Shifts in MRI utilization and payment bode hard times for service providers

You know a business situation is dim when the bright side is thata good chunk of your competition may close shop before you do.That about sums up the state of the outpatient imaging servicesmarket. And wither goes imaging services, so go the equipmentvendors.

For those waiting for Washington to announce a radical restructuringof the U.S. health-care system, the future is already here: managedcare is up, imaging procedures are down, procedure prices aredown, and a glut of scanners is accumulating fast.

No one predicts the demise of MRI, chief high-tech villainamong managed-care advocates. The imaging modality continues togain strength as the clinical modality of choice in many applications.However, MRI profits will flow to the providers who can offerthe latest technology at reasonable prices, which means one thing:volume.

The MRI shared service business is being hit--or soon willbe hit--by a congruence of regulatory and market changes thatwill result in a radical restructuring and shakeout of industryparticipants:

• Whether mandated by Washington or not, managed-carepurchasing of imaging services will grow, pushing down pricesand per-capita utilization rates;

• An outright ban on referring-physician ownership ofimaging centers is close to inevitable;

• Public investors are uneasy over impending health-carechanges and have pulled back from efforts to purchase centersfrom physician partnerships;

• Many existing referring-physician-owned centers reliedon built-in referrals rather than upgrading technology, leavingsites unprepared to compete in a more rigorous, managed-care dominatedservice market; and

• Equipment vendors, struggling to keep sales up, arediscounting scanners and stimulating hospital purchases despitea potential drop in procedure volume.

While some in the service industry point to a block of 37 millionuninsured individuals who might gain coverage under a new health-caresystem, it is not likely that increased MRI scans for this populationwill counter a general drop in procedures as managed-care purchasinggrows. Often MR is provided to indigent patients with the costshifted onto general insurance premiums.

"The assumption is that there is a bubble of 37 millionpeople out there without MR scans," said Antone J. Lazos,chairman and CEO of San Diego-based Medical Imaging Centers ofAmerica. "I am assuming that many of those are being takencare of now and that the quality of care they receive may notnecessarily be the quality of care others receive because of thebasic benefit programs."

Service providers have been hit by a triple whammy, said E.Larry Atkins, president and CEO of American Health Services ofNewport Beach, CA. They are receiving less money for fewer procedures,but still must compete for managed-care business by investingin the latest equipment upgrades.

While the growing predominance of managed care and pressureagainst physician over-referral may partially explain the dropin imaging procedure volume, more than one service company hasheard referring doctors talk of lower patient volume in theiroffices, which may itself be tied to expectations of change inthe health-care payment system.

MRI procedure volume has not increased as expected throughexpanded applications of the imaging modality, such as MR angiography,Atkins said. Problems in reimbursement for these new applicationsare holding down the number of procedures. Vendors appear frustratedas they tout the expanded capabilities of their machines but don'tsee a corresponding boost in business.

Using anecdotal data from California and Chicago, Atkins seesa potential drop in MRI procedures from 26 per 1000 patient populationto 14 when traditional insurance coverage is transferred to managedcare. More hard data are required to gauge the impact of managedcare on medical imaging, he said.

While Hillary Rodham Clinton's health-care task force couldaccelerate the transition to managed care, this process is proceedingapace on its own, Atkins said.

"The Clintons haven't laid a glove on us. The currentenvironment of lower utilization, excess capacity and fallingreimbursement is just a function of the marketplace now."

American Health Services took a major $12 million hit against1992 earnings when, among other charges, it lowered the valueof some imaging equipment and reevaluated the earnings potential--heldas intangible assets--of a service business purchased severalyears ago. The firm's auditors say that its negative cash flowand lack of credit lines places the company's future as an ongoingconcern in doubt.

AHS is currently negotiating with its creditors--scanner supplierGE Medical Systems foremost among them--and evaluating possibleasset sales or mergers.

In theory, the proliferation of health maintenance organizationsshould boost the use of medical imaging to provide early diagnosesand reduce the cost of treatment overall. Unfortunately, the searchfor immediate private and public medical cost control and federaldeficit reduction is focusing providers on short-term savingsand has already cut into the use of imaging.

"We already see the quality of health care eroding,"said MICA's Lazos. "We are seeing more pathology now withour MR scans than we have seen before because scans are beingdelayed."

Assuming an MR examination fee of about $500 and a drop inprocedure rates with managed care, there does not seem to be enoughbusiness to support the 3200 to 3400 MRI systems installed inthe U.S., Atkins said.

"You may only need 1500 machines in this country,"he said.

While it is clear that MRI procedure fees are dropping andwill probably continue to do so, not everyone is convinced thatthe number of MRI procedures is down. More MRI referrals couldbe shifting to hospitals as self-referring owners pull back fromtheir own centers but would rather not send patients to competingphysicians, said Charles Booth, senior vice president of centerfirm Diagnostic Health of Birmingham, AL (see story, page 6).

Diagnostic Health has increased revenue at its centers throughgreater volume. As many existing imaging centers go by the waysidebecause of dead-end equipment and other competitive factors, therewill be room for the efficient service operations to market aggressivelyand build profitable throughput, he said.

"MR is becoming the imaging protocol of choice in a lotof evaluations and diagnostic workups. As a result they (referringphysicians) have to do the studies," Booth said.

While new MR procedures may not presently receive reimbursement,it was not too long ago that MRI itself was not reimbursed, yetcenters were started at that time, he said.