Smart Growth: Outpatient Imaging in the Age of Reform
According to a 2011 report¹ developed by Radiology Business Journal with data from SDI (formerly Verispan), while imaging-center chains in the United States experienced a slower rate of growth in 2011 than in previous years, the total number of imaging centers in the country increased by 72, for a total of 6,383. At a time when radiology-group alignment with hospitals and health systems is making headlines as a trend, freestanding imaging continues to be strong in many markets.
On May 10 at the Health Connect Partners Radiology & Imaging Conference 2012, held in Miami, Florida, three large imaging-center companies presented their strategies for building an outpatient imaging presence amid some of the changes that have affected the radiology market in recent years in a session entitled “Freestanding or Hospital-based Imaging: Are You in the Right Game?” Among their representatives was Creighton Cook, director of business development for Outpatient Imaging Affiliates (OIA), who notes that his company is bullish about the future: “There is no reason to believe freestanding imaging centers won’t be a viable option for years to come,” he says.
This sentiment is echoed by consultant Richard Townley, who is president and CEO of AGI Healthcare Group. Townley observes that well run freestanding imaging centers are better able to capture revenue now (as compared with recent years). “Freestanding centers are increasingly well positioned to leverage their lower prices, better service and, often, superior quality, generally at the expense of local hospitals and weak operators,” he notes.
The OIA Model
Imaging-center chains operate according to strategies that vary widely. At OIA, Cook says, expansion strategy is largely based on joint-venture partnerships in different markets; of the chain’s 25 locations, 16 are hospital or radiology-group joint ventures, eight are wholly owned, and one is managed by the company. “From our standpoint and from a joint-venture standpoint, the number-one thing we bring to a relationship is focus,” he says. “Every single day, we’re working on how we can operate the center better. When we find something that works well, we can duplicate it at all of our centers.”
All of a center’s activities that don’t directly produce revenue—credentialing, billing, collections, accounting, and so on—are handled at company headquarters, so the center is free to focus on patients and referring physicians, Cook says. “Hospitals struggle with some functions we do very well,” he notes. “Their service levels are not as high. They centralize scheduling, so waiting times on the phone are longer. Parking is harder at a hospital. Just by virtue of being smaller, we are more agile; we can make business decisions on the fly, instead of going back to committees.”
These factors, combined with the continued obsolescence of less-competitive imaging-center operators, create an ideal market for the right company, Cook says. “There are imaging centers in this country going out of business every day, most of which were not developed under a strong business plan,” he says. “Ten years later, they have older equipment, and when that equipment dies, they won’t be able to reinvest. We’re undergoing a market correction, and the survivors are going to be hospitals and quality independent owners.”
Survival of the Fittest
Hospitals have the advantage of scale, in many markets, but Townley observes that radiology benefit managers (RBMs) are shifting business away from them, in light of the current reimbursement differential between hospital-based and freestanding imaging. “We see a much better future for freestanding imaging than we saw two years ago,” he notes. “RBMs are becoming much more aggressive in steering patients to lower-cost providers, and consumers are becoming much more knowledgeable, as they face higher deductibles and copayments.”
In addition, Townley says, freestanding centers are generally able to offer faster and better service than their hospital competitors, putting them in a better position to accommodate increasing volumes both from the aging population and from those who have regained health insurance as the economy recovers. “There’s more imaging being done, and it’s more likely to be done at a freestanding center,” he summarizes. “There’s increased demand, and the operators are more efficient than they were—they are able to make money at lower revenue rates. Those things are why we feel bullish about freestanding centers.”
Cook adds that the inflation and contraction of the radiology market that have occurred since the 1990s have created the ideal environment for imaging-center chains to expand. “I’m hopeful that self-referral is on the decline because reimbursement is on the decline, and it’s just not as profitable as it once was,” he notes. “The biggest driver in the industry, right now, is the age of equipment. As the equipment gets older, it becomes too hard to replace for the self-referrers.”
As a result, imaging centers can be bought cheaply and restructured for better business. “You already have the lease hold improvements and some book of business in place,” Cook says. Townley notes that since 2007, the focus of AGI’s work with imaging centers has shifted accordingly: “Seven years ago, 90% of our business was building new centers, while 10% was restructuring,” he says. “Now, it’s the opposite.”
Changes to Come
Townley notes that health-care reform represents the wild card that could throw current predictions about imaging’s marketplace into upheaval. “What will bundled payments and accountable-care organizations (ACOs) mean to freestanding imaging centers?” he asks. “Who knows? The world, right now, is still a fee-for-service world. However, cost-effectiveness, quality of service and access will be extremely important factors in any health care reform scenario, and freestanding centers are well positioned to deliver on these goals.”
Cook is also optimistic. “There’s a lot of talk about the number of newly insured,” he says, “but it’s our opinion that this won’t have a dramatic effect on imaging because 80% of the current uninsured are under the age of 45 and don’t use a lot of imaging anyway. Those 65 and older are six times more likely to use imaging than those 45 and younger. I won’t say there will be zero effect, but it’s likely to be a minimal effect.”
As far as new payment and delivery models are concerned, Cook says, “As a company, we have legitimate doubts that the ACO model will ever become predominant. We certainly don’t believe it will, in the form it’s in now. If it does, every additional scan will become an expense, whereas previously, it was revenue. The effect of that on imaging is hard to predict, but there will certainly be more pressure to ensure scans are appropriate.” He adds, “Reducing costs and providing better patient care are all good things, but we’re not going to base our strategy on a payment model that may or may not happen.”
Looking ahead, Townley believes hospitals increasingly will evaluate opportunities to purchase freestanding centers from a strategic perspective. “As the individual imaging centers and companies in the freestanding world become stronger, hospitals may want to buy them to consolidate for new payment models,” he observes. “Those centers will be in a good position to sell for a great price, if so.”Cat Vasko is editor of ImagingBiz.com and associate editor of Radiology Business Journal.
On May 10 at the Health Connect Partners Radiology & Imaging Conference 2012, held in Miami, Florida, three large imaging-center companies presented their strategies for building an outpatient imaging presence amid some of the changes that have affected the radiology market in recent years in a session entitled “Freestanding or Hospital-based Imaging: Are You in the Right Game?” Among their representatives was Creighton Cook, director of business development for Outpatient Imaging Affiliates (OIA), who notes that his company is bullish about the future: “There is no reason to believe freestanding imaging centers won’t be a viable option for years to come,” he says.
This sentiment is echoed by consultant Richard Townley, who is president and CEO of AGI Healthcare Group. Townley observes that well run freestanding imaging centers are better able to capture revenue now (as compared with recent years). “Freestanding centers are increasingly well positioned to leverage their lower prices, better service and, often, superior quality, generally at the expense of local hospitals and weak operators,” he notes.
The OIA Model
Imaging-center chains operate according to strategies that vary widely. At OIA, Cook says, expansion strategy is largely based on joint-venture partnerships in different markets; of the chain’s 25 locations, 16 are hospital or radiology-group joint ventures, eight are wholly owned, and one is managed by the company. “From our standpoint and from a joint-venture standpoint, the number-one thing we bring to a relationship is focus,” he says. “Every single day, we’re working on how we can operate the center better. When we find something that works well, we can duplicate it at all of our centers.”
All of a center’s activities that don’t directly produce revenue—credentialing, billing, collections, accounting, and so on—are handled at company headquarters, so the center is free to focus on patients and referring physicians, Cook says. “Hospitals struggle with some functions we do very well,” he notes. “Their service levels are not as high. They centralize scheduling, so waiting times on the phone are longer. Parking is harder at a hospital. Just by virtue of being smaller, we are more agile; we can make business decisions on the fly, instead of going back to committees.”
These factors, combined with the continued obsolescence of less-competitive imaging-center operators, create an ideal market for the right company, Cook says. “There are imaging centers in this country going out of business every day, most of which were not developed under a strong business plan,” he says. “Ten years later, they have older equipment, and when that equipment dies, they won’t be able to reinvest. We’re undergoing a market correction, and the survivors are going to be hospitals and quality independent owners.”
Survival of the Fittest
Hospitals have the advantage of scale, in many markets, but Townley observes that radiology benefit managers (RBMs) are shifting business away from them, in light of the current reimbursement differential between hospital-based and freestanding imaging. “We see a much better future for freestanding imaging than we saw two years ago,” he notes. “RBMs are becoming much more aggressive in steering patients to lower-cost providers, and consumers are becoming much more knowledgeable, as they face higher deductibles and copayments.”
In addition, Townley says, freestanding centers are generally able to offer faster and better service than their hospital competitors, putting them in a better position to accommodate increasing volumes both from the aging population and from those who have regained health insurance as the economy recovers. “There’s more imaging being done, and it’s more likely to be done at a freestanding center,” he summarizes. “There’s increased demand, and the operators are more efficient than they were—they are able to make money at lower revenue rates. Those things are why we feel bullish about freestanding centers.”
Cook adds that the inflation and contraction of the radiology market that have occurred since the 1990s have created the ideal environment for imaging-center chains to expand. “I’m hopeful that self-referral is on the decline because reimbursement is on the decline, and it’s just not as profitable as it once was,” he notes. “The biggest driver in the industry, right now, is the age of equipment. As the equipment gets older, it becomes too hard to replace for the self-referrers.”
As a result, imaging centers can be bought cheaply and restructured for better business. “You already have the lease hold improvements and some book of business in place,” Cook says. Townley notes that since 2007, the focus of AGI’s work with imaging centers has shifted accordingly: “Seven years ago, 90% of our business was building new centers, while 10% was restructuring,” he says. “Now, it’s the opposite.”
Changes to Come
Townley notes that health-care reform represents the wild card that could throw current predictions about imaging’s marketplace into upheaval. “What will bundled payments and accountable-care organizations (ACOs) mean to freestanding imaging centers?” he asks. “Who knows? The world, right now, is still a fee-for-service world. However, cost-effectiveness, quality of service and access will be extremely important factors in any health care reform scenario, and freestanding centers are well positioned to deliver on these goals.”
Cook is also optimistic. “There’s a lot of talk about the number of newly insured,” he says, “but it’s our opinion that this won’t have a dramatic effect on imaging because 80% of the current uninsured are under the age of 45 and don’t use a lot of imaging anyway. Those 65 and older are six times more likely to use imaging than those 45 and younger. I won’t say there will be zero effect, but it’s likely to be a minimal effect.”
As far as new payment and delivery models are concerned, Cook says, “As a company, we have legitimate doubts that the ACO model will ever become predominant. We certainly don’t believe it will, in the form it’s in now. If it does, every additional scan will become an expense, whereas previously, it was revenue. The effect of that on imaging is hard to predict, but there will certainly be more pressure to ensure scans are appropriate.” He adds, “Reducing costs and providing better patient care are all good things, but we’re not going to base our strategy on a payment model that may or may not happen.”
Looking ahead, Townley believes hospitals increasingly will evaluate opportunities to purchase freestanding centers from a strategic perspective. “As the individual imaging centers and companies in the freestanding world become stronger, hospitals may want to buy them to consolidate for new payment models,” he observes. “Those centers will be in a good position to sell for a great price, if so.”Cat Vasko is editor of ImagingBiz.com and associate editor of Radiology Business Journal.