Whacked! Radiology recoils under DRA ax

November 1, 2007

Representatives of the Access to Medical Imaging Coalition worried that freestanding outpatient imaging was heading toward disaster when they arrived at the White House on Sept. 10 to lobby for support from the Bush administration.

Representatives of the Access to Medical Imaging Coalition worried that freestanding outpatient imaging was heading toward disaster when they arrived at the White House on Sept. 10 to lobby for support from the Bush administration.

The AMIC team included some of the most powerful people in medical imaging: American College of Radiology executive director Dr. Harvey Neiman, ACR assistant executive director Cynthia Moran, GE Healthcare CEO Joe Hogan, Siemens Medical Solutions senior vice president Doug LaVigne, and high-level officials from the American College of Cardiology, Cardiology Advocacy Association, and ultrasound system manufacturer SonoSite.

Backed by 42 associations and companies, AMIC was formed in 2006 to enable frequently feuding members of the imaging community to speak with a single voice in an increasingly hostile Washington, DC. Executive director Tim Trysla arranged the White House briefing.

The group covered two main points in an hour-long meeting with Julie Goon, assistant to the president for health affairs. Its members described damage from Medicare reimbursement cuts in the Deficit Reduction Act, and they stressed how proposed extensive imaging reforms in the Children's Health and Medicare Protection (CHAMP) Act, a bill aimed mainly at extending Medicaid benefits to uninsured children, could strike a crushing blow to their industry.

Medicare technical payments dropped for most freestanding imaging centers in the first half of 2007 because of the DRA. The DRA cap, the term widely adopted to describe the new reimbursement policy, was intended to save money and equalize payments from the Medicare Physician Fee Schedule-the rates paid to most freestanding imaging centers-and the Hospital Outpatient Prospective Payment System, which was designed for hospital-based outpatient imaging. Congress instructed Medicare to pay nonhospital freestanding facilities the lower of the PFS or HOPPS rates for hundreds of imaging procedures.

The DRA also addressed the issue of discounts for imaging of contiguous body parts. The Centers for Medicare and Medicaid Services had previously proposed a discount for CT, MR, and ultrasound procedures in the 2006 Medicare Physician Fee Schedule. The new rates pay 100% of the technical component for the first segment imaged during an exam. The rates are then cut 25% for adjacent segments examined during the session. Congress exempted the new formula from its policy concerning budget neutrality, so the savings could be reflected in the Medicare budget.

Predicted losses from the DRA cap varied from $1.4 billion in the first year to as much as $13 billion over a three-year period. After six months, actual imaging center experience shows the DRA cap has drained the profit from the technical side of outpatient imaging covered by Medicare. Revenues from the technical component fell as much as 35%.

PET/CT centers, which are particularly dependent on the federal insurance program, saw their technical rates fall 63% (Table 1). Centers closed, and center valuations plummeted. The medical imaging device industry saw sales of CT, MR, and PET-the mainstays of outpatient services-fall by $125 million.

"This is a jobs issue and a competitiveness issue," Hogan said immediately after the briefing. "There will be no incentive to invent, upgrade or innovate if the current environment does not change."

Neiman stressed quality issues during the meeting. The DRA cap has failed to address why medical imaging had become the biggest contributor to the growth of physician services covered by Medicare, he said.

"What was driven home well was the fact that the DRA is a reimbursement cut that does nothing to achieve utilization control or management," he said. "We really need to look at utilization and not willy-nilly chop reimbursement."

Neiman lobbied for accreditation programs, appropriateness criteria, and order entry decision systems designed to eliminate inappropriate utilization. Trysla identified imaging innovations that have helped improve medical diagnosis and treatment.

The group urged the Bush administration to support the Access to Medical Imaging Act, a bill that would set aside the DRA caps for two years and require a study of their potential impact.

Enactment of CHAMP's imaging provisions seemed unlikely, but the implications of its numerous payment cuts and reforms were so alarming that they demanded attention. After the DRA cap, the CHAMP proposals seemed like piling on. (A Senate-House conference committee set aside the objectionable provisions 11 days after the briefing, but they could appear again when Congress considers its next major Medicare bill before the end of 2007.)

PROVIDER EXPERIENCE

Actual experience suggests fears about the DRA cap were justified. Its "lower of" payment formula had a sobering effect on Advanced Medical Imaging, a radiologist-owned imaging center in Kokomo, IN (Table 2). The Medicare technical payment rates for its CT angiography, MRI, and MRA services fell an average of 36.4%, 35.8%, and 29.1%, respectively, this year.

PET providers have always had a hard time catching a break. Slowed by political and regulatory problems, the modality did not qualify for Medicare reimbursement until 1998. Efforts to expand coverage beyond 10 initial applications were successful only after the Academy of Molecular Imaging agreed last year to sponsor the National Oncologic PET Registry (NOPR), an elaborate reporting system that compares the costs of dozens of new applications and their impact on patient management.

Though global reimbursement for PET was as high as $2800 just four years ago, payments fell steadily before taking a big hit from the DRA. The timing was inopportune. Most centers were still working off their startup costs or had recently upgraded to new $2.5 million PET/CT scanners. Because most PET procedures are directed at cancer and Alzheimer's disease patients, centers rely on Medicare for up to 50% of their business. Most have not diversified to reduce their risks.

The lower DRA rates took a bite out of PET/CT-related revenues at US Oncology, a publicly traded company that operates a national chain of cancer treatment centers. The company announced in its second quarter Securities and Exchange Commission report that pretax income from its 38 PET/CT services fell $4.7 million in the first six months of 2007, compared with the same period in 2006. The report estimated pretax income from PET/CT would decline $8 million to $10 million for the year.

The effect can be seen in a pro forma financial statement prepared by CEO Fred Stuvek and CFO Guy Messer of Georgia-based Trident Molecular Imaging (Table 3). If this hypothetical center scanned an average of 3.3 patients per day, the industry average in 2006, it would lose $160,657 in a year of operations.

To keep its own financial head above water, Trident restructured its debt, renegotiated supply contracts, and invested in PACS to control costs at its three centers. The firm has sponsored a continuing medical education program to help local physicians learn when PET/CT should be ordered for diagnosis, staging, restaging, and therapy monitoring.

Publicity from a new GE Discovery STE PET/CT machine helped boost utilization 27% this year at Roper PET/CT Imaging in Charleston, SC. The service, associated with Roper St. Francis Hospital, serves six patients per day, enough to stay profitable despite DRA-related rate cuts. Imaging manager Dawn Ludwig decided against filling a half-time technologist position, and a new McKesson RIS/PACS is improving the speed and quality of communications with referring physicians and soothing their irritation with the added paperwork spawned by the center's involvement in the NOPR.

"We are going to continue this service regardless of the revenue situation because it is the right thing to do," Ludwig said. "It is part of our hospital's oncology package, and oncology patients must have access to PET/CT."

WINNERS AND LOSERS

Dr. Howard Berger, CEO of RadNet, has used the DRA cap to his advantage. By destabilizing the imaging services market, the cuts set the stage for Berger's July 2006 purchase of Radiologix, a national imaging center chain based in Houston. Before the merger, RadNet subsidiary Primedex Healthcare owned 60 imaging centers and faced the prospect of about a $4 million revenue loss from the DRA. Radiologix owned 72 facilities. Its financial forecasts indicated revenues would drop $13 million because of the new Medicare payment formula.

The merger helped offset the expected DRA effect and enabled RadNet to apply skills learned while operating in southern California's tough managed care market to former Radiologix facilities in Texas, Maryland, and upstate New York. RadNet is profitable, with a 12.9% increase in pretax income on revenue of $107 million the second quarter of 2007.

The merger also established Berger's reputation as an industry consolidator with enough financial backing to build RadNet by acquiring distressed properties in specific regional markets. His objective reflects a goal aimed for but often missed by imaging center chains in the past. Radiologix had some success achieving regional dominance in several parts of the country and leveraging better terms with healthcare insurers.

Plenty of properties are available to help RadNet execute that strategy. About 10% to 12% of imaging centers were behind in their lease payments in the third quarter, according to consultant Steven R. Renard. Incidences of problem loans and leases are expected to increase as cash reserves are depleted and distributions to owners reduced. Portfolio managers have received numerous requests for refinancing and workouts.

Peter Myhre, CEO of Marcap, a Chicago-based healthcare financing company, said short-term delinquencies have increased. About 10% of his imaging center customers complain of tight cash flow, though most continue to pay on time because they can draw from resources other than medical imaging.

Strategies that may be available to these customers include renegotiating service contracts, reducing payments to radiologists, and extending the terms of their financing. Extensions make sense in selected situations because imaging centers are generally not upgrading equipment as quickly as in the past, Myhre said. The trend lessens the pressure on distressed imaging services to upgrade to stay competitive. Imaging utilization growth and a downturn in new imaging center development could lead to organic growth for well-established facilities.

Interest rates, especially on working capital loans, have risen because financiers see more financial risk in imaging center businesses, said Bob Maier, president of Regent Health Resources in Brentwood, TN. Imaging centers that rely on Medicare for more than 35% of their revenue are considered high risk.

The sale value of an imaging center is typically based on a multiple of its earning before the deduction of interest, tax, depreciation and amortization expenses (EBITDA). Valuations were typically 4.5 to 6.5 times EBITDA before DRA cap implementation. By mid-September, they had fallen to multiples of 3.5 to 5.8 earnings, Maier said.

This pattern has worked to RadNet's advantage. In September, it purchased three multimodality facilities in Victorville, CA, strengthening its established presence northeast of Los Angeles. RadNet also entered into an agreement with the creditor of Nydic Open MRI of America to manage 20 foreclosed imaging centers.

Outpatient Imaging Affiliates, a 14-center chain based in Nashville, is also looking at acquisitions, despite a 33% reduction in its Medicare-related MRI technical payments. The DRA cap cut OIA's Medicare-related PET and CT rates 26% and 16%, respectively. Several of OIA's centers are joint ventures with large academic hospitals.

"It ends up being a pretty big hit for these facilities," said Cannon King, executive vice president of business development. "Our hospital partners tend to do a lot of government work, and their scans are more complicated than what you see in a pure outpatient market."

Like Berger, King is looking to buy out centers to consolidate the chain's position in communities where it already has a presence. He received numerous calls through the summer from centers looking for buyers, but most were financially too weak to justify resuscitation, he said.

MIXED RESULTS

Though hospitals have felt some effects of the DRA cap, they are largely immune from its downside effects because their Medicare-related imaging business is covered by inpatient diagnostic-related groups or the outpatient HOPPS fee schedule. Some hospitals are taking advantage of the DRA cap by buying neighboring imaging centers to eliminate competition.

An emphasis on hospital partnerships and mobile imaging helped Alliance Imaging to avoid DRA fallout. Of 484 imaging systems that Alliance owns, 410 are mobile. Its hospital partners typically use the HOPPS rate schedule to bill Medicare.

Even with limited exposure, Alliance's pretax earnings declined $7 million in the first half of 2007 because of a 38% cut in the Medicare MRI technical rate and a 56% technical rate reduction for PET/CT, said CEO Paul Viviano. He responded by closing 10 fixed site services and deemphasizing PET/CT development.

Reimbursement has dropped 10% across the board at Metro Imaging, a network of five freestanding centers owned by a 13-member radiologist group in St. Louis. MR and CT have taken the biggest hits, with cuts of 20% to 40%, respectively, according to CFO Christine M. Keefe.

Metro accelerated its adoption of digital radiography to improve on efficiency over its now-retired analog systems. Digital mammography allowed the practice to close one room and work with one less technologist. A sophisticated RIS from Merge helps Keefe monitor staffing and imaging volumes.

"We massaged our staffing as much as we can. We tweaked our hours, renegotiated our service contract, and reduced preventive maintenance sessions," she said.

The cuts are so deep for DRA Imaging, a network of three centers along the Hudson River south of Albany, that no strategy can compensate for all the lost revenue, said CFO Mark T. Newton. The 12-member Hudson Valley Radiologists, which owns the centers, has postponed equipment purchases. Upgrades will be scheduled less frequently.

A diversified payer mix helped Radiological Associates of Sacramento limit its loss to less than 2% of total revenue. With 23 imaging centers, RAS has made up the difference with volume growth, especially from new sources of business, according to Fred Gaschen, executive vice president. Its marketing staff has reached out to personal injury attorneys and employers for workers' compensation referrals. The group's interventional radiologists are performing more vertebroplasty in its freestanding centers to capture the technical and professional components of these procedures. Four more physicians' assistants were hired to help boost radiologist productivity.

PRIVATE INSURERS STAND PAT

Most private insurers have yet to lower their rates to reflect the DRA reductions. Trident Molecular Imaging has kept insurers at bay by disclosing its precarious financial situation.

"They see the value in having a network of PET providers who offer routine and high-quality services," Stuvek said. "They understand it is not in their interest to drive us out of business."

Private insurers in Minnesota also recognize that they benefit when freestanding imaging centers survive, said Robert Baumgartner, CEO of the Center for Diagnostic Imaging, a Minneapolis-based imaging services company with 41 freestanding centers in eight states. Without independent imaging services, imaging would shift to hospitals that charge high rates.

CDI has refused to cooperate with managed care plans that have tried to adopt lower rates.

"We just go out of network if they try to cut us," he said. "That means we'll charge full price to their network patients. In some instances, it makes sense for us to image fewer patients at a higher rate. Most insurers don't want that and will settle at a reasonable rate."

Some insurers are not so charitable. Missouri Blue Cross lowered its technical payment this year to reflect the DRA rates, and United Healthcare reduced the technical payment for imaging of contiguous body parts to reflect the PFS rates in 2006. In upstate New York, about one in four private plans have attempted to cut their rates, according to Newton. Newton cannot identify these insurers because of nondisclosure agreements, but he said several plans have tried to adopt the federal DRA cap on the grounds that their contracts allow them to pay a percentage of Medicare.

They argue that if Medicare is paying at the lower HOPPS rate, they can too, he said.

DRA Imaging (formerly Dutchess Radiology Associates) has forced several insurers into arbitration. Newton and his colleagues argue that plans cannot adopt the HOPPS rates when the contracted payment scheme uses relative value units, the basis for the PFS. Such reasoning may help hold the line on cuts for now, but Newton expects private insurers to naturally gravitate toward the federally inspired DRA caps over time.

"If Medicare pays a lower amount, it will move the market down, though I suspect the health plans will find a balance between paying less and driving outpatient imaging out of business," he said.

HARD TIMES FOR MANUFACTURERS

For equipment manufacturers, the recession triggered by the DRA caps is serious, but they consider it part of a natural business cycle. GE, Philips Medical Systems, Siemens, and Toshiba America Medical Systems have all weathered recessions before. Each has global reach and is highly diversified. The U.S. downturn is counterbalanced to a degree by booming demand in China and India.

"These kinds of changes in our marketplace are not unheard of. They have a tendency to freeze the market until people figure out how to deal with the new regulations," said John Zimmer, director of sales and marketing at Toshiba.

But the downturn still hurts. Steve Rusckowski, CEO of Philips Medical, predicted that U.S. sales would decline by $350 million to $400 million in 2006 when customers were worried about the upcoming DRA cap. Sales dropped another $600 million to $700 million in 2007 when its effects became evident.

Because of global diversification, GE Healthcare experienced only a 1% decrease in revenues and an 8% decline in quarter-to-quarter profits. GE equipment system sales declined, however, by a double-digit percentage in the first half of 2007, said CEO Hogan. A direct connection can be made between the DRA fallout and cutbacks at GE affecting 1000 employees at corporate and manufacturing facilities in southeast Wisconsin alone, near the company's corporate headquarters in Waukesha.

What really concerned AMIC members as they gathered at the White House was the possibility that the DRA cap will lead to deeper cuts and harsher policies that could ultimately halt the R&D machine that powers diagnostic imaging.

For now, manufacturers are placing more emphasis on scanner efficiency. GE has been unique in its sponsorship of conferences and web-based programs to help freestanding imaging centers cope with the cuts. But the manufacturers continue to rely on the U.S. as a source of R&D innovation and equipment sales.

"We are continuing to innovate," said Tom Miller, president of health services for Siemens Healthcare Solutions in Erlangen, Germany. "At the next RSNA, we will show as many innovations as ever or more."

The major vendors continue to have a significant R&D and manufacturing presence in the U.S, Miller said. The country has a net positive balance of trade when it comes to medical imaging.

"And companies like ours concentrate efforts where the markets are," he said.

Mr. Brice is senior editor of Diagnostic Imaging.

SIDEBAR: Grassroots political coalition opposes DRA cuts

New York-based group gets Clinton to sign on as cosponsor of Access to Imaging bill

Opposition to the DRA cap has inspired a grassroots coalition to conduct a political campaign in New York State uniting radiologists and patients against the Medicare rate cuts and other federal initiatives against medical imaging.

Mark T. Newton, chief financial officer of DRA Imaging in Wappingers Falls, NY, and Dr. Jay Tartell, a partner with Advanced Radiological Imaging of Queens, have organized statewide support for the Access to Imaging Act of 2007 (HR 1293), a bipartisan bill that would shelve the DRA cap for two years and require the General Accountability Office to study its implications.

Newton became an activist against the DRA cap after learning it was created during last-minute closed-door Capitol Hill negotiations that bypassed formal study or open Congressional hearings.

"The premise behind the coalition is that healthcare dollars should be allocated among physicians and specialities using a transparent, analytical, data-driven methodology like relative value units and not just an arbitrary decision to cut imaging," he said.

Since February, 29 radiology group practices in 25 New York counties have joined the coalition. They participated in a letter-writing/e-mail message campaign and a petition drive that gathered 10,000 patient signatures in August.

The petition was hand-delivered Sept. 5 to the Albany offices of New York Sens. Charles Schumer and Hillary Rodham Clinton. Clinton signed on as cosponsor of the Access to Imaging Act a few days later. Every House representative from New York's Hudson Valley also supports the bill, Newton said.

HR 1293 was introduced by Reps. Carolyn McCarthy (D-NY) and Joe Pitts (R-PA) and has 156 cosponsors. Twenty-eight senators are cosponsors of a Senate companion bill, S 1138, introduced by Sens. Jay Rockefeller (D-WV) and Gordon Smith (R-OR). Passage as of mid-September was considered unlikely, however.

The coalition's work has been extended to support radiology-friendly provisions in proposals for the 2008 Medicare Physician Fee Schedule and the 2008 Hospital Outpatient Prospective Payment System, Newton said. It is monitoring the cosponsors of the Access to Imaging Act on their positions concerning other imaging-related issues.

"The question for us is, If you have only signed on as cosponsor but are not vocally opposing the additional cuts that are being proposed for 2008, what support are we really getting?" he said. -JB

SIDEBAR: CMS weighs 2008 Medicare payment changes

Radiologists see some encouraging signs, but bundling provisions raise concerns

The way diagnostic imaging will work, at least from Medicare's viewpoint, will be clarified when final rules for the 2008 Medicare Physician Fee Schedule and the Hospital Outpatient Prospective Payment System are published before the end of this year.

The proposed rules were generally encouraging for radiologists, though the bundling provisions in the HOPPS plan raised some concerns.

The 2008 MPFS saw the following key proposals:

  • a 9.9% across-the-board rate cut (subject to Congressional intervention);

  • antimarkup restrictions for the technical and professional components of diagnostic imaging;

  • rules forbidding independent diagnostic testing facilities from sharing space, equipment, and personnel with other individuals or groups;

  • expansion of Stark law to restrict under-arrangement deals between referring physicians and hospitals; and

  • possible new rules based on invited comments about the in-office ancillary equipment exemption to the Stark II self-referral restrictions.

The following recommendations were made for 2008 HOPPS:

  • a 5% to 15% rate increase for CT and MRI procedures, with the cost of contrast media bundled into the rates;

  • an apparently generous technical payment rate for nuclear medicine procedures, with the cost of radiopharmaceutical agents bundled into the total;

  • bundling of the radiology component of image-guided angioplasty with the therapeutic components and reimbursement under a single code, with the same principle applied to all interventional radiology applications, including fluoroscopy, ultrasound, MR, and digital subtraction guidance;

  • encouraging reimbursement rates for PET; and

  • continued separate payment for brachytherapy sources.

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