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Not long ago, an outpatient imaging center could open its doors in just about any metro community in the United States and reap sizeable earnings from high-profit reimbursements for such modalities as MRI, PET, and CT, plus the bread-and-butter x-ray, ultrasound, and mammography. But as of January 1, 2007, those good times are gone, thanks to the Deficit Reduction Act of 2005 (DRA), which substantially cut Medicare payments for those formerly high-profit modalities. The DRA reductions—and the private payors that have made similar cuts—have left some imaging centers holding million-dollar debts for new 64-slice CTs without enough patient volume to pay the notes, let alone make a profit. As if the DRA was not enough bad news, imaging centers enrolled as independent diagnostic testing facilities (IDTFs) have been subjected to 14 new standards, and threatened with more regulations and lawsuits that may eliminate physician shared leasing arrangements in states where they are not barred already.

But all is not lost, say health care consultants. Solutions will vary for different markets and the type of outpatient center; however, in general, the key to surviving the new age of outpatient imaging centers is simply getting back to Business 101: fixing sloppy business plans, cutting costs, building referral relationships, and finding innovative ways to increase patient volume.

Recent Events

Several factors have led the outpatient imaging business to the precarious state that it is in today. Briefly:

	In addition to significantly cutting reimbursements for high-profit modalities, such as CT, PET, and MRI, the DRA has dramatically reduced the amount that IDTFs receive for subsequent imaging scans of the same body part during the same imaging session. It is expected that private payors are following Medicare's lead with similar reimbursement cuts.
	As of January 1, 2007, IDTFs are subject to 14 new standards by the Centers for Medicare and Medicaid Services (CMS). Among the new regulations is that physicians are limited to providing supervision to no more than three IDTFs, and supervising physicians will be held responsible for the overall IDTF operations and administration, including the hiring of competent personnel and compliance with applicable regulations.
	In February 2007, CMS published—and then rescinded—transmittal CR 5449, which would have dramatically changed compliance standards for IDTFs. Although these standards were not implemented due to a large outcry by outpatient centers, it indicates CMS's thoughts toward IDTFs operating with shared, per-click, and block leasing arrangements. In these arrangements, IDTFs typically lease equipment and facilities to a physician or group of physicians for specific blocks of time, or share space and equipment with other lessees. Had it been implemented, the transmittal would have obligated all IDTF employees to be full-time W-2 employees, not independent contractors. It also would have barred IDTFs from sharing space with other Medicare physicians, though it exempted physician owners of an IDTF. In addition, the new provisions would have prevented the sharing of equipment. It is speculated that CMS's intention was to further limit the potential for physician self-referral and overutilization. CR 5449's effects have been voided; however, most industry experts believe its provisions will be revised and reintroduced in the near future with a public comment period.
	Another threat to IDTF block and per-click leasing arrangements is a series of state and Federal actions. In January 2007, the Illinois State Attorney General became directly involved in a suit against several imaging centers' per-click lease agreements.² The suit alleges that these shared lease agreements are merely an elaborate kickback scheme that benefits the imaging centers and referring physicians. In Federal actions, the Office of Inspector General (OIG) issued OIG Advisory Opinion 04-08 that addressed potential illegalities in shared expense arrangements.

Few experts are willing to predict how existing imaging center models will ultimately change until CMS revises and resubmits its rescinded transmittal. Joshua Kaye, JD, with the law firm of McDermott Will & Emery, Miami, says, "The best track is to remain somewhat flexible. From a regulatory standpoint, any time you're going to enter into shared or financial arrangements with referral sources, it's going to raise questions. True block leasing, where it's safe harbored, has historically been considered by health care professionals to have a low level of regulatory risk."

Recently, many imaging centers have formed joint ventures (sometimes known as "under arrangements") with local hospitals. These arrangements can solidify the physician referral base and spread risk, but at the cost of splitting revenue and being tied to the bureaucracy of a hospital. As a result of the joint venture trend becoming popular within the past year, fewer hospitals are willing—or legally able—to justify such joint ventures, which are still extremely regulated.

The DRA's Effect So Far

The first quarter of the year has barely finished, but consultants and health care lawyers report that the DRA's reduced reimbursement already has affected their own imaging center businesses and clients.

W. Kenneth Davis, Jr, JD, partner at the law firm of Katten Muchin Rosenman LLP, Chicago, says, "If you were marginally successful before [the DRA], you're getting killed now because your revenue just plummeted. Unless you can do something on the expense side, you're having significant problems." Davis says that newer facilities may be struggling the most because they lack a steady referral base. New centers also have the burden of substantial debt due to start-up capital costs for imaging equipment.

Doug Smith, a health care consultant and president of Barrington Lakes Group, Barrington, Ill, reports that losses due to the DRA have varied widely. "I've seen them across the map," he says. "Nothing more than about 12% to 15% impact to as high as 30% to 35% impact on revenues." Smith also is concerned about the decreased revenues affecting rural outpatient imaging centers. Although fewer regulations are affecting rural centers' development, DRA reimbursement cuts do not make any exception for these centers. Consequently, with lower reimbursements and inherently low patient volume, the financial pressures on rural imaging centers may be more pronounced than ever before.

As to the centers that are faring best, Davis believes that larger single-specialty physician groups and the multiphysician specialty groups that own their own outpatient centers are still doing well—assuming they had sufficient patient volume before the DRA went into effect.

Lynn Elliott, CEO of Radiology Associates of Tarrant County (RATC), Fort Worth, Tex, estimates that the DRA has negatively impacted its imaging centers by about 13%. RATC is a physician-owned company with 61 radiologists at 10 outpatient imaging centers. Its subsidiary, ASI Imaging Development, also in Fort Worth, separately manages three other physician-owned imaging centers that are not owned by RATC's group. Elliott credits having multimodality facilities located near medical centers as the reason for the DRA's minimal effect on RATC's profit.

Thus far, Elliott says that RATC's private payors have not instituted similar reimbursement cuts for its centers. But that is not the case across the country. Davis says that many of his clients are seeing private payors follow Medicare's reductions. "It's pretty common for private pay payor agreements to be tied to Medicare," Davis explains. "So if your fees are x% of Medicare, you've just gotten x% of a smaller number." Davis has, however, heard of two examples where private payors have modified the existing contract and paid more than the Medicare formula, but he believes this is rare.

Other DRA effects include:

	Consultants report a consolidation in the marketplace for outpatient imaging centers. Centers that have performed poorly because of poor management, poor business plans, or insufficient volume are being bought by larger entities with deeper pockets and better management.
	Plans for building new outpatient centers have been delayed or scrapped altogether.
	Original business plans that set a date for a return on investment for previous capital projects or equipment are now projected to take longer than first estimates.
	Capital improvements to existing centers have been scaled back or postponed, relying instead on current equipment, facilities, and staff.

Back to Business 101

Undoubtedly, the news for outpatient imaging centers is bad. But experts say that the true effect of the DRA and the tightening of regulations is that outpatient imaging centers will be forced to be more efficient and innovative, improve service and quality, and go back to Business 101.

"You need to understand what your cost structure is going to be in great detail," says Tim Stampp, a health care consultant for Medical Imaging Specialists, Metairie, La. "No more financial projections on the back of a napkin. In the old days, if you could spell MRI, you could get the money to [operate an imaging center]. Those days are over. Today, you truly have to understand your market, you truly have to understand what it costs you to do this business, and you have to do very careful due diligence and planning. It's an absolute must."

Arnold Bates, president of Medical Imaging Solutions Group (MIS), Atlanta, agrees that many outpatient centers were created without enough planning or thought, and now they are paying the price. "We spend a significant amount of time performing business analysis for a lot of people," he says. "We're aware of the internal and external challenges that they face; it takes planning and vision to generate a flexible business plan that can sustain earnings and maintain growth even in drastic market changes."

Understanding one's business means spending the time and money for professional feasibility studies that will analyze the metrics of a particular area, types of physicians in the area, demographics, patient demand, and competition.

Smith says that having the best technology may not be the best differentiator for your market. "Just because you have the best toy doesn't mean that it's a smart decision. If you're in a town that has two cardiologists, and you have a 64-slice machine, what are you doing, unless you need faster throughput to solve capacity issues?"

An imaging center's business plan will be subject to many variables, including state regulations, location, IDTF status, ownership, joint ventures, and the number of modalities offered. However, experts do have fundamental, practical recommendations that will help most, if not all, imaging centers during these challenging times.

Reducing Expenses

After the business plan is fixed, the next step is cutting costs. Elliott has implemented several cost-saving programs at RATC. The savings have come from many areas:

Staffing cuts—Payroll cuts or layoffs are difficult but may be necessary. Thus far, Elliott has made no layoffs, but he says that whenever a position opens because of attrition, it is first evaluated to see if the work can be spread among the remaining staff members. Aside from spreading the load, Elliott searches for new ways to perform tasks more efficiently.
Service contracts—Elliott also is restructuring equipment maintenance agreements by rescheduling the hours that the maintenance covers. Contracts that currently cover the centers from 9 am to 9 pm soon may be trimmed back to 9 to 5. As the manager or owner of 13 imaging centers, Elliott is using buying power to renegotiate and combine separate service agreements into a single vendor package.
Capital costs—In terms of capital expenditures, RATC is expanding replacement cycles. "We try to push the equipment to its limit," Elliott says, "but once we start to have capacity issues or frequent maintenance problems, then we will replace equipment." Furthermore, RATC is considering replacing equipment with refurbished equipment. When buying new equipment, Elliott says his centers will forgo any additional advanced features unless they can see a clear cost benefit reason to purchase it. Bates notes that imaging centers can save a significant percentage from buying refurbished equipment. Naturally, when purchasing refurbished models, buyers should negotiate the warranty period and service contracts.
Restructuring debt—For imaging centers that already have purchased the new high-dollar CT or MRI, Bates sees no shame in asking the financing company to restructure debt. Customers have asked him to restructure their loans and service agreements, and he is more than willing to work with them. "If you're working with people who are business partners, they're looking at strategic longevity rather than short-term profitability," Bates says. "If a bank says, ‘You signed this agreement; we're going to require that you make these payments to the letter of the agreement, or we're going to repossess your equipment,' they force you out of business. And that doesn't do any good for the bank, or the [imaging center] company, or any party involved." For those who do need the latest and greatest and can justify its cost with enough patient volume, residual value leasing may be the answer in the age of rapid obsolescence.
Selective technology upgrades—Although most capital improvements are on hold, Elliott has made capital improvements that have the potential to save money. He believes that going paperless and completely switching to PACS and electronic medical records will eventually save on personnel costs and improve efficiency.

Increasing Revenue Through Service

Business 101 includes providing excellent service to customers, and consultants say that this maxim is especially true for outpatient imaging centers after the DRA. Strategies for improving service include:

Extend business hours—Smith advises centers to be open when the public is available. This may mean being open from 7 am until 11 pm to attract more 9-to-5 workers. Imaging centers also are opening their doors on Sundays.
Increase the number of services offered—If specializing in, say, cardiac imaging is not bringing in sufficient patient volume, go multispecialty. Offer neurological imaging, orthopedic imaging, women's care, or whatever service is needed in your marketplace. This might incur additional capital costs for new modalities, but if you do your homework and the metrics justify it, the investment will be worth it.
Distinguish yourself with quality—If radiologists are peer reviewed, board certified, or fellowship trained, or have any distinction at all, inform referring physicians, and tell them why it counts. Likewise, Davis advises centers to be accredited and follow any accreditation programs that private payors may be mandating. In addition, find ways to reduce waiting room times and meet your schedule, and do whatever it takes to decrease the number of days for an appointment. The faster that referring physicians can get their patients into your center and receive their results, the more likely they will think of you first.
Offer customer finance—For patients who are not covered by insurance or want currently investigative procedures, such as coronary CTA, find a local bank that will offer low-cost financing to patients. Print brochures and educate referring physicians.
Make it easy—Smith says that outpatient centers must make the experience as easy as possible for patients. "From the moment that patient arrives," he says, "is it easy to park? Is [the facility] easy to get into? Is the registration process easy? Do they understand what their expenses are, and what someone else's expenses are?" Smith also advises that everyone—from the physician to the receptionist—be friendly and welcoming. Patients notice these customer service details and may tell referring physicians about their experience.

Building Relationships

Relationships are as important as reducing costs and providing excellent service, especially in the wake of tighter regulatory controls on shared leasing.

If CMS and state regulators deem shared leasing arrangements to be illegal, small group practices that dissolve such arrangements will be referring their patients to new imaging centers, opening the market to their referrals. Even without that prospect, Medical Imaging Specialists' Stampp believes that financially strapped imaging centers that fail will be surrendering their referring physicians to the surviving marketplace. Imaging center operators should be prepared to capitalize on these opportunities.

One also should never take existing referral sources for granted. Bates says that a Laredo, Tex, imaging center client has an employee who routinely checks in with the center's referring physicians about once every 2 weeks. He explains that the employee asks the referrers, "What are your needs? What can we do to better provide service? What are your future needs?" This value-added support has been provided for the past 4 or 5 years. As a result of understanding their referrers' needs, the imaging center upgraded its equipment so that a physician's group could perform renal studies without having to take that business elsewhere.

The Future

Although it appears to be a challenging time for outpatient imaging centers, consultants are optimistic about the future. Medicine relies more and more on imaging modalities. With Baby Boomers starting to enter the Medicare rolls, few believe that imaging utilization will decrease. In the meantime, outpatient imaging center bargain hunters and consolidators already have entered the market. Take the experts' advice here, and get back to the basics to ensure your facility's survival.