Just as diagnostic imaging providers were figuring out strategies to weather the reimbursement cuts mandated by the Deficit Reduction Act of 2005, the ground shifted once more with a severe economic downturn. While the full impact of the recession continues to unfold, looming developments on the reimbursement front seem to indicate that the rough times are not yet over, especially for those operating freestanding or in-office services.

The Medicare Payment and Advisory Council (MedPAC) has recommended changes to the Medicare Physician Fee Schedule (MPFS) that, if enacted, could potentially represent the final blow to many freestanding providers. Each economic setback—whether enacted or under way or still on the horizon—has required imaging providers to think carefully about how best to compete in this rapidly changing landscape.

Over the past two years, freestanding imaging providers and manufacturers have attacked the first of these setbacks—the DRA—arguing that it would limit Medicare beneficiaries' access to imaging services. According to a Government Accountability Office report published last year, however, such fears have been unrealized to date.

From 2000 to 2006, Medicare spending on physician imaging services increased at an annual rate of approximately 13%, while overall Medicare physician-billed services grew 8% annually over that same timeframe. This equals an increase of $7.1 billion from $6.7 billion to $13.8 billion. During this same period, expenditures per beneficiary for advanced imaging (CT, MRI, and nuclear medicine) grew at twice the rate of expenditures for other imaging services (15.4% versus 7.7%).

By lowering the reimbursement physicians and freestanding providers receive for performing (rather than reading/interpreting) imaging tests to the lower of the MPFS or Hospital Outpatient Prospective Payment System (HOPPS), the DRA attempted to slow the obvious growth in physician-billed imaging services. This so-called HOPPS cap has had the effect of reducing reimbursement on the most commonly performed MRI tests by 21% to 41% and on the most commonly performed CT tests by 7% to 15% within the freestanding setting.

The table on page 18 shows the percentage of volume for each modality that was affected by the HOPPS cap. Overall, as a result of DRA implementation, Medicare expenditures on physician-billed imaging services decreased 12.7% to $12.1 billion in 2007. This represents the first year-over-year reduction since 2000.

While Medicare expenditures for physician imaging services declined in 2007, the volume, or utilization, of such services continued to increase. On a per-beneficiary basis, utilization grew from 1.41 tests in 2000 to 1.99 tests in 2006. In 2007, the volume of per-beneficiary imaging tests increased to 2.05, a growth of 3.2%. Even more dramatic growth occurred among traditionally higher cost procedures, which experienced reimbursement cuts and were paid at the HOPPS rate. On a per-beneficiary basis, utilization of these high-cost procedures grew at 7.4%. This is four times the rate of growth experienced among lower cost procedures—those that continue to be reimbursed under the MPFS.

Whether stated or not, Medicare's goal of reducing costs for imaging services does not seem to have affected access to these same services. Utilization has increased, and there are few reports of widespread bankruptcies or closings of imaging providers. It appears, however, that the growth in the number of new freestanding imaging centers has leveled off in the wake of the DRA.

In addition, while the industry is still fairly fragmented, ownership consolidation picked up rapidly in 2006, as the prospect of the DRA loomed. Almost three-quarters of all imaging centers are now owned by companies that operate more than two such centers (see figure below), up from only half of all centers as recently as 2003. This consolidation will likely continue as payers continue to squeeze reimbursement and as existing well-positioned centers look to strategically lock up the competition and attendant procedure volumes through acquisitions.