Making the Financial Case for Technology Upgrades

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 - Cost, financial

Radiology departments and practices need to replace or add imaging equipment and technology continually. Sometimes these acquisitions are related to issues regarding safety and quality. Other acquisitions are prompted by the availability of upgraded technology with new functionality.

Whatever the reason for the acquisition, all purchases have cost and revenue implications. In the current environment, cost considerations weigh more heavily than ever.

According to Lynne Roy, MBA, director, S. Mark Taper Foundation Imaging Center, Cedars-Sinai Medical Center in Los Angeles, Cedars-Sinai does not have a systematic plan for capital replacement. “Cedars-Sinai will sometimes continue to use equipment past ‘end of life’ as long as it still functions well and operates efficiently,” she says.

This means that even though new pieces of imaging equipment are introduced to the market, Cedars-Sinai won’t replace an existing piece of equipment just because the new technology might be a little more efficient or increase throughput.

Roy points out that Cedars-Sinai Health System—like most providers—is dealing with budget restraints. “We have to prioritize the entire medical system’s needs when it comes to replacing existing equipment,” she says.

For example, if the Cedars-Sinai Pain Center is experiencing a significant patient backlog and is in need of an additional procedure suite and C-arm, imaging may have to make do with an old but functioning MRI, even if it is less efficient.

“There are competing needs,” she explains. “That’s why we have some pieces of equipment that are past end of life.”

As Roy puts it, Cedars-Sinai “is rarely the first kid on the block with new technology.” However, once a decision is made to replace a piece of equipment, Cedars-Sinai will always go with the most advanced technology, with a proven track record she says.  The same holds whenever imaging seeks to add a new piece of equipment.

Software upgrades are a little different. “Manufacturers are always creating new software for an existing installed base,” she says. While the organization does not purchase every new piece of software introduced, some purchases are considered necessary.

For example, Cedars-Sinai recently invested in an MRI liver elastography module in response to the addition of a researcher and physician, each of whom focus on the liver and needed the technology for research and to diagnose patients. “This was a fairly large amount of money,” she says. “We needed to provide it to serve the patient population these physicians were recruited to serve.”

Building a case

Justifying the acquisition of new imaging technology is getting more difficult as reimbursement continues to get squeezed, says Sheila Sferrella, senior vice president at Regent Health Resources, Inc., Nashville, and former administrator of diagnostic services at Lehigh Valley Health Network in Allentown, Penn.

In the case of inpatient volume, imaging is a cost center, Sferrella says, meaning that outpatient studies are really the only source of additional revenue that can be produced by imaging. “Unless it’s a safety or quality issue, if I want to justify the acquisition of a new piece of equipment, I’m going to have to make the case based just on outpatient volume,” Sferrella explains.

Roy points out that a number of factors go into building a case for the acquisition of new technology, including present volume, growth curves, service history. One thing they are conscious of at Cedars-Sinai is how not replacing or adding a piece of equipment limit its ability to add value to the system.

The increasing emphasis on reducing healthcare costs means that radiologists, referring physicians, and even patients have become more concerned with ensuring that imaging is specific and has a good chance of answering the diagnostic question, Roy says. The bottom line is that it enables patients to be moved into an appropriate plan of care.

When it comes to justifying imaging equipment acquisitions, a key question has become this: What’s going to happen if that piece of equipment isn’t acquired?

“If it’s a piece of equipment that affects inpatients, and patients can’t get their studies, it’s going to increase their length of stay,” Roy points out. “If it’s specific to outpatients and you’ve been experiencing positive growth—and you don’t add capacity with an additional piece of equipment—you won’t be able to continue to meet the increased demand.”

Cost center to value center

Competing for scarcer resources is something that Fergus Coakley, MD, chair of the department of diagnostic radiology, Oregon Health & Science University School of Medicine, Portland, has to deal with, just like his colleagues across the healthcare spectrum.

“We’re competing with many deserving projects all across campus,” Coakley says.

The process is very much the same as it is in most large institutions as far as projecting costs and revenue associated with purchases. “We need to be able to build a sound business case,” he says.

With the evolution towards value-based healthcare, radiologists should begin thinking differently about how they are going to justify the acquisition of new technology. Coakley recommends that radiology departments work to move decision makers away from thinking about imaging as a cost or a revenue center, and instead get them thinking of it as “a value center.”

A new CT scanner can reduce radiation dose, image faster and improve throughput—benefits that are fairly easy to document. “We need to be able to document what we do that’s really beneficial and show how we are driving patient outcomes,” Coakley says. “That’s something we’ve taken for granted and never  had to prove. We have to show that we’re a value center—and that’s what we need to bring to the table where these [acquisition] decisions get made.”

Of course, Coakley adds that healthcare continues to ride “the fee-for-service train.” The processes involved in justifying and making technology acquisition decisions aren’t that much different than they were a decade or so ago, he acknowledges, adding: “But the value-based world is on the horizon.”

The actual process of building a case for an acquisition isn’t easy, Sferrella says. It should involve the development of a pro forma financial statement to project the financial impact of the proposed acquisition.

“In a hospital, if you’re just replacing a diagnostic room with another diagnostic room, you don’t have to go through a five-year pro forma,” she notes. “But if you are going to go from a 4-slice CT scanner to a 32-slice scanner, then you need to do that.”

It will involve making projections based on a number of questions. How many exams—by CPT code—will be performed on the scanner? How many will be contrast-enhanced? Where is the volume coming from? Who are the referring physicians? “It’s a good bit of work and not something you can do in 10 minutes,” she said.

Making and meeting projections

While at Lehigh, Sferrella was involved in the start-up of a neurointerventional program. Among the things she had to justify was whether it should incorporate biplane technology, which would have added approximately $1 million to the start-up cost.

“I had to justify the additional million,” she says. “This was very complex because we had to assume we were going to lose some surgical cases because they were going to be done in interventional radiology instead of surgery, and surgery brings in more money than an interventional or radiology case.”

Within a year and half the new program met all her projections. Sferrella says she has never missed a projection for one key reason.

“I’m always conservative,” she says. “If a physician tells me we’re going to do 100 of something, I use 50 as the number. And working with the financial people at Lehigh, we also would do best and worst case scenarios.”

It helps, she says, to negotiate good contracts and to “watch the numbers.” “If something wasn’t working, or wasn’t right, I wasn’t the kind of manager who waited six months and then asked, ‘What’s going on?’” she notes. “I knew what was happening.”

Anticipate problems and have a plan in place to deal with them, she suggests. For example, in the case of the Lehigh neurointerventioanal program, part of the cost involved sending a physician out on fellowship.

“That wasn’t cheap,” she says, adding that the contract called for the hospital and the radiology practice to split the cost of the fellowship and for the physician to pay back a pro-rated amount if he left the practice before a prescribed time—which he did. They also had a plan in place to keep the program going until that physician could be replaced.

It also helps that radiology teams are good with data. “No one in any institutions do better justifications than radiology teams,” she said. “And that’s because we do it with data.”

She recalls a situation at Lehigh in which she sat down with the chairman and managers of the radiology department to set priorities one year in which one of the issues was the cost of service. In the case of one CT scanner the cost of servicing was prohibitively high — $400,000 over two years—and its replacement was set as a high priority.

When asked in a capital budget meeting if the scanner really needed to be replaced, she replied, explaining that they spent $200,000 a year over the previous two years. If they waited one more year to replace the scanner, they would have spent the replacement cost for a new one.

We had very bad service cost incident with that manufacturer,” she recalls. “And we got the machine. You know you are never going to get everything since the needs always exceed the dollars, but you have to be willing to do the work.”

If you buy it, will they come?

“That’s a problem that a lot of people worry about,” Roy says. “You justify new equipment and analytically demonstrate that there will continue to be a huge demand, and you install it—and the demand dries up, and the patients don’t come. We’ve been fortunate in that they do come.”

Recently Cedars-Sinai opened its Advanced Health Sciences Pavilion, which included a new imaging wing. “I was a little concerned about reaching capacity,” Roy says. “Although we were not fully booked on opening day, by the end of the year all our slots were filled, and we were increasing hours for both MRI and CT.”

At OHSU Coakley was able to bring in a new service line—MRI-guided prostate biopsy—as part of the package that brought him to OHSU in 2012. “Without doing a lot of promotion or marketing, that service has really taken off,” he says.

Sometimes, though, marketing is necessary to ensure that the patients will come.

In the case of Cedars-Sinai, one of the issues it faces is simply a lack of space, Roy explains, which complicates plans to add new equipment and makes those requests relatively rare. They are necessary, though, and it becomes particularly important to market to the system’s referring physicians when those acquisitions are made.

“If we are at capacity, and patients have to wait a month for an appointment, the patients are referred elsewhere,” she says. The referring physicians can get used to a different distribution [pattern], but they will not redirect patients back to the department when additional equipment is installed—without marketing.

There’s also the risk that waiting on acquisitions could provide competitors with an advantage, however fleeting. For example, according to Roy, if a freestanding clinic down the road installs a state-of-the-art 7T MRI scanner, “We would take notice because that particular center could take away some patients,” she explains. “While we aren’t going to immediately request and justify a 7T MRI, it could, however, influence what we get tomorrow.”

Cedars-Sinai is more likely to pay attention to what a major competitor—UCLA Health—is up to, Roy said.  “UCLA is much more likely to significantly enhance its imaging technology because it has access to more capital than a typical freestanding clinic.”

An argument for acquisitions of new technology could, therefore, reference what’s happening over at UCLA, Roy says. “If we have an MRI that’s 14 years old and breaking down, and we can’t get new parts, I may also point out that, by the way, UCLA has 3T MRIs and we’re having trouble competing. It just adds a little more fuel to the fire.”

As for external marketing, Sferrella pointed out that while independent imaging centers are likely to spend money on marketing, those kinds of dollars are scarcer in hospitals. “There’s very little marketing for hospital radiology,” she says. “It’s one of those resources that continues to get whacked.”

Impact of XR 29

In 2016, hospitals and health systems will face the possibility of seeing their payments for CT scans reduced if they aren’t performed according to the new standard—XR 29—established by the Medical Imaging and Technology Alliance.

Effective January 2016, Medicare will reduce payment per scan for the technical component by 5% for those scans performed on noncompliant CT scanners, and will further reduce it to 15% in January 2017.

Should all sites replace their noncompliant scanners? Sferrella poses the case of a 250-bed hospital with about 17,000 outpatient CT studies annually and a 50% Medicare payor mix. In 2016, that hospital would see a reduction of about $100,000 and by 2017 that hospital would be faced with a reduction in payments of about $300,000.

Considering that the average cost to replace a CT scanner with one that is XR-29 compliant is about $500,000, she explains, “You will break even in less than three years if you replace your scanner, based on this outpatient volume.”

Coakley said that he senses that XR-29 isn’t a major concern for larger organizations. “Most have scanners that are compliant,” he says, pointing out that OHSU has just one scanner—at PET/CT—that isn’t compliant. “It may be a problem for smaller hospitals with older scanners.”