Stock offering signals technology tipping point

April 2, 2006

A recent move by a market-leading teleradiology services provider may signal the beginning of unstoppable momentum for a disruptive technology, with significant consequences for our specialty. The provider filed a registration statement with the Securities and Exchange Commission for a proposed initial public offering of its common stock.

A recent move by a market-leading teleradiology services provider may signal the beginning of unstoppable momentum for a disruptive technology, with significant consequences for our specialty. The provider filed a registration statement with the Securities and Exchange Commission for a proposed initial public offering of its common stock.

A "disruptive technology" is an innovation, product, or service that, through a series of cascading events, eventually overturns the existing dominant technology. By contrast, the term "sustaining technology" refers to the successive incremental improvements to performance that are incorporated into an existing product.

The ability to transmit large amounts of data rapidly over great distances is a disruptive technology. Its application to medical imaging data spawned the teleradiology industry, which may turn out to be disruptive or sustaining.

Many of our colleagues harbored optimistic notions that teleradiology would be benign to radiologists because the founders of many of these companies were radiologists. We saw the ability to enhance our lifestyles and provide more timely interpretations as winning solutions for our patients and for ourselves. Some small and rural radiology practices welcomed the access to subspecialty radiologists. These benefits of teleradiology are indisputable.

Even before the birth of the first "wet read" company, however, some radiologists recognized the potential disadvantages associated with teleradiology. One drawback is the disconnect between offshore radiologists and the immediate community from which the images originate. Although teleradiologists may have credible training, they likely do not have the same level of involvement in the medical community and the same degree of commitment to interpretation of all examinations for all patients as do local radiology practices.

Another concern is the potential for bidding wars in response to the search for the lowest price available for preliminary and final interpretations. The provision of intermittent subspecialty overreads to a small hospital requires technology similar to that required for interpretation of all cases, an observation a hospital CEO is likely not to miss. The rapidly proliferating self-referred in-office imaging performed by nonradiologists-permissible under loopholes in the Stark laws and creative permutations in their interpretation-is particularly receptive to bids from low-cost, geographically diverse practitioners.

Because they do not have the same overhead as local radiology practitioners, teleradiology providers charge less than local competition, thereby facilitating the spread of teleradiology ventures and making them more profitable. They also lack the same business considerations, attention to patterns of local care, access to follow-up, or accountability for the clinical consequences of the examinations or their interpretations.

ENTER WALL STREET

As imaging moves into the crosshairs of payers-both governmental and private-pressure is mounting to reduce its associated costs. During the last presidential campaign, a conversation on "Meet the Press" about the Medicare crisis featured political pundits touting the potential savings from outsourcing radiological interpretations to India.

As more imaging is brokered by nonradiologists and people who have no appreciation for the science provide services that they delegate to others, the imperative to maximize profits will come to the forefront. Independent imaging centers and increasing hordes of self-referrers will also want to maximize profits. Consequently, payers will seek to decrease their expenses. These scenarios promote the evolution of radiological interpretations to become more like commodities that are subject to ready exchange or exploitation within the market.

The Internet has already begun a revolution in many markets: eBay comes to mind. There is no stopping these kinds of disruptions to the status quo, and a commoditized radiology may be no different. Market forces, along with the imperative to reduce costs and the brokering of imaging, will engender a change in the way radiology is practiced.

We can prepare now for imminent change. With the entry of public money and the control exerted by venture capitalists, underwriters, and others, we can expect aggressive and predatory pursuit of market share. As the market for night-time wet reads becomes saturated and the competition heats up, Wall Street managers of these and new companies will turn to supplemental sources of revenues, including daytime reads.

Public teleradiology companies will not be the only predators. Numerous radiologist-owned entities already solicit primary interpretation opportunities from self-referring nonradiologists. Advertisements already appear in general medical management journals from certain prestigious radiology departments offering their services to nonradiologists. They say, "Let us bring world-class imaging to your doorstep. If you are sending your patients down the street, you may be losing potential revenue and inconveniencing your patients." Some also solicit work directly from hospital administrators, essentially striving to displace local radiologists. The entry of Wall Street, however, will ensure a more forceful and pervasive push as the governance includes more savvy and aggressive investor-managers.

If I am correct, the disruptive technology has reached a tipping point. Absent regulatory relief or restriction, we radiologists will have to either compete on price or demonstrate that radiological interpretation is not a commodity and that local radiologists bring value to the process that cannot be accomplished via long-distance communication. Otherwise, we will provide services whose prices are determined by an international wage scale.

A full discussion of the spectrum of potential preparations that radiologists can make to deal with this threat is beyond the scope of this column. Briefly, to avoid teleradiology-induced obsolescence, we must take the following steps to make the disruptive technology a sustaining technology:

- demonstrate our value to the healthcare process, thereby precluding the need for outside assistance;

- create the local capabilities to deliver a product that is better than what can be supplied by the faceless providers;

- become familiar with existing laws and regulations that would serve to limit the operational alternatives of the teleradiology companies; and

- strive to ensure that the legislative, regulatory, and hospital governance environments are favorable to us.

Although teleradiology has many benefits for patients and radiologists, the implementation of the technology is fraught with potentially deleterious consequences for radiology as a profession and business and for patient care. Radiologists accustomed to the protection of an exclusive arrangement with hospitals, a dominant position in their local markets, or other apparent positions of strength should not rest easy. The reaction of incumbent radiologists may determine whether the technology is disruptive or sustaining.

Dr. Kaye is radiology chair at Bridgeport Hospital and president of Advanced Radiology Consultants in Bridgeport, CT.