Outpatient Imaging Forecast: More Volume, Slower Growth, Heightened Competition
With imaging representing the hospital’s greatest source of outpatient profits, hospitals must rewrite their playbooks to compete with more aggressive freestanding providers.
Strong growth, particularly for advanced imaging studies like CT, MRI, and PET/CT, has increased imaging volumes and profits at an unprecedented rate over the past decade. Strong growth will continue, despite recent payment cuts and utilization controls. Hospitals, however, will continue to face strong competition from freestanding centers as both attempt to maximize revenue in a tightening market. With the years of double-digit growth likely to be behind us, now is the time to rethink imaging-program goals.
While hospital executives know that diagnostic imaging plays an important role in keeping the hospital enterprise profitable, many are surprised to discover how profitable the service line has become, relative to other, more top-of-mind business lines. Advanced imaging volumes have been growing seemingly unabated throughout the past decade, with CT, MRI, and PET experiencing double-digit annual growth. Building on this cumulative growth, diagnostic imaging now represents the largest source of hospitals’ outpatient profits. According to Advisory Board analysis, diagnostic imaging contributed over $21 billion in 2006, besting outpatient surgical procedures (which brought in $19.8 billion). 
Figure 1. Total contribution to 2006 profits of hospital-based outpatient services, according to the Innovations Center Futures Database, The Advisory Board Co, Washington, DC; EGD=esophagogastroduodenoscopy. At the procedure level, imaging’s dominance is even more impressive. Imaging examinations—CT, radiography, and MRI—are the three leading contributors to overall profitability and five of the 12 most profitable procedures overall (Figure 1). Diagnostic CT alone, contributing $7.5 billion in profit in 2006, generated more dollars for hospitals than colonoscopy, cardiac catheterization, radiation therapy, and sports medicine procedures combined. Although imaging will continue to grow at a brisk pace throughout the next decade, utilization controls and reimbursement cuts will exert significant downward pressure on imaging growth. From a clinical perspective, imaging is reaching a saturation point for many indications. For example, how many more imaging studies can be ordered for a patient with abdominal pain? This saturation is also likely to curb growth. Similarly, rising perpatient utilization is raising concerns about the downstream effects of radiation exposure; public awareness and physician sensitivity may further serve to curb growth in radiation-based imaging modalities. While quantifying market demand may prove challenging, Imaging Performance Partnership data analysts have developed a set of forecasting tools that estimate imaging growth by both procedure and modality over the next 10 years. These forecasts indicate that MRI and CT will grow 5% and 6%, respectively, per year (Figure 2). Only PET/CT will continue to see doubledigit growth through the next decade. Our forecasting models can also assess growth potential in local markets (as defined by county or ZIP code) of individual member hospitals. These local analyses of markets across the nation confirm that nearly all areas are likely to see similar reductions in growth, moving forward. Outpatient Competition Although hospitals have seen unprecedented growth in outpatient imaging, freestanding centers and physician-office–based providers—hospitals’ major competitors for this business— have experienced even more robust growth. Imaging Performance Partnership analysis indicates that nonhospital volumes for advanced imaging grew 13% more quickly than hospitalbased volumes between 2003 and 2006. With nearly all major markets experiencing rapid growth in the number of imaging business competitors over the past decade, more than half of hospitals now report the presence of three or more nonhospital competitors for imaging business, according to Advisory Board member surveys.
Figure 2. National hospital-based outpatient imaging volumes, 2006–2016, as projected by the Imaging Performance Partnership Outpatient Imaging Forecaster; CAGR=compound annual growth rate.
Figure 3. Migration of outpatient imaging volumes from the hospital setting predicted by the Imaging Performance Partnership Outpatient Imaging Forecaster. Although recent reimbursement cuts have targeted freestanding providers, hospitals are expected to continue to lose premium imaging market share in years to come (Figure 3). Whereas hospitals controlled 71% of outpatient CT volumes in 2006, their share is expected to drop to 62% by 2016. Having already lost the majority of outpatient MRI examinations, hospitals will see their share of this business fall to just 36%. Only in diagnostic radiography will hospitals see a (small) increase in market share over the next decade. Why are hospitals losing ground? Clearly, physician investment in inoffice imaging equipment has purloined examinations from hospitals, particularly in MRI, ultrasound, and nuclear medicine. Even more significant, however, has been the rise of large, multimodality freestanding imaging centers in nearly all markets across the nation. Freestanding imaging centers have emerged as smart, aggressive competitors that attract referring physicians by adopting a service-oriented business model, besting hospitals in their ability to schedule patients quickly and relay results back to the referring doctor. Although hospitals face the hurdle of accommodating inpatient and emergency- department examinations, in addition to outpatient volumes, on their scanners, freestanding imaging centers have employed a technology strategy that maximizes patient capacity. Whereas hospitals often invest in premium technology (such as 64-slice CT and 3T MRI), freestanding centers have used the same (and, often, fewer) dollars to build a fleet of standard-ofcare platforms (such as 8-slice or 16- slice CT and 1.5T MRI) that allow them to enhance throughput, schedule quickly, and accommodate same-day add-on examinations more easily. With an aggressive and targeted marketing strategy, freestanding centers have been able to advertise their services directly to local doctors and quickly shift referral patterns. Reimbursement Cuts The past two years have seen unprecedented changes in both Medicare and private-payor imaging payment environments. Hospitals hoped that several initiatives, including self-referral reforms and site-of-service payment normalization, would help tip the balance in favor of hospitals, though actual outcomes have proven less beneficial. The Deficit Reduction Act (DRA) of 2005 went into effect January 1, 2007, resulting in an immediate cut in reimbursement for most outpatient imaging procedures performed outside the hospital setting. The DRA normalizes site-ofservice payment for nonhospital providers, paying the lower of either the Physician Fee Schedule or hospital outpatient rates for imaging services. Although a bill repealing the DRA was introduced in Congress, no action has been taken, and the DRA is expected to remain in effect for at least the six years specified in the legislation. Although the DRA cut reimbursement by as much as 30% to 40% for many premium studies (such as MRI, ultrasound, and MR and CT angiography), most freestanding imaging centers report a revenue hit of only 5% to 10%. The impact has been absorbed by most larger providers, causing little change in the outpatient market dynamics in most regions. Why has the impact been less than hospitals expected? Many outpatient centers are located in demographically favorable markets where they have carved out a lucrative payor mix with a limited Medicare population. Perhaps more important, freestanding providers have quickly altered their business models to offset DRA losses. While many initially expected the DRA to benefit hospital outpatient business by limiting the advantages of freestanding centers, early reports indicate that the DRA may serve only to increase the competitive environment in many saturated markets. To be sure, the DRA is likely to shutter some small imaging providers, such as standalone PET imaging centers or physician offices that overextended resources to acquire a bigbox modality such as MRI. One year into the DRA, however, freestanding centers are pursuing a leaner, meaner business strategy: minimizing new technology purchases, optimizing operations, and increasing marketing efforts to garner extra volumes to make up for DRA losses. Hospitals—historically slower to react to these dynamic market forces— may find themselves losing opportunities to capture a larger share of the market as a result. While self-referral remains a hot topic in the imaging and payor communities, it is doubtful that ongoing efforts will translate into reform having any impact in the near future. Although CMS has shown willingness to consider additional restrictions on the physicianpartnership models that form the basis for self-referral, a widespread repeal of the in-office exemption (the source of most self-referred volumes) remains unlikely. Congress has shown a lack of willingness to get involved, not wanting to be seen as playing favorites among physician groups; although self-referral hurts radiologists, other physician groups benefit handsomely. Evidence documenting the effects of self-referral— quantifying overuse versus the benefit of increased access for patients—has also been todifficult to find. Private payors are unlikely to move on the issue, as physician-office–based (and potentially self-referred) examinations account for a small percentage of their imaging examinations, compared with hospital and freestanding volumes; thus, payors have decided to enact broader utilization controls that will affect all providers. Precertification Targeting imaging as their highestgrowth service, private payors have stepped up efforts to dampen imaging volumes though precertification protocols that require prior approval for certain premium examinations. Should this authorization not be obtained prior to the scan, the imaging provider can be refused payment for the examination. More than 100 million US residents, representing more than half of all commercially covered lives, currently belong to plans requiring precertification, and penetration is expected to grow, reaching 75% to 80% of the commercial payor market over the next five years. A survey of our member hospitals revealed that more than 90% currently work with payors requiring precertification. Most plans require prior authorization primarily for CT, MRI, and PET/CT examinations, although other nuclear-medicine and ultrasound examinations are increasingly coming under scrutiny. These programs have spread rapidly through the commercial market because they have proven extremely effective in minimizing growth. Several major payors report that precertification programs have nearly flatlined annual CT and MRI growth from previously double-digit levels, and precertification is probably here to stay. Given the cost of administration, a handful of plans have attempted to roll back their programs, only to see growth approach rates seen prior to precertification. Most payors have contracted with third-party vendors to operate their precertification programs; just five radiology benefits managers (RBMs) dominate this market. According to Advisory Board interviews and research, National Imaging Associates (Avon, Conn); CareCore (Wap - pingers Falls, NY); American Imaging Management (Chicago); Med Solutions (Nashville, Tenn); and Health Help (Houston), combined, reach 102 million patients across the United States. Payors have found that working with an RBM is more effective and efficient than selfadministered precertification, despite the added costs. Given their success in this arena, RBMs are hoping to expand their presence in the entire imaging process. Vendors are developing new services to enable payors to outsource imaging management, including credentialing of centers and equipment, determination of new-procedure coverage, and administration of billing. In many markets, RBMs are moving preemptively to schedule patients at the time of preauthorization with preferred providers; this is a tactic designed to steer patients toward lower-cost centers. Given that payors often receive lower rates in their contracts with freestanding imaging centers, active steering of lucrative outpatient examinations away from hospital providers is increasingly likely. A New Hospital Strategy All imaging providers are facing an uphill battle for profits, with reimbursement cuts and utilization controls impinging on growth. Hospitals, however, find themselves at a crossroads: growing imaging dollars continue to serve as a support for other, less profitable hospital-based services, while aggressive competition eats away at their share of the outpatient market. The Advisory Board’s Imaging Performance Partnership helps member hospitals to address these challenges and develop strategic plans that will improve services, grow volumes, and secure their places in the market. In this work, a few imperatives have risen to the top. First, raise the visibility of diagnostic imaging among hospital leadership. Hospital executives are faced with a new crisis every week, and a service line usually does not receive their attention unless a flash point arises. Imaging has largely been viewed by executives as a reliable profit generator: as long as volumes are growing, there is little need to intervene. Most are surprised to learn that, despite rising profits, their hospitals are losing business and market share. Now is the time to dedicate resources to a focused imaging strategy, before hospital volumes flatline and profits disappear. Second, move toward a balanced technology portfolio. New premium scanners and upgrades are added to the major imaging modalities annually. Despite the buzz, most recent additions provide little incremental diagnostic (or marketing) benefit. Hospitals also run scanners at a much higher capacity than competitors, not triggering the need for a new purchase until capacity reaches 80% (or more) of maximum; outpatient competitors tend to pull the trigger when a platform reaches 50% to 60%. As a result, hospitals find it difficult to schedule patients quickly and accommodate same-day add-on patients. Our forecasts show that more than 90% of future MRI and CT examinations will be bread-and-butter studies adequately performed on baseline scanners like 16- slice CT and 1.5T MRI. Any premium purchase should be carefully targeted based on physician strengths and hospital strategy and balanced by lower-cost, standard, high-capacity platforms offering high throughput and quick scheduling of basic examinations. Third, make access and service the cornerstones of outpatient imaging strategy. Apart from a few select specialties, access to premium technology rates low among referring physicians when recommending an imaging provider. These decisions are more often based on access and service: the ability to schedule patients quickly; the receipt of a prompt, high-quality report; easy access to the radiologist; and a pleasurable experience for the patient. Hospitals should develop strategies to improve each part of the imaging referral and patient experience, and should quickly act on and resolve complaints. Fourth, closely monitor the payor environment, and engage with payors when necessary. With RBMs planning to expand further into the imaging process, providers must remain engaged with their larger payors to respond quickly to new policies. Hospitals must also make sure that they are accurately represented in payor-derived quality scores and other performance measurements, and must pursue formal accreditation as necessary to attain preferred-provider status. Fifth, develop (and dedicate resources to) a targeted marketing strategy. Freestanding centers dedicate more resources, in both dollars and staff, to marketing, and they approach both consumer and physician outreach strategically. With better technology and more subspecialist radiologists, hospitals do retain advantages over the competition. While the DRA is unlikely to shutter major competition, it and other measures have momentarily slowed freestanding- center expansion, opening a window for hospitals. Developing a dedicated imaging multimodality marketing strategy— using physician liaisons, online resources, and targeted advertising—will be necessary to secure referring-physician and consumer loyalty
Figure 1. Total contribution to 2006 profits of hospital-based outpatient services, according to the Innovations Center Futures Database, The Advisory Board Co, Washington, DC; EGD=esophagogastroduodenoscopy. At the procedure level, imaging’s dominance is even more impressive. Imaging examinations—CT, radiography, and MRI—are the three leading contributors to overall profitability and five of the 12 most profitable procedures overall (Figure 1). Diagnostic CT alone, contributing $7.5 billion in profit in 2006, generated more dollars for hospitals than colonoscopy, cardiac catheterization, radiation therapy, and sports medicine procedures combined. Although imaging will continue to grow at a brisk pace throughout the next decade, utilization controls and reimbursement cuts will exert significant downward pressure on imaging growth. From a clinical perspective, imaging is reaching a saturation point for many indications. For example, how many more imaging studies can be ordered for a patient with abdominal pain? This saturation is also likely to curb growth. Similarly, rising perpatient utilization is raising concerns about the downstream effects of radiation exposure; public awareness and physician sensitivity may further serve to curb growth in radiation-based imaging modalities. While quantifying market demand may prove challenging, Imaging Performance Partnership data analysts have developed a set of forecasting tools that estimate imaging growth by both procedure and modality over the next 10 years. These forecasts indicate that MRI and CT will grow 5% and 6%, respectively, per year (Figure 2). Only PET/CT will continue to see doubledigit growth through the next decade. Our forecasting models can also assess growth potential in local markets (as defined by county or ZIP code) of individual member hospitals. These local analyses of markets across the nation confirm that nearly all areas are likely to see similar reductions in growth, moving forward. Outpatient Competition Although hospitals have seen unprecedented growth in outpatient imaging, freestanding centers and physician-office–based providers—hospitals’ major competitors for this business— have experienced even more robust growth. Imaging Performance Partnership analysis indicates that nonhospital volumes for advanced imaging grew 13% more quickly than hospitalbased volumes between 2003 and 2006. With nearly all major markets experiencing rapid growth in the number of imaging business competitors over the past decade, more than half of hospitals now report the presence of three or more nonhospital competitors for imaging business, according to Advisory Board member surveys.
Figure 2. National hospital-based outpatient imaging volumes, 2006–2016, as projected by the Imaging Performance Partnership Outpatient Imaging Forecaster; CAGR=compound annual growth rate.
Figure 3. Migration of outpatient imaging volumes from the hospital setting predicted by the Imaging Performance Partnership Outpatient Imaging Forecaster. Although recent reimbursement cuts have targeted freestanding providers, hospitals are expected to continue to lose premium imaging market share in years to come (Figure 3). Whereas hospitals controlled 71% of outpatient CT volumes in 2006, their share is expected to drop to 62% by 2016. Having already lost the majority of outpatient MRI examinations, hospitals will see their share of this business fall to just 36%. Only in diagnostic radiography will hospitals see a (small) increase in market share over the next decade. Why are hospitals losing ground? Clearly, physician investment in inoffice imaging equipment has purloined examinations from hospitals, particularly in MRI, ultrasound, and nuclear medicine. Even more significant, however, has been the rise of large, multimodality freestanding imaging centers in nearly all markets across the nation. Freestanding imaging centers have emerged as smart, aggressive competitors that attract referring physicians by adopting a service-oriented business model, besting hospitals in their ability to schedule patients quickly and relay results back to the referring doctor. Although hospitals face the hurdle of accommodating inpatient and emergency- department examinations, in addition to outpatient volumes, on their scanners, freestanding imaging centers have employed a technology strategy that maximizes patient capacity. Whereas hospitals often invest in premium technology (such as 64-slice CT and 3T MRI), freestanding centers have used the same (and, often, fewer) dollars to build a fleet of standard-ofcare platforms (such as 8-slice or 16- slice CT and 1.5T MRI) that allow them to enhance throughput, schedule quickly, and accommodate same-day add-on examinations more easily. With an aggressive and targeted marketing strategy, freestanding centers have been able to advertise their services directly to local doctors and quickly shift referral patterns. Reimbursement Cuts The past two years have seen unprecedented changes in both Medicare and private-payor imaging payment environments. Hospitals hoped that several initiatives, including self-referral reforms and site-of-service payment normalization, would help tip the balance in favor of hospitals, though actual outcomes have proven less beneficial. The Deficit Reduction Act (DRA) of 2005 went into effect January 1, 2007, resulting in an immediate cut in reimbursement for most outpatient imaging procedures performed outside the hospital setting. The DRA normalizes site-ofservice payment for nonhospital providers, paying the lower of either the Physician Fee Schedule or hospital outpatient rates for imaging services. Although a bill repealing the DRA was introduced in Congress, no action has been taken, and the DRA is expected to remain in effect for at least the six years specified in the legislation. Although the DRA cut reimbursement by as much as 30% to 40% for many premium studies (such as MRI, ultrasound, and MR and CT angiography), most freestanding imaging centers report a revenue hit of only 5% to 10%. The impact has been absorbed by most larger providers, causing little change in the outpatient market dynamics in most regions. Why has the impact been less than hospitals expected? Many outpatient centers are located in demographically favorable markets where they have carved out a lucrative payor mix with a limited Medicare population. Perhaps more important, freestanding providers have quickly altered their business models to offset DRA losses. While many initially expected the DRA to benefit hospital outpatient business by limiting the advantages of freestanding centers, early reports indicate that the DRA may serve only to increase the competitive environment in many saturated markets. To be sure, the DRA is likely to shutter some small imaging providers, such as standalone PET imaging centers or physician offices that overextended resources to acquire a bigbox modality such as MRI. One year into the DRA, however, freestanding centers are pursuing a leaner, meaner business strategy: minimizing new technology purchases, optimizing operations, and increasing marketing efforts to garner extra volumes to make up for DRA losses. Hospitals—historically slower to react to these dynamic market forces— may find themselves losing opportunities to capture a larger share of the market as a result. While self-referral remains a hot topic in the imaging and payor communities, it is doubtful that ongoing efforts will translate into reform having any impact in the near future. Although CMS has shown willingness to consider additional restrictions on the physicianpartnership models that form the basis for self-referral, a widespread repeal of the in-office exemption (the source of most self-referred volumes) remains unlikely. Congress has shown a lack of willingness to get involved, not wanting to be seen as playing favorites among physician groups; although self-referral hurts radiologists, other physician groups benefit handsomely. Evidence documenting the effects of self-referral— quantifying overuse versus the benefit of increased access for patients—has also been todifficult to find. Private payors are unlikely to move on the issue, as physician-office–based (and potentially self-referred) examinations account for a small percentage of their imaging examinations, compared with hospital and freestanding volumes; thus, payors have decided to enact broader utilization controls that will affect all providers. Precertification Targeting imaging as their highestgrowth service, private payors have stepped up efforts to dampen imaging volumes though precertification protocols that require prior approval for certain premium examinations. Should this authorization not be obtained prior to the scan, the imaging provider can be refused payment for the examination. More than 100 million US residents, representing more than half of all commercially covered lives, currently belong to plans requiring precertification, and penetration is expected to grow, reaching 75% to 80% of the commercial payor market over the next five years. A survey of our member hospitals revealed that more than 90% currently work with payors requiring precertification. Most plans require prior authorization primarily for CT, MRI, and PET/CT examinations, although other nuclear-medicine and ultrasound examinations are increasingly coming under scrutiny. These programs have spread rapidly through the commercial market because they have proven extremely effective in minimizing growth. Several major payors report that precertification programs have nearly flatlined annual CT and MRI growth from previously double-digit levels, and precertification is probably here to stay. Given the cost of administration, a handful of plans have attempted to roll back their programs, only to see growth approach rates seen prior to precertification. Most payors have contracted with third-party vendors to operate their precertification programs; just five radiology benefits managers (RBMs) dominate this market. According to Advisory Board interviews and research, National Imaging Associates (Avon, Conn); CareCore (Wap - pingers Falls, NY); American Imaging Management (Chicago); Med Solutions (Nashville, Tenn); and Health Help (Houston), combined, reach 102 million patients across the United States. Payors have found that working with an RBM is more effective and efficient than selfadministered precertification, despite the added costs. Given their success in this arena, RBMs are hoping to expand their presence in the entire imaging process. Vendors are developing new services to enable payors to outsource imaging management, including credentialing of centers and equipment, determination of new-procedure coverage, and administration of billing. In many markets, RBMs are moving preemptively to schedule patients at the time of preauthorization with preferred providers; this is a tactic designed to steer patients toward lower-cost centers. Given that payors often receive lower rates in their contracts with freestanding imaging centers, active steering of lucrative outpatient examinations away from hospital providers is increasingly likely. A New Hospital Strategy All imaging providers are facing an uphill battle for profits, with reimbursement cuts and utilization controls impinging on growth. Hospitals, however, find themselves at a crossroads: growing imaging dollars continue to serve as a support for other, less profitable hospital-based services, while aggressive competition eats away at their share of the outpatient market. The Advisory Board’s Imaging Performance Partnership helps member hospitals to address these challenges and develop strategic plans that will improve services, grow volumes, and secure their places in the market. In this work, a few imperatives have risen to the top. First, raise the visibility of diagnostic imaging among hospital leadership. Hospital executives are faced with a new crisis every week, and a service line usually does not receive their attention unless a flash point arises. Imaging has largely been viewed by executives as a reliable profit generator: as long as volumes are growing, there is little need to intervene. Most are surprised to learn that, despite rising profits, their hospitals are losing business and market share. Now is the time to dedicate resources to a focused imaging strategy, before hospital volumes flatline and profits disappear. Second, move toward a balanced technology portfolio. New premium scanners and upgrades are added to the major imaging modalities annually. Despite the buzz, most recent additions provide little incremental diagnostic (or marketing) benefit. Hospitals also run scanners at a much higher capacity than competitors, not triggering the need for a new purchase until capacity reaches 80% (or more) of maximum; outpatient competitors tend to pull the trigger when a platform reaches 50% to 60%. As a result, hospitals find it difficult to schedule patients quickly and accommodate same-day add-on patients. Our forecasts show that more than 90% of future MRI and CT examinations will be bread-and-butter studies adequately performed on baseline scanners like 16- slice CT and 1.5T MRI. Any premium purchase should be carefully targeted based on physician strengths and hospital strategy and balanced by lower-cost, standard, high-capacity platforms offering high throughput and quick scheduling of basic examinations. Third, make access and service the cornerstones of outpatient imaging strategy. Apart from a few select specialties, access to premium technology rates low among referring physicians when recommending an imaging provider. These decisions are more often based on access and service: the ability to schedule patients quickly; the receipt of a prompt, high-quality report; easy access to the radiologist; and a pleasurable experience for the patient. Hospitals should develop strategies to improve each part of the imaging referral and patient experience, and should quickly act on and resolve complaints. Fourth, closely monitor the payor environment, and engage with payors when necessary. With RBMs planning to expand further into the imaging process, providers must remain engaged with their larger payors to respond quickly to new policies. Hospitals must also make sure that they are accurately represented in payor-derived quality scores and other performance measurements, and must pursue formal accreditation as necessary to attain preferred-provider status. Fifth, develop (and dedicate resources to) a targeted marketing strategy. Freestanding centers dedicate more resources, in both dollars and staff, to marketing, and they approach both consumer and physician outreach strategically. With better technology and more subspecialist radiologists, hospitals do retain advantages over the competition. While the DRA is unlikely to shutter major competition, it and other measures have momentarily slowed freestanding- center expansion, opening a window for hospitals. Developing a dedicated imaging multimodality marketing strategy— using physician liaisons, online resources, and targeted advertising—will be necessary to secure referring-physician and consumer loyalty