CT Coding Changes Impact 2011 Imaging-center Valuations

Judging solely by the number of imaging engagements at our company during the first half of 2011, imaging transactions continue at a frantic pace. For the most part, there are not any new trends to report in imaging valuations. Discount rates, multiples, and the primary value drivers—competition, volumes, reimbursement, and capital-expenditure needs—remain the same. One change that has had a material impact on almost all multimodality imaging centers in 2011, however, is the change in coding for CT exams of the abdomen and pelvis. In an ImagingBiz.com article published earlier this year on radiology’s reimbursement outlook for 2011, Cat Vasko of ImagingBiz.com and Randy Roat of Medical Management Professionals (MMP), Atlanta, Georgia, explored the impact of several key changes made to the Medicare Physician Fee Schedule (MPFS) for 2011. While increases in RVUs across many imaging codes were partially offset by the 7.9% decrease resulting from the Medicare Economic Index Budget Neutrality Adjustment, the reimbursement impact associated with changes in the CPT® codes for angiography and CT exams of the abdomen and pelvis is so significant that it has the potential to wipe out, single-handedly, a 6.2% increase across the remainder of radiology practice. In most of the imaging-center valuations we have conducted this year, the replacement of separate codes for CT exams of the abdomen and pelvis by a single code has had the largest negative impact on overall reimbursement, earnings, and value.Medicare Versus Commercial ImpactFor many changes in Medicare reimbursement, the positive or negative impact is often muted because the Medicare change only directly affects 20% to 40% of the revenue. As a result, even a double-digit percentage decrease in Medicare reimbursement might result in a small impact on overall revenues, in the short term. Because many commercial/managed-care contracts for freestanding imaging centers are either directly or indirectly tied to Medicare reimbursement, however, increases or decreases in Medicare reimbursement eventually flow through to affect commercial/managed-care reimbursement. Keep in mind that changes in Medicare reimbursement might be a function either of changes in the conversion rate or of changes in the RVUs assigned to procedures. While changes in the conversion rate might have an impact on some commercial/managed-care reimbursement indirectly, changes in RVUs have a much more direct impact, based on our experience. Even changes in the RVUs assigned to a given procedure, however, might take one to two years or more to affect commercial/managed-care reimbursement. Because commercial/managed-care contracts are often tied to the MPFS of previous years (for example, many 2011 commercial/managed-care contracts might be tied to the 2008 or 2009 MPFS), it might take at least one contract cycle for this impact to be realized. With a change in coding such as this, however, the impact on commercial/managed-care reimbursement is almost always immediate. We have seen exceptions to this change resulting in immediate impact on commercial/managed-care contracts. For example, in one case, the issuance of new CPT codes resulted in payments to an imaging center based on the imaging center’s charges, rather than on RVUs or Medicare reimbursement. This, however, is the exception, not the norm, and over the long term (the next contract cycle), the change is likely to affect future reimbursement.Magnitude of the Revenue ImpactThe figure demonstrates the impact of the change for CT exams of the abdomen and pelvis on Medicare reimbursement.
These data¹ show the impact of the reimbursement change. To estimate the impact of the combination code, we have observed, many providers simply take a 50% reduction in volumes into account when evaluating the impact of this change. This might overstate the impact of the analysis, however, due to the reimbursement adjustment for imaging contiguous body parts, which was 25% for the first half of 2010 and 50% for the second half. Note, from this analysis, that the 50% reduction in volume resulting from the combination code is partially offset by a 27% increase in the net revenue per scan for the subset of combined CT exams of the abdomen and pelvis. For this center (see figure), the 37% reduction in reimbursement resulting from the combination codes resulted in a 16% reduction in overall CT reimbursement—a subtraction of approximately 20% on overall CT volumes and the addition of 5% to overall CT net revenue per case. The simplifying assumption in the analysis above is that the change in overall reimbursement will be identical for all payors. This might or might not be the case. If commercial/managed-care payors do not mirror the Medicare policy for contiguous body parts, for example, this analysis might understate the impact of the change and would need to be adjusted for differing effects across the payor mix. Fortunately, we are several months into 2011 now, and this analysis can be compared with actual results for 2011.Valuation ImpactBased on our experience with this issue, the combined (volume and net revenue per scan) impact on CT revenues in the example is fairly typical. Because CT revenues are approximately 35% of the center’s total revenues in this example, the impact on the valuation is also fairly substantial, with the overall impact on the valuation from just this change exceeding 15%. This is yet another example of how dangerous it can be simply to apply multiples to historical revenues or earnings when doing imaging valuations. What is needed is a discounted–cash-flow analysis that considers the impact not only of reimbursement changes (positive or negative) such as this, but also of changes in the competitive environment that will affect volumes and an imaging center’s capital-expenditure needs.Todd J. Sorensen, AVA, is a partner with VMG Health, a national company (with offices in Dallas, Texas, and Nashville, Tennessee) that specializes in health-care valuations and transaction advisory services.