Diagnostic Imaging
November 2002

Radiology Economics

Medical practice faces national challenges

Rising costs, shrinking resources could squeeze radiologists, other physicians.

Corporate accountability. Fast track trade authority. Prescription drugs for the elderly and disabled. Slow growth in new jobs. Increasing budget deficits. The headlines have slowly emerged from the sadness and challenges of Sept. 11. While the U.S. continues to face challenges to its national defense and sense of security in the world, domestic issues have begun to reassert themselves, notably in bills being passed by Congress and economic concerns raised by the nation's financial authorities. What does this have to do with the practicing radiologist? Quite a bit, it turns out.

Making informed decisions about a radiology practice, whether academic or private, requires an understanding of the current and future directions of the national and healthcare economy, as well as of the legislative issues that will impact the immediate and near future. Planning must also consider the match of social needs to the resources available.

While the U.S. economy is not technically in a recession, the growth of employment opportunities is slower than the growth of the workforce. This trend will likely continue for some time. Combined with increasing health insurance costs, it will mean a larger uninsured and underinsured population. One of the most important macroeconomic indices, released quarterly, is the Employment Cost Index (see figure) issued by the Bureau of Labor Statistics. This index is important in conveying incipient inflationary pressures from the labor force. From a health economist's standpoint, however, it also suggests trends in healthcare costs. The most recent data show that health benefits, which are the largest component of benefit costs, are once again increasing rapidly, with implications for the economy. Rising health benefits pressure employers to look for cheaper forms of healthcare for their employees. The cheapest, of course, is to drop coverage altogether. Keeping but reducing coverage or dropping it altogether both have grim implications for the practice of medicine in the near term.

The costs of health benefit inflation are a challenge for employers and the U.S. economy. If employers are to be believed, health benefit inflation pushes up the costs of U.S.-produced goods and compromises the nation's ability to succeed globally. If, on the other hand, economists are to be believed, health benefit inflation will eventually be answered by lower labor compensation, which would also hurt the standard of living. Either way, healthcare inflation is not something that can be dismissed.

WHAT GOES AROUND . . .

This combination of a recessionary economy and increasing healthcare inflation brings back clear images of the crisis that emerged in the late 1980s and early 1990s. At that time, politicians ran for office on the basis of healthcare reform, and the "solution" that ultimately emerged was managed care.

Managed care was far from a panacea, but it did drive down costs over time. Most of the savings came from harsh negotiations with providers combined with varying strategies to reduce utilization. Few believe that many additional savings can be achieved through this model. In fact, consumers/employees have increasingly asked for a new model that gives them more choices, instead of the fewer choices offered by managed care. Employers, of course, have continued to search for lower benefit costs.

Looking for newer means to reduce benefit costs, employers have moved toward "defined contribution" and "consumer-oriented" plans. In these situations, the employer typically pays for only a part of the health costs of the employee and gives far more control over health spending to that participant. Consumer-directed healthcare sounds intuitively enticing and can certainly be good for certain providers, including radiology. This approach takes the form of "boutique" medicine, concierge services, and, in our specialty, CT screening centers. This trend, then, is favorable for the short-term health of radiology: The more decision-making that is placed in the consumer's hands, the more likely that imaging utilization will continue to rise, particularly for higher margin offerings. From a health policy perspective, however, this trend is unfortunate in that our best skills and resources may be diverted to areas where our impact is least proven. Further, it does the least good for those who are already poorly served by the healthcare system.

Other trends from the weakening economy are easier to foretell, and are not good. Federal revenues are dropping rather precipitously, as a result of employment changes, stock market losses (and the resultant evaporation of capital gains taxes), and the federal tax cut. At the same time, federal expenses are rising rapidly, due to the government's response to domestic terrorism and the needs of an underemployed workforce.

The budget deficit, which will likely be with us throughout this decade, is understated by the accounting use of the Social Security surplus funds to narrow the apparent gap. Thus, demands on the federal government for new programs-such as a prescription drug benefits for the elderly-are beaten back by calls for fiscal prudence and responsibility. The same fate awaits attempts to shore up long-standing programs, such as reform of Medicare reimbursement practices for physician/radiologist services.

While most of us look at healthcare on a national scale, many of the most important battles will be fought at the state level. The federally mandated Medicaid program is heavily dependent on state funding for its operations, but most states, unlike the federal government, are prohibited from running deficits. Thus, the growing demands on states for increased funds to the poor, combined with decreasing funds from income and sales taxes, lead to pressure on safety net services, such as Medicaid. In this environment, states can begin to limit eligibility to the federally mandated requirements, restrict or reduce reimbursement, or both. While Medicaid is a small portion of most practices' budgets, it nonetheless represents marginal revenue. Practices without Medicaid-eligible patients will still see an increase in demand for uncompensated care.

ELUSIVE FIX

What does this mean for the imaging practice? The recessionary period that we entered over a year ago is only now being felt at the federal and state government levels, in terms of budget pressure. Slow growth means that Medicare and Medicaid reimbursements will not reach the higher levels needed. The sustainable growth rate legislation built into the Balanced Budget Act of 1997 reduced Medicare reimbursement by 5.4% in 2002 and is expected to have a similar impact in 2003 and 2004. Legislators are aware that this will lead to the demise of the Medicare program, with the exit of many able and willing practitioners who are no longer able to provide care at these rates. In the face of budget pressures, however, the "fix" will be far less than hoped. A reversal of the 2002 cut is now out of the question, and the only hope is for cost-of-living increases in the 2003 and 2004 rates.

As the uninsured population grows, demands on hospitals, in particular, will increase. This budgetary pressure will hit hospital-based practices that have only recently received long-awaited capital equipment purchases and improvements. Although this year's reimbursement policies for hospital-based outpatient practices and hospital inpatient fees look reasonable, this cannot be expected to continue.

While the public sector news is not favorable, the private sector should be more flexible, as long as contracts are not linked to the Medicare conversion factor. Many recent contracts have paid "a certain percentage of Medicare." While the use of a conversion factor and the resource-based relative value scale is justifiable, connecting the government's conversion factor to the private sector is not. Astute contracting managers should shy away from setting rates linked to Medicare rates.

On the legislative front, two pressing nonreimbursement-related issues need federal intervention. First, the regional variation in torts and malpractice insurance access is becoming a genuine access problem, particularly for the surgical and obstetric specialties. In radiology, breast imaging is quite susceptible to this problem and would benefit from malpractice reform. Second, concerns about the complexity of Medicare compliance have raised issues of contracting and compliance reform. This was a major concern in the first half of the current congressional session and will likely be incorporated into any Medicare reform bill.

Where does all of this leave the practicing radiologist? Many lessons and directives can be gleaned from an assessment of the current economic state of the specialty. As always, the greatest attention must go to the main objective of the profession: to provide the best clinical imaging interpretation possible. Directing attention to quality and accuracy of interpretation should be at least as important as providing what the market is asking for. The emphasis on healthcare quality will resurface, and all practices should be prepared. To preserve revenue, practices must make certain that their inpatient and outpatient services are meeting the new clinical needs of our referring physicians. We should continue to educate clinicians and patients about the safety and efficacy of our offerings and make certain that we remain focused on patient well-being.

Continuing shortages of mammographers and pediatric radiologists, as well as radiologists in general, are another problem. As a specialty, we must begin to address these shortages through training programs for newer physicians, while also training our technologists to be partners in the practice by gaining efficiencies and improving delivery of care.

While attention in the U.S. has been diverted to pressing global and domestic threats, it is up to the practicing radiologist to pay heed to the challenges-economic, legislative, and societal-that will define the future of radiology. Leadership and professionalism will do much to see us through these troubled times.

Dr. Forman is an associate professor of diagnostic radiology and management and director of the MD/MBA program at Yale University in New Haven.