Analysis teases out true value of outsourcing anytime reads

September 1, 2007

The need for nighttime coverage relief was the initial driver of commercially viable teleradiology. For several years, however, the local in-house radiology group gained no economic value for outsourcing its nighttime work, because its members had to reread the cases the next day to formally convert the reports to primary reads. The group also had to pay a premium for nighttime services.

The need for nighttime coverage relief was the initial driver of commercially viable teleradiology. For several years, however, the local in-house radiology group gained no economic value for outsourcing its nighttime work, because its members had to reread the cases the next day to formally convert the reports to primary reads. The group also had to pay a premium for nighttime services.

Only recently have teleradiology providers begun to offer final or primary reads. The offer of final reads not only helps the local group avoid night call; it provides true economic value to the local in-house radiology group. Teleradiologists now can act as an extension of the local group's workforce in completing final reads. These final reads can be performed for nighttime emergency imaging as well as for the group's daytime workload.

This rapidly growing radiology trend, using both outsourced and offshore teleradiology, has led to a rift, with traditional radiologists on one side and progressive radiologists on the other. The general argument revolves around three questions: Can outsourced radiology services be offered at a high enough quality to be generally acceptable to the population? Is there true economic benefit to using outsourced radiology, or is the only demand driver the desire to improve quality of life for the local radiologist? Is teleradiology driven by supplier-side economic surplus becoming overly competitive with local radiology groups such that the hospital-based radiologist's margins are being squeezed?

We address the second of these concerns, regarding economic value gained from outsourcing radiology services, by making two major assumptions about the first and third issues. We assume that a local radiology group can ensure the quality of outsourced radiology by carefully selecting a fully staffed, Joint Commission on Accreditation of Healthcare Organizations-accredited, U.S.-based, board-certified teleradiology provider. We also assume that some teleradiology groups operating today have made a conscious, economically feasible decision to be noncompetitive with in-house radiology groups (what we call the "friendly teleradiology" concept), with the understanding that overly competitive behavior in any market will eventually reduce economic profits to zero.

With these assumptions in mind, we base the following analysis on the outsourcing decision to use a teleradiology group that offers 24-hour service, provides final reports, operates with a fully functional quality assurance program, and is a "friendly teleradiologist" such that it acts as a service to in-house radiology groups and not as a competitor.

The economic question always arises as to whether true economic consumer-side surplus can be gained through the use of outsourced radiology services by a local radiology group. Under the right conditions, this approach can absolutely bring economic value, with a reasonable return on investment (ROI) of 60% or more, when some overflow, nighttime, and weekend casework is outsourced to the right teleradiology group-one capable of performing quality final reports.

We have done a full-scale economic ROI analysis, making reasonable assumptions about the radiology market and adjusting several variables. We found a 63% internal rate of return on an initial investment into outsourced radiology services for daytime, nighttime, and weekend casework when the demand for those radiology services is equal to 30% of an additional full-time equivalent employee. The initial investment in this case is in paying for teleradiology services in year one without any change in staffing for the local radiology group. The return on this investment is driven by the ability to continue into the following four years using teleradiology services to cover the workload of 30% of an FTE as well as night and weekend work such that the local radiology group does not need to fill a full 24/7 schedule.

The analysis uses the following assumptions:

  • The fully burdened cost of one additional FTE radiologist for the average U.S.-based radiology group is $450,000.

  • A radiology group requires a minimum of three FTE radiologists to cover a full nighttime and weekend schedule 365 days a year.

  • When considering an average mix of modalities that any radiologist might outsource throughout any given day, the radiology group incurs a $50 cost for every outsourced case, assuming that the teleradiology group doing the read will return a final or primary report.

  • An average FTE radiologist can read approximately 100 exams in any given workday.

  • Teleradiology service covers days, nights, and weekends.

  • Teleradiology service provides final reports.

  • Replacement of one daytime FTE starts after one year of service.

  • Exam mix includes all modalities.

CRUNCHING THE NUMBERS

The actual calculations for our analysis break out the average cost of an insourced radiology report and compare this with an outsourced radiology report. The primary driver in cost differential between these two types of reads is that the costs for insourced radiology reads are fixed in a local radiology group's cost structure, whereas the outsourced report costs are variable. In other words, a local radiology group must hire at least three FTE radiologists at a cost of $450,000 per year each to cover a full nighttime and weekend schedule for 365 days, and it must then hire an additional FTE radiologist at a cost of $450,000 per year for daytime work of any fraction of 100 cases per day. If the daytime case volume exceeds 100 by any significant amount, then another FTE radiologist at a cost of $450,000 per year would be required for insourced readings.

We work this out in our analysis to a per-exam cost for daytime reads at various marginal costs based on how much of an additional FTE radiologist's time is actually required. If case volume averages 150 cases per day, for example, and the radiology group employs only one FTE, then there would be demand for 50% of an additional FTE. In most cases, however, the radiology group would still be forced to hire an FTE radiologist even though demand is for only 50% of that person. We also assume that in order to staff nights and weekends, only 33% of an FTE is used efficiently because of the requirement for at least three FTE radiologists to cover the full schedule.

In contrast, the per-case cost for outsourced radiology when final reports are generated by a teleradiology group that is available 24 hours a day, 365 days a year is very easy to calculate. Most teleradiology groups offer a per-case price that may vary based on modality but that we assume in this study to average out to $50 per case for a standard mix of modalities. This then goes on a local radiology group's income statement as a 100% variable cost. The local group generates variable revenue through reimbursement from an insurance company and then pays a variable cost for outsourced casework to the teleradiology group. The calculation is straightforward.

In order to show the economic consumer-side surplus generated by outsourcing some of the local radiology group's casework to a teleradiology group, we compare the per-case cost difference for insourcing and outsourcing and then multiply by the number of outsourced cases, which is based on the percentage of marginal caseload for the local radiology group (i.e., if the decision is made to insource by hiring an additional FTE radiologist, what percentage of their time would actually be required to cover the additional case demand). The result of this calculation is a daily net gain (or loss) to the local radiology group for outsourced casework.

We then extrapolate this result to a full 365-day year and carry forward the calculation for four years. We assume that an initial investment is required for outsourcing radiology casework in the first year because a local radiology group will most likely not see any FTE reduction in that year.

PAYOFF BEGINS

As case volume increases into the second year, the decision to outsource some of the casework begins to pay off, as the local radiology group will not have to hire additional FTE radiologists to cover growing demand, nor will it have to continue to staff up for nighttime and weekend coverage. The benefit or gain derived from this effect will be inversely proportional to the percentage of an FTE's time that would be required to cover additional case volume if the decision were made to insource the work. This inverse relationship is shown in Figure 1.

The return calculated in this case is the internal rate of return based on an initial investment in year one followed by gains in the next four years derived from an outsourced per-case cost advantage to the local radiology group. The internal rate of return, in economic turns, is what return would be required from an alternate investment to break even. Returns of over 12% are generally considered economically profitable, as 12% would be a typical gain expected from an alternate use of invested funds.

We also calculate the present value of the estimated cash returns derived from the initial investment into teleradiology. The present value calculations are based on a 12% discount rate. In other words, we assume that the initial cash invested in outsourcing the radiology work to a teleradiology company could have been invested in another project and would earn 12% returns. We then look at the returns that are actually generated in years one through four from the outsourcing decision, discount these accordingly, and sum up all of the present values into a net present value. Figure 2 shows the net present values for various marginal caseloads.

The analysis finds that, if all daytime radiologists are used at 100% capacity with no extra demand in a local radiology group, the decision to outsource nights and weekend work to a teleradiology group has no economic consumer surplus, but it may still be an attractive decision to improve the quality of life of the local radiologist. In some cases, in fact, having teleradiology services contracted is considered a good benefit provided by a local radiology group to attract new FTE radiologists.

But in the event that an additional load on a local radiology group exceeds what the current staffing can handle, and this load would require less than 100% of an additional FTE radiologist's time, the decision to outsource the casework to a teleradiology group that provides final reads and 24-hour coverage has true economic value to the local radiology group. This gain, shown in Figures 1 and 2, is based on the actual percentage of an FTE's caseload that would be outsourced.

Dr. Salen is CFO and Dr. Vincent is CEO and president of Online Radiology Medical Group in Riverside, CA. Mr. Salen is director of technology at Online Radiology Medical Group.