best as anyone can be for the future, and the future right now looks a little bleaker because of the federal budget deficit," he said.
Deal making
W. Kenneth Davis Jr. is a partner in the law firm of Katten Muchin Rosenman in Chicago and provides counsel for physicians, ancillary service companies, and other types of healthcare businesses. He has a broad range of experience in the structuring, growth, and ongoing operations of new imaging center businesses and joint ventures, including initial business model development, analysis of regulatory and reimbursement issues, various types of financings, and mergers and acquisitions.
"Nearly everyone who owns or operates an imaging facility is wondering about what to do in anticipation of the DRA 2005 reductions going into effect," he said. "There has undoubtedly been an increase over the last few months in imaging centers exploring mergers, acquisitions/consolidations, and restructurings."
Davis believes that the imaging center development market, although slowing, will continue.
"The deals that are tending to still move forward are ones involving joint ventures between radiology groups and hospitals and, to a lesser extent, imaging centers exclusively owned or sponsored by radiology groups," he said. "These deals have generally always had to stand on their own two legs. Nevertheless, the reimbursement implications of DRA 2005 need to be projected. And a radiology group should not just assume the hospital understands the financial implications of DRA 2005. Remember that hospitals operate primarily under Medicare Part A, and may not be very familiar with what DRA 2005 does to Medicare Part B reimbursement for imaging."
"The deals that are being much more closely evaluated and questioned are the ones involving imaging facilities shared among nonradiology groups or owned exclusively by a single nonradiology group," he added. "When reimbursement was higher, these deals could usually be cost-justified, even if the imaging facility was not used to full capacity. With almost certain, significant, across-the-board reductions, especially on the high-end modalities, these deals are now more difficult to justify."
However, if a group does not have experience in running an outpatient diagnostic imaging center, now may not be the best time for it to get into the market, according to Davis.
"High-quality, mature, well-run facilities are going to survive," he said. "They just aren't going to be making as much money. Indeed, the good operators, as well as entrepreneurs new to the space but with ready access to capital, are already looking for buy opportunities."
"Unfortunately, some centers are not going to survive, either because the buyer versus seller tension is irreconcilable, or because the economics simply don't support the center at the new reimbursement levels," Davis noted.
For those entrepreneurs already in the outpatient diagnostic imaging center market and forced to deal with the fallout from the DRA 2005, Davis offered the following advice:
"To mitigate the effects of the DRA 2005, imaging facilities should be doing at least three things. First, support efforts to eliminate or scale back the reductions. But don't hold out too much hope that the reductions will be significantly scaled back. Second, realistically evaluate what the future holds for you under DRA 2005 and the corresponding private payor reductions. You may have some interesting strategic opportunities available to you. On the other hand, your best alternative may be to sell. Third, plan, plan, plan! Consider what you can be doing proactively to grow volume and reduce costs."
By Jonathan S. Batchelor
AuntMinnie.com staff writer
April 27, 2006
Related Reading
Opposition grows to DRA law within House, April 3, 2006
House resolution urges DRA investigation, March 31, 2006
House Demos criticize Bush on DRA signing, March 24, 2006
Public Citizen files lawsuit against DRA, March 22, 2006
Deficit Reduction Act of 2005 puts radiology through the grinder, March 3, 2006
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