Diagnostic Imaging
November 2003

RADIOLOGY ECONOMICS

Medical trends will put pressure on imaging income

Declines in reimbursement look likely, but radiology could gain from smart response to adversity

The recession is officially over. Actually, according to the National Bureau of Economic Research (http://www.nber.org/cycles.html), the U.S. exited recession in November 2001. It is not surprising that a long interval is required to confirm such an important turn in the economy. What is surprising is that it remains sluggish.

We have been unable to create new jobs, budget deficits have worsened at the local, state, and federal levels, and the demands of ongoing international and domestic security operations have left the U.S. with one of the most challenging economies in several decades. While some enjoy the recent tax cuts, the adverse consequences for our country and economy will last for decades.

What does this forebode for radiologists? The average radiology practice, whether academic or private, relies on public and private sources of reimbursement. Both are now under enormous pressure. Legislation pending in Congress seeks to add a prescription drug benefit to the Medicare program. This is much needed, but it creates an additional strain on Medicare and will add to demands for decreased reimbursement or decreased imaging utilization to control spiraling costs.

Medicaid, although it is a smaller part of the reimbursement of most practices, actually serves a larger number of citizens than Medicare. As a federally mandated but dually (state-federal) funded program, it is under budget pressure not only from the federal government but even more so from individual states. While the federal government can run large deficits, most states cannot. Their budgets must be balanced, and some Medicaid spending is discretionary. Our two most important sources of public funding are thus under tremendous pressure.

The dramatic increase in the U.S. government's annual budget deficit and the resulting debt will undoubtedly pressure our legislators to either reduce Medicare reimbursement, curtail universal access to the program, or enact some combination of both. When the highest consuming segment of the healthcare economy is at risk, our practices will feel the resulting pain.

Private-sector reimbursement is generally considered to be richer for most practices. There is little doubt that most practices engage in cost shifting so that their private-insurance patients pay for more than their share of the costs of imaging while the public sector pays for less. This may be an inefficient financing mechanism, but there are no meaningful alternatives in a country that refuses to consider universal healthcare.

In economically robust times, this financing model can be favorable. Employers are generally willing to improve benefits to retain employees. But in the current situation, unfortunately, two major forces are leading to decreased support from the private sector: increasing unemployment with the accompanying loss of private-sector coverage, and a decreased willingness to pay for increasingly costly health benefits.

As shown in the graph, the benefit component of the employment cost index has worsened. According to last year's economic update, the divergence in benefit and wage/salary costs puts pressure on employers. When unemployment is low, employers must pay the added costs of benefits or risk losing their scarce human resources. When unemployment is rising, however, as it currently is, employers have a few levers to use in trying to control this divergence. They may ask their employees to bear more of the cost of health coverage through increasing co-pays or premium sharing. They may provide the benefit to fewer employees, using full-time status to restrict access. They may shift to less expensive (usually more heavily managed) programs. Finally, they may choose either to drop health coverage or never to initiate it.

Managed-care and insurance entities, for their part, seek to maintain as much business as possible. When faced with employers' reduced willingness to pay, they respond by developing more restrictive and more heavily managed plans.

TROUBLE AHEAD

Although most radiologists have felt relatively protected from the effects of the current economic malaise, it is certain to have an impact. The increasing uninsured population, coupled with decreasing public-sector reimbursement and an increasing reticence on the part of the largest employers to provide good health benefits, means that radiology practices must once again prepare for challenging times.

The current legislative calendar does not offer much hope for a federal solution. Congress will continue to consider prescription drug legislation without making draconian changes to the Medicare program. As both political parties have acknowledged the importance of some form of cost containment or greater fiscal control, we would expect that the current Medicare+Choice program (or managed Medicare) will receive enhanced funding and efforts toward increased enrollment. While the introduction of more managed care and less traditional fee-for-service Medicare may be welcome in some parts of the country, in most areas, it will not. The other proposed legislative and executive branch efforts at cost containment may be challenging, but they certainly have promise for the innovative practice.

Competitive bidding and incentives for quality services are means by which Medicare hopes to contain costs and seek the best services. As the single largest payer for health services in the U.S., Medicare has a unique ability to effect change. Practices should be aware of their costs and of the minimum acceptable reimbursement for imaging studies. They should attend to providing the requisite services that are being demanded. In this model, a fixed, mandated fee schedule from Medicare is replaced by contracted fees, perhaps by auction.

On the other hand, without a true fix to the sustainable growth rate (SGR) legislation first enacted with the Balanced Budget Act of 1997, we may be faced with true declines in reimbursement for many of our services. If this occurs, the effect on our practices could be devastating. With reduced reimbursement by a large but not truly monopsonistic purchaser, radiologists may begin to opt out of Medicare. This would not have serious consequences if the supply of radiologists were greater than the demand, as others could step in to cover for those who chose not to provide services.

It is in the areas where supply is already tightest, however, that the "profit-maximizing" radiologist will either officially or implicitly opt out of Medicare by diverting resources to non-Medicare patients. We are already seeing this in some regions with large numbers of screening centers. The increased emphasis on novel but elective radiology procedures such as venous embolotherapy and fibroid embolization is another sign of this trend. It is therefore appropriate for us to speak directly to our elected representatives and demand that the SGR legislation be corrected. The short-term fix created this past year is insufficient to prevent declining access to imaging services among our nation's elderly and disabled citizens.

It is not unfathomable that the dereliction of the SGR legislation is purposeful. Could our current elected officials actually want to see the demise of the fee-for-service Medicare system? If this issue is not addressed, we may see a migration of Medicare-eligible citizens to managed Medicare because the fee-for-service Medicare system will no longer have enough physicians to provide access.

What are the appropriate strategies to undertake with private payers? When employers last tried to reduce health benefit costs, in the early 1990s, our specialty and most of organized medicine was ill prepared for the influx of managed care. We responded poorly, by decreasing residency slots and changing hiring practices. Things could not be more different at the present time. The diversion of many well-trained radiologists to screening centers and other entrepreneurial ventures makes the staffing shortage even worse. Despite early indications that new trainees are entering the market, the shortage persists and puts the specialty at great risk for losing turf wars, failing to serve certain markets, and ceding our position as innovators.

While this update may be sobering, many opportunities to grow stronger are available during this time of adversity. Radiologists have skills and abilities that are without parallel. We can respond by doing the following: