The following article is the second in a series providing analysis of current trends and anticipated developments in the healthcare industry.
Background
Free-standing imaging centers were decimated by the passage of the Deficit Reduction Act in February 2006 (the DRA). The DRA materially reduced Medicare reimbursement for imaging procedures in physician offices and in free-standing imaging centers. From 2000 through 2006, Medicare spending for physician imaging services doubled from roughly $7 billion to about $14 billion, but following enactment of the DRA Medicare spending declined to approximately $12 billion in 2007. This reimbursement cut followed on the heels of another payment reduction effective Jan. 1, 2006 in which the Centers for Medicare and Medicaid Services (CMS) reduced physician payments when multiple images are taken on contiguous body parts during the same visit.
In 2006 and 2007 M&A activity in the imaging sector ground to a halt as buyers tried to get a handle on the prospective performance of imaging centers. The greatest concern was the degree to which the DRA changes would be pulled through by commercial payors. Since two managed care contracting cycles have occurred since the passage of the DRA, most observers believe that the reduction in commercial rates flowing from the DRA is now reflected in current reimbursement. Starting in late 2007, transaction volume began to increase again in the imaging sector.
Commercial payors remain concerned about the growth in reimbursement for outpatient imaging. Particular areas of concern involve physician-owned imaging centers. In response, many payors have (i) engaged third parties to manage utilization through demanding pre-certification and denying requests for studies that do meet medical necessity criteria and/or recommending alternative, more appropriate studies and (ii) imposed multi-modality requirements for eligibility. The net effect has been a significant reduction, generally, in the number of MRI and CT scans being performed.
Additionally, payors have recently begun grading imaging centers and using the grade to determine the kind of procedures for which that center will be eligible. The information the payors are gathering to grade imaging centers includes the type of equipment used, certification of the technician and the center's policies and procedures regarding patient care, including whether the center requires a radiologist to be present.
Finally, reimbursement is becoming more fine-tuned with the amount of commercial reimbursement being linked to the type of equipment. For example, eligibility for reimbursement, as well as the amount of reimbursement, may depend upon the Tesla strength of an MRI.
The United States Government Accountability Office proposed in a report issued in June 2008 that CMS also explore the feasibility of adding more prospective safeguards as used by private payors, such as using prior authorization and privileging. CMS, however, stated that such an approach would be administratively burdensome and perhaps incompatible with Medicare's existing payment appeals process.
CMS proposed but deferred implementation of changes to Medicare regulations which would require physician practices conducting diagnostic imaging tests to comply with several of the standards applicable to imaging centers enrolled as independent diagnostic testing facilities (IDTFs). CMS decided to defer implementation of these proposed changes in part due to the intervening passage of the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA). MIPPA requires the establishment of an accreditation process for entities furnishing advanced diagnostic testing procedures such as CT, MRI and nuclear medicine by Jan. 1, 2012. The net effect will be to add additional costs to physician groups and IDTFs providing imaging services. In many cases it will no longer be commercially viable for smaller physician practices to perform imaging services in-office.
Payors are looking to reduce utilization further, as well as the number of providers, by focusing on demonstrated quality and in some cases requiring accreditation by third party organizations. Consequently, having information systems in place that allow quality to be measured will become crucial. Mom and Pop imaging centers are likely to fall further behind by better funded competitors as RIS and PAC systems become commonplace and demanded by physicians utilizing the center and as costs of compliance with regulations and plan requirements increase.
Hospitals that have inpatient and outpatient imaging networks will continue to pressure payors to exclude unaffiliated imaging centers from the network. It will remain difficult for imaging centers that cannot offer a payor a network in a market to get contracts. Payors are increasingly restricting the ability of imaging centers, and other providers, to bill out-of-network and/or insisting that out-of-network procedures be billed pursuant to fee schedules that are typically less than Medicare reimbursement.
The Opportunity
Imaging centers appear to be at or near the bottom of the reimbursement cycle. As a result, reimbursement is likely to remain steady and possibly increase. CMS, however, is likely to stay focused on strategies that reduce real or perceived overutilization. As the accreditation requirements become effective and to the extent the proposed changes requiring physician offices to enroll as IDTFs become final, the volumes for free-standing multi-modality imaging centers should increase as small group physician practices exit the space. Hospitals also might begin to re-enter this space as a strategy to draw patients into their systems, attract specialists and contribute to their revenue.
Access to capital to develop high quality information systems and RIS and PAC platforms will be crucial to future success. There are few markets where a single facility strategy is likely to be successful long-term. Competent, well capitalized companies that can aggregate multiple facilities in a single market could be successful. One managed care strategy would be to consider joint venturing each imaging center with a hospital in the market to take advantage of the hospital's leverage with payors. It could be difficult, however, for a sponsor organization in that model to report the results of those joint ventures on the consolidation method of accounting (which generally requires the sponsor to control) and to have managed care contracting performed by the hospital (which, under applicable anti-trust laws, generally requires the hospital to control). It might be possible for the sponsor to have enough controls to consolidate and for there to be enough clinical integration with the hospital to enable the hospital to contract with plans on behalf of the joint venture.
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