Three Keys to Identifying and Quantifying Imaging Reimbursement Risk
The diagnostic-imaging industry continues to face significant reimbursement headwinds as a result of recent Medicare reimbursement cuts. Industry-specific cuts recently enacted include the Multiple Procedure Payment Reduction (MPPR), which was introduced in the 2012 Medicare Physician Fee Schedule (MPFS) and expanded in the 2013 MPFS, and the increased equipment-utilization rate (used to calculate Medicare reimbursement) contained in the American Taxpayer Relief Act (ATRA), passed in January 2013. These industry-specific reimbursement cuts, not to mention any potential overall health-care cuts related to the automatic budget cuts of March 1, 2013, or to the sustainable growth rate formula, will present the industry with a very challenging reimbursement environment, over the next couple of years.
Many of our clients hoping to acquire (or having recently acquired) an imaging center have asked us how these reimbursement cuts will affect the revenue, cash flow, and (ultimately) value of the target entity. The answer to this question depends on three factors: the target entity’s payor mix, its procedure mix, and its ability to realize operating-expense efficiencies to mitigate the effect of reimbursement cuts.
Payor Mix
Outpatient imaging centers typically have fewer Medicare patients than other health-care businesses. A typical imaging center, depending on the demographics of the patient population, will derive approximately 20% to 30% of its revenue from Medicare patients. Therefore, the reimbursement cuts mentioned earlier will have a direct effect on less than half of the center’s overall revenue.
As a result, it is important to understand whether (and how) the Medicare cuts will affect the reimbursement received from the center’s other payors. An analysis of the expected reimbursement from non–Medicare payors should address four questions: Does the current contract include scheduled fee increases? If it does, for how many years? Are the reimbursement rates tied directly to Medicare? What is the relative negotiating power of the center?
Hospital systems and large imaging-center chains will use their negotiating power to prevent what has been called private-payor follow on, in which private payors take their cues from Medicare. Unfortunately, individual imaging centers and practices might not have the same negotiating power with commercial payors. Even single-center operators, however, might be able to take advantage of their positions as low-cost providers to negotiate against reductions from certain payors. Ultimately, the center’s payor mix and its ability to negotiate with its commercial payors will determine the center’s overall revenue.
Procedure Mix
Many imaging centers generate the majority of their revenues from advanced imaging services, including MRI, CT, and PET/CT. Unfortunately, the recent Medicare reductions are also targeted primarily at advanced imaging services, since that is where the majority of Medicare dollars are spent on outpatient imaging. For example, the MPPR applies primarily to CT, MRI, and ultrasound services. The increased utilization rate in the ATRA applies only to imaging equipment with a capital cost that exceeds $1 million, resulting in reimbursement reductions for MRI, CT, and PET/CT procedures.
The Medicare cuts to advanced imaging highlight the importance of offering multiple modalities. Multimodality centers with revenue diversification are able to maintain a more stable revenue stream when certain modalities are targeted for reimbursement cuts. Imaging operators should try to diversify their revenue streams by adding and growing modalities outside advanced imaging services: fluoroscopy, ultrasound, mammography, and interventional procedures such as breast biopsy. Advanced imaging services might always account for the majority of revenue generated by typical imaging centers; however, providers able to diversify their exam mixes will decrease the overall risk associated with their businesses.
Expense Adjustments
Despite providers’ best efforts to diversify their revenue and offset reductions through commercial-contract negotiations, Medicare cuts will ultimately create reimbursement pressure for imaging centers. In a decreasing-reimbursement environment, expense control is paramount to maintaining stable cash flow. For many imaging centers, facility rent, staff salaries/wages and benefits, and equipment costs constitute the majority of the center’s major expenses, aside from the professional-radiology expense. Together, these expenses generally take up approximately 35% to 45% of a center’s net technical revenue. While these expenses have fixed components, they can be effectively managed to help reduce the center’s overall operating expenses.
First, facility-rent expenses can be controlled by ensuring that the center is using its space efficiently and is not leasing more square footage than necessary. As facility leases are typically long-term commitments, it is important for centers not to overestimate potential growth (and end up leasing more space than they can use effectively). Second, a center’s administrative and technologist positions must be appropriately staffed in terms of hours per exam, compared with centers with similar exam mixes. Third, since diagnostic imaging is such a capital-intensive business, imaging centers should be selective in their equipment decisions.
Other possibilities for expense savings include attempts to renegotiate operating leases or maintenance agreements. In addition, the useful life of high-cost imaging equipment (such as MRI systems) can by increased through relatively inexpensive software upgrades that postpone the need for full replacement. Centers that are able to manage their operating expenses effectively will be able to prevent reimbursement cuts from having too strong an impact on the bottom line.
Conclusion
It is important for operators attempting to quantify the effects of recent Medicare cuts to give careful consideration to the issues involved. While the cuts present a challenge to operators, a careful analysis of an imaging center’s payor mix, procedure mix, and operating expenses will help operators and potential acquirers identify and minimize reimbursement risks.Matthew Strother is a manager with VMG Health. Justin Mowrey is a senior analyst with the company.