Outpatient imaging: Back to the hospital?

Oct 4, 2007

Nothing stays the same for long, and the field of medical imaging is no different, especially in light of the Deficit Reduction Act (DRA) of 2005 legislation that went into effect this year.

One particular way the DRA seems to be influencing the flow of care in medical imaging is in outpatient services: As freestanding centers cope with reimbursement cuts to their Medicare patient base, hospitals are jockeying to pick up some of the slack.

"The outpatient market has been fueled by entrepreneurs, but with the advent of the DRA and tighter financing requirements, that fuel is drying up," said Steve Renard, president of SR Consulting, a healthcare consulting firm that works with outpatient and inpatient imaging centers. "Entrepreneurs have been in the driver's seat, with 50% to 60% shares in outpatient ventures with hospitals, or excluding hospitals altogether. The attitude toward hospitals in the past has been, 'You can be part of this if you want to.' Today it's: 'Will you please partner with us?' and a willingness to take the minority position."

Hardest hit are those who established imaging centers two years ago or less, and bought their equipment at the high end of the business cycle, Renard said. Now they're defaulting to the tune of 10% to 12%, and some predict that these percentages will increase to 15% or 16% in 2008. In the face of these numbers, it's no wonder selling the majority share of a freestanding imaging center to a hospital sounds good to lenders.

According to Renard, this pendulum swing is in keeping with the Centers for Medicare and Medicaid Services' (CMS) goal: to clamp down on overuse of imaging outside hospital systems so those systems can remain healthy. Combine that with the competitive reimbursement advantage hospitals have in the outpatient market under ambulatory payment classifications (APCs) -- that is, if the hospital retains majority ownership in the outpatient center venture -- and outpatient imaging begins to look like a good service to focus on for hospitals and their networks.

More often, hospitals are partnering with an existing freestanding center, rather than trying to either build or move an outpatient center on its existing campus, Renard said. In some cases, the freestanding center owner becomes the minority partner who manages the facility, providing the service-oriented expertise that hospitals can lack.

Ramping up the retail mindset

"The DRA has sharpened everyone's focus on retail service principles," said Milan diPierro, chief operating officer at Ivy Ventures, a Richmond, VA-based firm that works with hospitals to develop outpatient growth strategies. "Hospitals are responding to independent centers' efforts to solidify their client base via service improvements with similar initiatives."

A hospital has benefits that freestanding centers do not: the continuum of care that can be offered under one (virtual) roof, client loyalty and long-time experience with the hospital, and brand awareness within a community, diPierro said. All of these perks can give a hospital or hospital network a competitive edge as compared to the local mom-and-pop MRI center.

"We tell our clients that (focusing on customer service) is good business, regardless of the DRA," he said. "If you provide superior customer service, you can win business from your competition. But it's not just a matter of making some scheduling and parking fixes -- it's a continuous loop that requires feedback and ongoing improvements."

What has made freestanding imaging popular is that patients want to be able to get imaging services at a convenient location -- maybe one where they can also accomplish other errands in addition to the imaging appointment -- without having to navigate a hospital infrastructure or sit in a waiting room packed with people who may be acutely ill, diPierro said. It's not surprising that hospitals would be interested in acquiring these freestanding centers as a way to accentuate outpatient imaging services.

Shifting the marketing paradigm for a hospital can be a challenge, since most are more familiar with providing services rather than marketing them. And to the extent hospitals do market themselves, they often focus on their patient base, rather than cultivating relationships with referring physicians and their staff.

Case study: North Shore Radiology

An example of how hospitals are putting energy into outpatient imaging services is in a recent deal between North Shore Radiology, a subsidiary of North Shore-Long Island Jewish Health System in Glen Cove, NY, and Ivy Ventures. North Shore hired Ivy to help it expand its outpatient imaging services by offering strategic planning, analyzing relationships with physician groups, assessing the market and competitive environment, helping with equipment investment and selection, and marketing.

"Our goal is to gain presence in the ambulatory service marketplace that will allow us to coordinate ambulatory imaging with other types of ancillary services physicians use," said Rob Scoskie, vice president of business development at North Shore. "While we have the benefit of scale as a large system, we also want to be nimble in the marketplace."

In this vein, North Shore plans to provide advanced imaging modalities adjacent to ambulatory service lines, Scoskie said. If freestanding imaging centers have provided generic service, then North Shore will provide specific service by offering imaging technology that meets specialists' needs.

"Part of why we chose to partner with Ivy is that we recognized a critical need to be responsive to our patient base," Scoskie said. "Working with an outside entity can help us compete against those who have a business model that has worked pre-DRA."

How can hospital administrators decide the best way to increase outpatient service? Start by understanding the contribution margin for imaging at the facility, diPierro advises.

"Do a good calculation and figure out how much profit would be generated by one additional MR or CT exam," he said. "Once you understand that, you can make a more educated decision as to how best to expand outpatient services."

The other metric is a hospital's modality utilization. How full are particular pieces of equipment? Are they operating at maximum capacity, or are there creative ways of opening up more patient time, therefore getting a better return on investment? It's best not to assume a modality is at full tilt, according to diPierro.

"If you ask administrators at a hundred hospitals whether they can get more exams out of a piece of equipment, chances are nearly every one of them will say they're at capacity," he said. "But at every hospital we've worked with, we've found more capacity without having to recommend that the hospital purchase more equipment. Sometimes, just hiring personnel who can expedite patients through the exam process can speed up throughput and shorten appointment times."

By Kate Madden Yee
AuntMinnie.com staff writer
October 5, 2007

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Rhode Island hospital opts for local radiology service, September 6, 2007

Process improvements at MGH boost inpatient imaging service, August 10, 2007

DRA's arrival forces imaging centers to adapt, February 1, 2007