Market conditions test economics of diagnostic imaging services

July 1, 2009

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.

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.

While the DRA hit freestanding centers especially hard, the impact of the recent economic downturn appears to be more wide reaching. A survey completed by the American Hospital Association in late 2008 found that 45% of hospitals have halted or delayed new investment in clinical equipment and technology. Anecdotal reports from our clients suggest this is familiar territory for freestanding imaging centers. Many began to delay capital investment when the DRA was implemented, but now the economic downturn has further restricted access to capital. Only extremely well-capitalized operators are considering upgrading or acquiring new equipment, and many of the financing deals once available have dried up.

Providers are not the only ones that have been affected by the current economy-patients have had to make hard choices about what medical care they receive. A recent Kaiser Family Health tracking poll indicates that over 50% of surveyed consumers delayed or skipped medical care over the past year. Almost a quarter of respondents skipped a recommended test or treatment. Among our client base, imaging volume was down significantly during November and December 2008. While these are usually lower volume months, January 2009 was also much weaker than expected. Over a third of patients decided to try home remedies rather than visit the doctor. Imaging providers will have little control over volume reductions if patients are not entering the healthcare system at all.

The most recent U.S. Census Bureau analysis found that the percentage of the population with employer-sponsored health insurance has declined and state Medicaid rolls have increased. If more employers reduce staff in an effort to trim costs, this trend is likely to continue.

RECESSION FALLOUT

Assessment of the lasting fallout from the recession is likely still months or even years away, but evidence suggests that imaging will remain in the crosshairs of any broader healthcare reform initiatives. In a national study presented by Advanced Radiology Consultants at the RSNA meeting last year, 69% of radiologists reported receiving unnecessary or duplicative scans in the past six months. Spurred by these numbers and recent reports of the dramatic increase in radiation exposure resulting from imaging procedures, especially CT scans, payers will likely seek additional ways to control utilization. Radiology benefit managers are now used by 90% of commercial insurers for controlling imaging utilization. The GAO has recommended that Medicare begin to implement a radiology benefit manager solution as well.

The DRA took a big swing at freestanding imaging provider reimbursement, but another equally, if not more, dramatic change could be coming at these providers in the near future. Currently, freestanding imaging center providers are reimbursed for imaging technology practice expenses based on the assumption that the imaging units are operating 25 hours per week. MedPAC has recommended that this basis be changed to 45 hours a week.

A 2006 MedPAC survey of physician offices and freestanding imaging centers found that the median hours of use for CT and MRI were 40 and 46, respectively. This potential change to the reimbursement formula would reduce payment for the technical component by as much as 44% and create incentives for providers to purchase and operate imaging equipment only if volume warranted operation at near-full capacity.

If this recommendation is implemented, the expected reimbursement cuts will likely force further contraction among freestanding imaging centers. The net result would be higher utilization at the remaining freestanding centers or at hospitals and hospital-based imaging centers. Shifting patient volume back to hospitals, which have largely been left alone by Medicare to date, will ultimately drive imaging costs back up under current hospital reimbursement levels. This consequence will likely force Medicare and commercial payers to take a second look at hospital reimbursement.

In an effort to compete with freestanding imaging providers, many hospitals have invested in provider-based freestanding imaging centers. These facilities often maintain a separate entrance for quick, easy patient access. Operations at these facilities are meant to mirror the high customer service level offered at independent freestanding imaging centers and typically have a lower cost structure as a result. The successful provider-based centers are virtually indistinguishable to outsiders from their freestanding brethren. Yet because they are a department of the hospital, they are reimbursed at hospital commercial rates, which can be as much as 55% higher than commercial rates paid to freestanding centers.

If more volume is shifted to hospital-based centers as freestanding providers fail and these centers look and feel like freestanding operations, hospitals will need to develop a compelling argument as to why they should continue to command such preferential reimbursement. A bright spot for freestanding imaging centers relates to commercial reimbursement, however. These payers need to offer a low-cost option in their provider networks and have incentives to drive as much volume through these low-cost options as possible. If Medicare continues to squeeze freestanding imaging centers, these facilities have significant leverage to request rate increases from the commercial payers. Even with a 10% to 20% rate increase, freestanding facilities will still be a low-cost option for these payers when compared with hospital-based options.

The only constant in the economic outlook for imaging services is change. There may not be many avenues left to cut costs through operations since most of these services are fixed-cost businesses. Providers will need to differentiate their offerings more than ever and drive more volume through their enterprises by offering patients and referring physicians value regardless of the reimbursement climate.