CXOFiles No.6 Q & A: Scott Arant American Health Imaging: Bulwark of Single-Modality Model

Scott Arant, CEO of American Health Imaging (AHI), a 20-center chain based in Decatur, Ga, started operations in June of 1998 in Decatur, Ga, an eastside suburb of Atlanta, with an open MRI, as did many other entrepreneurs around the nation. The facility flourished in short time, and AHI sold a portion of the company to private investors to further develop the company. Over the next five years, the company opened five more imaging facilities in Georgia, Alabama, Dallas, Tex, and Tallahassee, Fla. With competition intensifying, AHI switched from a de novo model to an acquisition model and acquired three centers from Radiologix around 2002 (two of which were recently sold in Orlando). The company subsequently got back into de novo development, building two centers in Indianapolis and one in Columbus, Ohio. It subsequently acquired five centers in Texas, and opened two additional centers, one in Austin, Tex, and one in Omaha, Neb. AHI is currently in a holding pattern, focusing on efficiency and keeping an eye on the market.

“We don’t have any aspirations about being the largest in the business. We’ll let RadNet and MedQuest chase that dream. We are committed to having quality facilities in markets that truly need these services or markets where we truly believe we can provide a competitive advantage, and therefore track the business. Size is not our game. Quality is our game.” —Scott Arant, CEO, American Health Imaging

ImagingBiz.com talked with Arant about quality imaging and strategies to maintain quality in the current reimbursement environment. ImagingBiz: How does AHI define quality? Arant: Obviously, you will define it in your images, in the radiologists you use: are they board certified, are they fellowship trained? There are some companies that are doing it in India and I think that’s a big mistake. Let’s face it, MRI machines for the most part are MRI machines. There’s not a lot of difference [between vendors]. So quality comes down to the patient experience more than anything. In health care, there’s not a lot of customer service. You walk into a doctor’s office and they open a little window, say sign this, and then they close the window. Then of course you wait for an hour. That’s not service. We believe that patients and referring physicians have a choice, with all of the competition out there. We believe our experience has to be different. So when you walk into one of our facilities, you are going to walk into a significantly large waiting room that has been decorated to feel warm, inviting, and comfortable. It’s going to have nice furniture, it won’t be from the ‘60s or ‘70s. You will not find any tile, such as hospitals use, and you won’t find any white paint. We really want our centers to be warm and inviting. And all of our people, are trained to focus in on the customer and treat them as a customer, not a patient. Again, they have choices, and they can go spend their money elsewhere. MRI and CT scans are cheap, they are getting cheaper, but they are not necessarily cheap. If you go into a store to spend $500, you want to feel like you are being well taken care of. ImagingBiz.com: What is your current business model and how has it changed over the years? Arant: It is to do nothing more than get our house in order and run as efficient a business as we possibly can, due to the changes in the industry. That has been our focus in the past year and a half since the DRA was announced in February of ’06, and it is going to continue to be our focus probably for the next year, year and a half. We are doing little-to-no development, no acquisitions at this time, although we are staying knowledgeable about what is going on in the market and keeping our pipeline full. We don’t have any growth plans right now, because we want to see how all of this shakes out. Going forward, as this DRA cloud and some of the reimbursement troubles move off, we will probably get back to some form of development, probably in the way of acquisitions. I don’t think de novo is the way to go. But we will be very, very strategic in that. We are not going to buy centers just to buy centers. We are going to backfill where our current footprints are: ie, Georgia, Texas, and the Midwest. Beyond that we are going to begin looking at diversification and not bank on imaging for the next 10 years. Imaging is going to continue to feel pressure. So we feel as a health care company, we have to diversify and get into other things, and what they are, I don’t know right now. But there are other things that we can get into and therefore use our infrastructure in different ways. ImagingBiz.com: When you started out, you were an MRI company. Have you moved beyond that? Arant: We are predominantly an MRI company. We do have some facilities that have CT scanners, it depends on the size of the facility and the market penetration we’ve achieved in those markets. We also do have one PET/CT facility in Atlanta, and that has been a reasonably good product for us. We do not do any of the lower end: mammography, X-ray, ultrasound for two reasons: we don’t know it that well, and the reimbursement doesn’t just support it. ImagingBiz.com: Have you encountered any payor problems with that model? There have been reports that some payors are requiring multiple modalities from centers and privileging just those types of centers. Arant: We have experienced no problems with that, and I feel that if insurance companies attempt to force you to do multi-modality, it’s going to put people out of business, because many of them can’t pay the bills. It is going to erode the profits you are able to achieve, and, lets face it, those profits you are making on MRI, CT, or PET have been dramatically decreased in the past 12 months. So if you throw in mammography, ultrasound, and X-ray, I think you are exacerbating the problem and may find yourself belly up sooner rather than later. ImagingBiz.com: Considering the current assault on the technical component in imaging, what recourse do providers have? Arant: The recourse you have on downward pressure is to say, no, we will not take sub-cost reimbursements. We make significant investments in high technology equipment that is not inexpensive, its over a million dollars. And with that said, we have got to stop saying, Yes I will take $375 for a global MRI because I am afraid to lose the volume. You have to read the contracts that are being proposed to you, and you have to go to the table and talk and negotiate with the insurance companies. Stop taking these low-rate contracts. And stop signing these contracts without reading them or negotiating them. Insurance companies need us as much as we need them. Outpatient imaging is the lowest cost provider available throughout the entire country. Hospitals get two to three times more for an MRI scan than we get on the outpatient market. They need us because they save money, and we are good for patients. We are convenient: They come in, get a scan, and walk out, all in 45 minutes. We’ve got to be able to charge appropriate or at least decent rates for that. So, bottom line, just say no. ImagingBiz.com: If a center is asked to provide service beneath its cost, doesn’t that imply that you need to keep a close on what each exam costs? Arant: It does imply that you have to know intimately your cost structures. Cost is not that much different from a thoracic scan to a knee scan, it is time on the machine, that cost is sunk, it’s fixed, it’s not going to change. But we do cost accounting throughout our organization, and we do know what each code is going to cost us. In doing that we are able to stay way from contracts that do go below that number. Some people think if they pick up volume, costs will go down, which is true. But the bottom line is this: Insurance companies will say they will pay you $375 for an MRI and steer more volume to you. That is just a line. I’ve been in this business a long time, and I have never, not a single time, seen an insurance company steer patients to you because you’ve agreed to a low price. This is key for providers to remember: the physician writes the order and if you are on contract with CIGNA, for instance, and five other imaging companies are as well, that physician can determine where that patient goes, because he’s got five choices. The insurance company is not going to care because there are five in the network. What they don’t want is for the patient to go out of network, because that is expensive for everybody. ImagingBiz.com: What response do payors have to such data? Arant: They don’t trust your numbers. But providers are going to have to be willing to expose more information, more numbers, to show them, truthfully, we can’t afford to deliver those types of procedures at the rates they are proposing. So you have to be willing to take hard data to them, to show factually what the costs are. The perception over the years has been that imaging is a cash cow, we’re printing money, and that might have been true of some situations. But when you are talking about $300, $400, $500 MRI scans, that’s not the case anymore. We have to show them that’s not the case, and if we do, they will understand about fixed cost on a $1.3 million scanner. People should be prepared to show hard data and be willing to disrobe a bit. ImagingBiz.com: Is it better to close your doors than take business at a loss? What other options are there? Arant: None of us want to close our doors. We got in business to be in business. We have to run our businesses smart, we have to read these contracts, and we have to understand our costs. It’s easier to scale back your business. Let me give you a scenario. If Aetna were to offer $400 MRI scans and they are 10% of your business, it is better to drop that contract and scale your business back by 10%, whether it be by staff or operating hours than it is to ramp up to meet this false volume for lousy reimbursement, because then you are throwing good money after bad. You’re going to find quickly that those numbers don’t work for you: you’ve brought on people, you are keeping your doors open longer, you are keeping the machines working longer to chase low reimbursement. That might have worked five years ago, but it doesn’t work today. So yes, keep your doors open, just scale your business back to maintain your margins. That’s my belief and that is our strategy. ImagingBiz.com: The imaging business is quite segmented, with many tensions between factions. Is it possible to overcome the cultural differences between entrepreneurs and physicians on the one hand, and outpatient and hospital-based imaging on the other to arrive at a consensus approach to countering the imaging cuts? Arant: This industry has to come together by faction, and let’s take the entrepreneurs to start with. We as entrepreneurs have to begin to talk, have to begin to meet, have to begin to know each other, and share best practices, ideas and so forth, for survival. If we don’t, we will pay a big price. Benjamin Franklin said, “We can all hang together, or surely we will all hang independently.” And that is very true of today’s imaging market. We have got to lay our arms down, and we have got to spend time together, and talk about what are good business practices. I am not suggesting that we fix price, don’t get me wrong. But I am suggesting that we spend time together and talk about best practices so that many of us can benefit and survive this storm. There are probably many imaging centers that will and should go away. And that’s fine. The market is overbuilt, and that is part of the reason we are having this problem. But for the CDIs, the American Health Imagings, MedQuest, and Cypress Partners, those companies have to come together and begin to share ideas and help each other. In the end, there will be a core group of imaging centers that provide good quality. I don’t see radiologists as a faction. Radiologists, years ago, made the determination—whether they know it or not—that they weren’t going to be heavy owners of outpatient centers. In all of our markets, I have maybe one or two radiology groups that I compete with, and Austin is a good example of that. But in Georgia, I don’t compete with a radiology group. I don’t compete with a radiology group in Columbus Ohio, or Omaha, or anywhere else. For the most part, I don’t have that problem. The other faction you referred to is the hospital-based. Eighty percent of all imaging is done on the outpatient market and over the last 15 years, the move has been to go outpatient for most services that could be done on an outpatient basis, ie ASCs, physical therapy, labs, and we are just a component of that. I think there are always going to be hospitals and outpatient providers, and hospitals are never going to like us because we take business from them. But we are competitors, and competition is good for everyone. I think it has been good for them. ImagingBiz.com: The dialysis industry must have had similar factions, but it appears to have had more success in defending pay cuts in Washington. Any insight? Arant: I don’t know much about the dialysis industry, but I know they went through a period when they were getting cuts pretty substantially. It used to be a very fragmented market, and I guess it still is to some degree. But to a large degree, there are two or three major companies—non-U.S. companies—that own probably the largest share of dialysis centers around the country. That could be where imaging is heading. ImagingBiz.com: What impact would another round of imaging cuts have on the business and how likely are we to see that? Arant: Another round of imaging cuts would be devastating and if it comes from Medicare. If that were to happen I think providers are going to have to evaluate whether providing services to Medicare patients is profitable. It’s getting pretty close now and nobody is going to continue to provide services that are not profitable. Do I think it will happen. I think we will begin to see cuts along the same level as other Medicare components. So if there is a 7% decrease in Medicare across the board, then I think we will see a 7% decrease. I don’t think we will be exempted from future decreases. But I do think that imaging can not continue to pay the bulk of the bill. We just don’t have those margins anymore. If we go away two things will happen: one, physicians will control more of the market and they will scan more people, or two, hospitals will control a big part of the market and prices will go higher than they already are. Anthem Blue Cross in Indiana is paying about $450-500 for an outpatient MRI whereby they pay the hospitals as much as $2,500 for that same MRI scan.