Imaging Reimbursement: What We Knew Then and What We Know Now

As anyone who has been around medical imaging for any amount of time can tell you, the latest headwind is the same as it’s seemingly always been: reimbursement cuts. While this comes as no surprise, the magnitude of cuts and actual effect it will have on the imaging industry in the foreseeable future is the subject of much debate within the industry.  To be sure, 2014 promises to be another year of soul searching as imaging operators, especially those more susceptible to Medicare reimbursement risks, struggle to offset fairly drastic cuts in reimbursement that are happening in 2014.

Figure 1 includes a small sample of common CPT codes with corresponding 2013 and 2014 Medicare Physician Fee Schedule (“MPFS”) reimbursement, as reported by the American College of Radiology. This data reflects the technical component only, and includes all the known impacts to reimbursement. Based on our review of this information, approximately 483 CPT codes are receiving less technical reimbursement in 2014 than in 2013, while 64 CPT codes are receiving a higher level of reimbursement.

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Medicare reimbursement under the Hospital Outpatient Prospective Payment System (“HOPPS”) in 2014 continues to be impacted as well, as shown in Figure 2 (source: The Advisory Board company). Many HOPPS payments had already been reduced in prior years (e.g. 25% reimbursement decrease for APC 0331 in 2013).

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Declining HOPPS imaging reimbursement should come as no surprise, as the Medicare Payment Advisory Commission (“MedPac”) has repeatedly recommended to Congress that reimbursement for outpatient services should be aligned or equalized across the various outpatient settings. The declining HOPPS payment trend, and it’s impact, will be interesting to follow, as overall imaging equipment reinvestment has been waning in recent years. Continued decreases in reimbursement should be an additional disincentive for hospitals to reinvest and replace expensive imaging equipment, unless imaging equipment prices come down.

The rationale behind the continued declines in reimbursement from Medicare is believed to be a reaction to the phenomenal growth in imaging services since 2000. Figure 3 presents the growth in volume of physician fee-schedule services from 2000 to 2011, and was taken from MedPac’s Data Book published June 2013.  

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Based on this information, imaging volume increased 85% from 2000 to 2009. Evaluation and management volumes increased 32% over this same period. From 2009 to 2011, imaging volumes declined 4% annually on average. In addition, Medicare spending growth for advanced imaging services declined on a compounded annual basis from 2005 to 2007 and 2007 to 2011 by 3.4% and 2.2%, respectively[i]. Per beneficiary, Medicare payments to physicians for imaging services decreased 10.3% from $319 in 2008 to $286 in 2010[ii]. Clearly, the past several years of pressure on imaging services has begun to impact imaging volumes and Medicare expenditures for those services.  

Medicare is only part of the story. Other commercial and managed care payers maintain their own fee schedules, some of which are tied to Medicare rates, whether current or from prior years. The downstream effect of Medicare reimbursement changes today may or may not have implications for any particular imaging center over the next several years.

The question remains, how will the industry be impacted by these trends? Depending on who is asking, the answer to that may be positive or negative. The imaging industry is comprised of a wide array of centers and operators (physicians, hospitals, and management companies), ranging from limited-modality, single-site centers to larger multi-site chains with a broad modality mix. While the implication for Medicare reimbursement to the industry is clear, opinions regarding the impact to individual industry participants is not. A look back at the industry growth over the past several years is helpful. Figure 4 presents the total number of freestanding imaging centers versus affiliated imaging centers, as published by the Radiology Business Journal, as well as a summary of reimbursement changes over time.

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In spite of Medicare reimbursement cuts and declines in spending over the past eight years, the number of freestanding imaging centers have grown, reaching a high water mark in 2012. While 2013 saw a contraction in the number of freestanding centers, this largely came at the expense of primarily unaffiliated centers, as evidenced by the lack of acquisitions or divestitures amongst imaging center chains.  Based on experience, some of these centers were acquired by their local hospitals, which still enjoy a payment differential over freestanding centers. However, as far as anyone can tell, it is likely that many more simply closed.

After ruminating on these trends, and assuming the current policy environment continues, the following can be said:

1. Reimbursement rates can’t continue to decline at the current pace. Managing an imaging center successfully in the current policy environment takes a strong stomach. The continued cuts to reimbursement have to stop at some point, with the recent increase in the equipment utilization rate assumption being one of the last meaningful levers available to pull. I recognize it’s been said every year, but Medicare rates cannot continue to decline by double digit percentages forever.
2. The current round of reimbursement cuts will cause some imaging centers to close, and create opportunities for others. If history is any indicator, smaller or limited modality imaging centers that are not affiliated with a chain or hospital joint venture partner are most at risk. Many centers have high fixed costs due to capital equipment operating lease payments, which makes their economic viability highly sensitive to changes in scan volume and reimbursement. However healthcare reform takes shape, freestanding imaging centers have been and will continue to be the low cost, quality provider of imaging services, which should ensure a place at the table. Other factors, such as the level of competition and level of hospital-physician practice acquisitions in a given market, may present greater operating risks than reimbursement for stronger or well positioned imaging centers. As the 2014 reimbursement cuts are sure to result in the eventual closure of many marginally profitable centers, there will be opportunities for imaging operators and local competitors to either acquire these imaging assets at an attractive price, or absorb the volumes previously performed there.
3. Hospital based imaging centers still have higher average reimbursement. Even though Medicare HOPPS rates are being aligned with MPFS rates, hospitals still have significantly higher commercial and managed care reimbursement than freestanding centers. Declining HOPPS rates should be a disincentive for hospitals to invest in new imaging equipment or add imaging capacity to their market. However, the payment differential among commercial and managed care payers will still make freestanding imaging center acquisitions an attractive option for hospitals.
4. The specific market matters. It’s impossible to determine how any particular imaging center will fare in the current environment. Some imaging centers may actually end up better positioned over the next several years, depending on local competition from freestanding and hospital imaging centers, the local payer environment, the existence of certificate of need regulations, and so on... Having an acute understanding of where an imaging center is positioned in a particular market should guide and inform an imaging center’s strategic plan.

Continued reimbursement pressure in 2014 will impact everyone, both freestanding and hospital-based imaging centers alike. Imaging centers that are more at risk will be forced to close or sell due to the reimbursement cuts, the same as before. Freestanding imaging centers, being low cost, quality providers of healthcare services, will continue to survive as consolidation and other strategic affiliations result from the opportunities brought about by these trends. The one thing that is more difficult to discern is how patients will be impacted as a result of these reimbursement cuts.

Aaron Murski is a partner with VMG Health, a national firm with offices in Dallas, Texas and Nashville, Tennessee, which specializes in health care valuations and transaction advisory services. Nick Taglioli is a VMG senior analyst. 

References:

1. Medicare Payment Advisory Commission. A data book: health care spending and the Medicare program. Published June 2013. Accessed February 19, 2014.
2. Lee DW, Duszak R Jr, Hughes DR. Comparative analysis of Medicare spending for medical imaging: sustained dramatic slowdown compared with other services. AJR Am J Roentgenol. 2013;201(6):1277-1282.
3. Harvey L. Neiman Health Policy Institute. Fact sheet: trends in imaging. Accessed February 18, 2014.4. Proval C. Imaging-center growth hits the wall in 2013; volumes plummeted in 2011. Radiology Business Journal. Published August 30, 2013. Accessed February 19, 2014.