Outpatient Imaging: The End is Near

Take a closer look at private and in-office outpatient imaging and you see an industry in a rapid death spiral. The federal government, big insurance companies, and large hospital corporations have conspired to aggressively “direct” patients to hospitals and hospital owned outpatient imaging centers for their diagnostic imaging needs. Frankly, I don’t see a silver lining for a problem that has only accelerated to the downside. The Deficit Reduction Act of 2005 and the Affordable Care Act of 2010 (Obamacare) clearly spelled out the mandate of the Federal government to eliminate the independent outpatient imaging industry as the answer, albeit incorrect, to controlling runaway healthcare costs. The idea that patients need or want a choice and will need independent non-hospital affiliated or physician based outpatient imaging services has become a myth. The majority of patients go wherever their insurer directs or their primary care / ordering physician recommends. Complex contracts between insurance companies and hospitals result in insurers paying more for imaging services performed by the hospital network but offset those costs through negotiated “discount” rates for other clinical services (outpatient surgery, ER, oncology, etc.) at the hospital. While there are a minority of patients who refuse to tolerate the hospital maze of parking lots, central scheduling, and lack of personalized service, these patients are too few to keep the doors open for independent outpatient imaging centers. Sadly, this is not the only problem plaguing the industry.

One must recognize that imaging technology is rapidly evolving as the age of big data and supercomputers continues to make huge advancements in visualizing disease and its effects on the human body. The capital investment for one piece of imaging equipment can be well over a million dollars. The expectation is that the lifespan of the equipment and steady reimbursement for services will provide a positive return on the equipment and support the overall outpatient imaging service. This is definitely no longer the case. The revenue generating life cycle for any advanced imaging equipment is shorter than ever before and the reimbursement for in-office / private outpatient imaging is lower than ever before. As such, the independent and private office imaging service falls behind in providing the expected image quality or can’t even perform the complex imaging exam requested. Not a problem for the hospital which can afford to upgrade and buy new equipment given their reimbursement levels for many exams can be three times higher than reimbursement rates for private and physician based outpatient imaging. Yet, the shorter life span of imaging equipment is a minor back ache compared to the cancer affecting the whole body of the independent outpatient imaging industry.

Hospitals have been on a tear in the last 10 years buying primary care and subspecialty practices as a way of driving healthcare dollars into their hospital network. Today, roughly 25 percent of all specialty physicians who see patients at hospitals are employed — a sizable increase from the 5 percent of specialists who were hospital-employed in 2000. The number of employed primary care physicians has doubled to roughly 40 percent during the same time span. Given the administrative red tape heaped on physicians, primarily from Obamacare, and the other ever increasing administrative hassles of owning and managing your private practice, it’s easy to see why doctors are choosing hospital employment. As the solo practitioner continues to disappear, so do the referrals to privately owned imaging centers. In its “big brother” role, hospitals employ administrative utilization teams to ensure employee physicians and their respective offices utilize the hospital owned imaging and clinical services for delivering every aspect of healthcare to their patients. Yet, this is not the main cause in the death spiral of private and physician owned outpatient imaging.

Ultimately, look no further than the recent deep cuts in reimbursement enacted for 2014 for non-hospital outpatient imaging. Global Imaging reimbursement contains two payment components, technical (reimbursement reflecting the capital cost and maintenance of the equipment plus the trained personnel to perform the exam) and professional (reimbursement to the physician for interpreting the exam). Changes to Medicare reimbursement are subsequently adopted by insurance carriers. As reimbursement drops from Medicare for any exam, there is an equivalent drop in reimbursement from insurance companies, as all insurance companies use Medicare as the “measuring stick.” An analysis published by VMG Health in March of 2014 clearly spells out the bad news for outpatient imaging:

From just 2013, reimbursement for complex imaging exams like MRI and CT, which as expected would pay more than a simple x-ray or ultrasound, is down 13 to 24%. Reimbursement for these exams has been systematically cut over the past five years with some exams paying 75% less than they did 5 years ago. Does this matter for patients? You bet. Private insurers’ hospital outpatient reimbursement can be up to three times higher than physician and private office reimbursement, and Medicare reported an 80 percent difference between the two. As rates increase, so does the financial burden to the patient. For example, a co-insurance on a diagnostic or therapeutic procedure could jump from $20 to $60 depending on the venue in which it is performed. Physician office reimbursement is not just lower than hospital outpatient reimbursement; it is often too low in general. Even worse, when hospitals buy physician practices with in-office imaging services, the hospital then bills and receives payment for those services at the higher reimbursement. This allows hospitals to pay big bucks to acquire physician groups knowing they can turn around and use their hospital network contract with the insurer to quickly gain back the dollars used to purchase the “investment,” whether the patient still use the physician in-office imaging service or is directed to the hospital or its outpatient center for the same imaging exam. Note, the professional component (the payment to the radiologist for interpreting the exam) has slightly improved, translation that CMS i.e. the Federal government wants radiologists to practice radiology but stay out of the imaging business. The last thing CMS or large insurers want is the doctors who deliver patient care to actually have any knowledge or understanding in how health care dollars are actually being spent.

So private and physician based outpatient imaging is not dying from just one mortal wound but actually by multiple wounds administered through federal legislation, primarily the Deficit Reduction Act and Obamacare, and action by big insurers and hospital monopolies. Is there a cure? Unfortunately not. Radiologists are selling or shuttering their doors and joining the ranks of hospital based radiologists. Physicians still operating their in-office imaging services can only do so if they themselves are able to appropriately order enough imaging exams to keep the service in the black, as seen in orthopedic offices with MRI machines. These will be the last to go, but eventually they will close also. It’s just a matter of time for many of those offices, as eventually the significantly decreased reimbursement rates for in-office exams and evolving technology will swallow any benefit associated with performing those in-office exams. Probably another reason that larger well established groups are cashing in before it’s too late, and selling their practices and becoming hospital employees. Those in the industry see the writing on the wall, but don’t want to admit it. Rather, they hold out hope that a miracle will save the day. There are miracles every day in medicine but not on the business side of healthcare.

In closing, as a radiologist who formerly owned an imaging center, I see the death of independent outpatient imaging as a huge loss to patient care and service. I personally enjoyed seeing patients at the front desk and calling doctors with results and being available 24/7 directly on my mobile phone. I did it not only because I cared passionately about my patients but because, like many small business owners, my imaging center service had to be perfect every time and, without a doubt, head and shoulders above the hospital based service.

Product and service are the life blood of any business. In imaging, the same product can now be easily delivered by numerous providers. Independent imaging centers could always count on their service as the valuable differentiator. But, service has also been systematically eliminated from the imaging industry and patient expectations forced low. Now, patients won’t or don’t know any better and with the herd mentality governing the forces in healthcare, this major change in the imaging industry will follow the same path as the home telephone, invaluable for 100+ years and then overnight, obsolete and forgotten.

About the author: Raja P. Reddy, MD is a board certified diagnostic radiologist specializing in breast imaging. He is also a managing director and healthcare business consultant for King & Prat, a boutique firm that provides private equity placement and consulting resources to help businesses overcome operational challenges and develop momentum for growth.