Consolidation and Change: The Current State of Outpatient Imaging

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Large Outpatient Providers Are Adapting, but Can Smaller Businesses Survive?

Due to ever-present reimbursement concerns, a lack of available capital and increased competition caused by overexpansion around the turn of the century, today’s outpatient imaging industry finds itself under significant pressure. In the last few years, a common industry response to that pressure was consolidation, but is that trend expected to continue? And what does that mean for the industry as a whole?

According to figures from the U.S. Census Bureau, there were 6,598 outpatient imaging diagnostic imaging centers in the U.S. in 2015 (the last date in which those numbers were tabulated). While this number is substantially below the peak number of 7,080 centers in 2008, it still represents an industry that is clearly “fragmented,” says Mark Stolper, executive vice president and chief financial officer of Los Angeles-based RadNet, the largest provider of outpatient imaging services in the United States.

Outpatient imaging centers also have faced increased competition from hospitals in recent years. According to a 2015 Journal of the American College of Radiology (JACR) study, business that once belonged to private outpatient imaging offices is now migrating to hospital-operated outpatient centers (J Am Coll Radiol. 2015 Oct;12(10):1042-7.) The study’s authors found that the ratio of private office to hospital outpatient imaging fell from 1.67 in 2008 to 1.03 in 2013, with the shift especially visible in the areas of MRI, echocardiography and nuclear medicine.

The Struggle to Survive Shifts in Policy

One of the co-authors of that JACR study, David Levin, MD, professor and chairman emeritus in the department of radiology at Jefferson Medical College in Philadelphia and Thomas Jefferson University Hospital in Philadelphia, notes that Medicare reimbursement cuts in both the technical and professional components of advanced imaging have directly resulted in a decline in the number of outpatient imaging centers. These cuts, like many other policy updates in the last few years, left outpatient imaging providers feeling as if they were fighting an uphill battle.

Certain regulatory requirements are making life especially difficult for smaller imaging offices, Levin says. For instance, the passage of the Medicare Access and CHIP Reauthorization Act (MACRA) in 2015 and its provisions—such as the Merit-based Incentive Payment System—place a significant administrative burden on healthcare facilities. “Keeping up with the necessary documentation is going to be difficult for private outpatient offices, particularly those run by small groups,” Levin says. “It is becoming more and more difficult for them to break even, never mind making a profit.”

Stolper says that considering how much new regulations have affected his team at RadNet, it must be much worse for the smaller outpatient providers with fewer resources. “This business requires a constant investment in capital, a constant ability to market vis-à-vis your competition and an ability to deal with changes in reimbursement,” he says. “All of those things are a challenge for us, but those challenges are magnified for the smaller ‘mom and pop’ outpatient centers.”

Wendell Gibby MD, the director of Riverwoods Imaging & Interventional Centers in Provo, Utah, says his relatively small business has certainly seen its share of tough times lately.

“Costs aren’t going down, whether it’s for infrastructure, buildings, equipment, or IT,” he says. “And now with additional government regulations, it’s getting more expensive to run outpatient imaging. We probably spend $10,000 a year just on mammography regulatory compliance alone.”

Rick Long, president and CEO of Minneapolis-based Center for Diagnostic Imaging (CDI), agrees with Stolper’s assessment, pointing to his own personal experience. CDI has more than 100 imaging centers nationwide, but Long says the regulatory burden of programs such as MACRA has still been a difficult pill for the company to swallow. “We have added a number of people to help us measure and comply with MACRA,” Long says. “It’s been a costly, difficult process that has put pressure on our margins and driven our costs up.”

Consolidation: Is it Inevitable?

Based on both his own research and what he’s witnessed in today’s healthcare marketplace, Levin believes more consolidation is almost certain to come to the outpatient imaging industry. “The deck is stacked against small private offices,” he says.

Consolidation is common everywhere in radiology, Stolper adds, and there’s no reason to think outpatient providers will choose a different path. “Talk to an older radiologist in this business and he or she will tell you it’s not like it was 15 years ago,” he says. “They’re working harder to make less money. You’re seeing a natural attrition in older radiologists retiring or groups wanting to pass along that torch of the [cuts to] technical component to companies such as our own.”

Stolper says outpatient imaging “is one of the few areas of healthcare services that remains largely unconsolidated,” but that is likely to start changing in the immediate future. He sees consolidation increasing over time, eventually leaving the industry so that it more closely resembles the clinical laboratory or surgical center industries.

While the changing healthcare landscape may not contribute to the survival of the small outpatient imaging office, consolidation does have its advantages for patients. Stolper points out that one of the reasons the industry is consolidating is that it is a reaction to the overexpansion in the 1990s and early 2000s, leading to an overcapacity in certain modalities such as MRI.

“We have fewer centers now, but they are more efficient and that benefits the healthcare system in general,” Stolper says. He also points out that that the freestanding outpatient industry benefits the healthcare system because its prices are substantially lower relative to hospital outpatient departments.

Levin notes that consolidated providers also lead to more subspecialization within the industry. “I think there will be an increasing demand for subspecialty reads and, with consolidation, there will be more opportunities to have subspecialization,” he says. “And with subspecialization, you’ll get more quality work done. There have been a number of studies showing that if you re-read high-end studies that have been done by general radiologists, subspecialists will pick up a lot of mistakes.”

Coping with Cuts and Uncertainty

Reimbursement cuts continue to be a common concern for outpatient imaging providers. “Rates have fallen so precipitously in the last decade that it has become almost unsustainable,” Gibby says. For example, he noted that Medicare reimbursement for brain MRI three decades ago was in the order of about $1,000 compared to $321 today. “With that I have to pay for the cryogen, the radiologist, a technologist,” he explains. “That’s just not sustainable.”

Long brings up the strong possibility that CMS will propose a 50 percent cut to the technical component of mammography reimbursement in the 2018 Medicare Physician Fee Schedule proposed rule. Imaging societies such as the American College of Radiology and Radiology Business Management Association have warned that if this reimbursement cut goes through, it could have a dire impact on access to mammography services, particularly those provided by smaller offices.

“[Reimbursement cuts by CMS] could seriously limit where some providers offer mammography services, or force them to exit the business altogether,” Long says. “Think about those offices in rural areas that may have just one mammography unit, and then think about patients having to drive one or two hours just to get a mammogram. It’s bad for healthcare and bad for population health.”

As Gibby puts it, it’s “no secret that outpatient imaging centers have really struggled.” With that in my mind, how do smaller operations such as Riverwoods survive, and even thrive, in this challenging environment?

At Riverwoods, an increased focus on marketing has been essential. And while trying to increase volume might seem to be a sensible course to follow, Gibby thinks that could be a “fool’s errand.”

“People say they’ll try to make money on volume, but sometimes that just won’t work,” he says. “There is a finite number of people who need imaging. People just don’t decide one day they are going to get their gall bladder imaged because it’s on special.”

Instead, Gibby says Riverwoods focuses on imaging that is more lucrative. This includes procedures such as functional MRI for medico-legal claims and certain interventional procedures such as spinal interventions. Riverwoods is also focusing on cutting costs, which means delaying capital equipment purchases or even buying used equipment rather than brand new, off-the-shelf machines that are substantially more expensive.

Gibby also has taken an “if you can’t beat ‘em, join ‘em” approach, setting up a multispecialty practice that provides Riverwoods with a network of physicians.

“Many hospitals and healthcare systems, to provide sustainable volumes, resorted to hiring physicians,” he says, mentioning one Salt Lake City system with more than 1,400 physicians on its payroll. “We’ve done the same kind of thing, but on a very small scale.”