The end (of a declining imaging market) is near

July 30, 2009

The makers of imaging equipment will soon get a handle on industry-wide performance in the first half of 2009, tallying the units sold and revenue earned. They’ll put their numbers in the context of what they believe their competitors did and come up with a snapshot of where we, the imaging community, have been. I’m betting two bits to a donut it won’t be pretty.

The makers of imaging equipment will soon get a handle on industry-wide performance in the first half of 2009, tallying the units sold and revenue earned. They'll put their numbers in the context of what they believe their competitors did and come up with a snapshot of where we, the imaging community, have been. I'm betting two bits to a donut it won't be pretty.

Preliminary reports suggest that the glamour twins of the industry, MR and CT, have been battered. Million-dollar-plus machines are no longer in vogue for macroeconomic reasons.

Financial analysts are scouring the economic landscape for signs that the recession, now officially the worst economic downturn since the 1930s, is coming to a close. I am not encouraged that the best they can find for "green shoots" is a gradual decline in the number of jobs being shed each month. This is like a pilot feeling encouraged that her plane is losing altitude at a slower rate. Eventually the plane, like the economy, will level off. How big the thud will be is the question.

The near-term answer for the imaging community may be found in the stock market. Many hospital purchases of high-tech equipment were funded from endowments enriched by a booming stock portfolio. Predictions that the recession would end in this second half of the year have been marred by rising unemployment and fears that an expanding out-of-work force would hurt the expected recovery. Those fears have been amplified lately by the recognition that extended unemployment benefits were running out for the early waves of workers who were pushed out of jobs at the end of last summer.

But the stock market, which responds more to expectation than event, has historically rebounded months ahead of a recession's end. The market now appears on the cusp of such a rebound, as stock pickers see a trend toward better-than-expected corporate quarterly results. The next few months will tell.

Contributing uncertainty are the yin and yang of healthcare reform. As the Obama administration pushes a government insurance option that would increase demand for diagnostic services, including medical imaging, it also seeks a revision of the Medicare formula used to reimburse radiologists. The issue here is the assumed utilization of equipment, which Obama would like to boost from the current 50% to 90% for advanced imaging systems. A healthcare reform proposal now being considered by Congress would boost it only to 75%, still a significant bump, but not as much as the administration would like to see. Such a change would effectively reduce per case reimbursements. But decreased reimbursements would be outweighed by rising volumes of patients.

In sum, efforts to reform healthcare seem on track to boost utilization while reducing reimbursement. This is pretty much what we've seen for the past two decades-with one exception: The installed bases of high-tech imaging equipment in this country, comprising CT, MR, and PET/CT, today represent largely replacement markets with little expansion. A substantial boost in utilization, made possible by the availability of a public health insurance option, will outstrip the capacity of equipment installed at medical facilities currently operating at optimal volume. For the most part, these are the midsize and large hospitals that for the past several years have deferred the purchase of MR scanners in favor of upgrades and jumped on the introduction of 64-slice CT to drive that marketplace to unprecedented heights.

Recently developed and commercially launched low-dose, high-performance CT scanners and 3T scanners built for routine clinical use are ready-made to satisfy this future need. Similarly, a new generation of PET/CTs has emerged, offering faster and higher resolution hybrid scans. Demand for these systems will quicken with the availability of new PET radiopharmaceuticals, which could enter the market over the next couple of years.

So it is that we appear to be on the verge of a phoenix-like resurgence in medical imaging. The trigger would be healthcare reform and the unprecedented rise in utilization it would bring. An early and unconnected rebound in demand for imaging equipment could come by year's end with the recovery of the stock market, as rising endowments allow institutions to replace MR and CT devices.

Another, less attractive, scenario would result from the scuttling of healthcare reform. But even under those circumstances, demand for high-tech imaging equipment would grow following the dictate of a replacement market that can hold out only so long until aging machines have to be replaced.

If this logic proves correct, the need for replacement systems will spur rising orders for MR scanners by year's end, particularly in the 3T segment, which already has bucked the overall decline in demand seen in this modality. CT sales could rebound as early as the end of this year but almost certainly in the first half of 2010. If healthcare reform passes, demand for equipment in both modalities will abruptly increase, a consequence of supply and demand, if not political necessity.

With a major argument against public insurance being the long wait times for diagnostic services in countries with socialized medicine, the Obama administration has a vested interest in not allowing its healthcare reform program to cause this in the U.S. If such waiting lines begin to form, we could see the return of something like the long abandoned Medicare Pass-Through. This program provided government funding for the purchase of new equipment according to a formula based on the percentage of Medicare patients handled by an institution. This time, however, the formula would factor in patients covered by a much broader insurance program, a repeat of history that in retrospect will seem obvious.