Impacts of DRA 2005 on Imaging Centers

November 20, 2007

Doug Smith, Barrington Lakes Group


However, for the purposes of this article we will share our experiences, to date, ,based upon specific data from a number of imaging centers, in a number of different markets across the country, with varying Federal and State patient content, and with  varying market positions in the communities they serve.

As one might expect, results to date very widely depending on the size of the imaging center, local demographics, numbers of modalities in the imaging centers, and the aggregate amount of Medicare and Medicaid content at each of the centers.  But, as we found out, DRA 2005 is only part of the story.

It is no surprise that the imaging centers most affected by DRA 2005 are the smaller operators and imaging center owners with a single modality, or two modalities, specifically MRI or CT as the principal imaging modalities at the center.  Larger facilities with a full spectrum of modalities, located in high population growth areas, or increasing supply of medical professionals in the area, and robust business infrastructure, are not experiencing significant impacts from DRA 2005-yet.

Let’s take a look at a few examples of the impacts that we have seen through the first quarter of 2007.  Second-quarter results may provide a different set of data and more precise insight into the issue than we have available, at the moment.  However most of the analyses and forecasts we performed for a number of clients in 2006 with respect to potential DRA 2007 impacts, based upon actual 2006 CPT code by CPT code, by modality experience, appear to be as expected.

At one end of the spectrum is a single modality, MRI-only facility (IDTF) in a small rural community located in the southern part of the Midwest.  In this practice the Medicare and Medicaid content is approximately 35% of the total volume.  However, the majority of studies performed in this facility are driven by specialists with high utilization of with and without contrast studies.

Historically, approximately 47% of their MRI studies were with and without contrast studies.  The impact of DRA, including the multiple procedure discount, and reduction of reimbursement to the lower of the MPFS or the Outpatient Prospective Payment System, has been in the range of a 37% reduction in revenues on their Medicare and Medicaid patient population.

In this specific case, certain payors, in this rather rural area, began ratcheting down reimbursement in late 2006 (when DRA was in the offing, and early 2007 using a flat rate reimbursement methodology for MRI studies in the range of $500-$600 per study as an average.  In addition, in this case, the business also has run into rather severe pre-authorization requirements on the part of all payors.  This issue has, in the best case, slowed reimbursement and increased days outstanding, and in the worse case, created a number of denials from some payors, until the operators and ordering physicians learned how to provide the necessary information to the payer to facilitate more rapid payment and fewer denials.

The net impact, on an annualized basis, from the first quarter experience, assuming minimal growth in volume, is forecast to be in excess of $300,000 for this small facility – HUGE.  It is estimated that this facility will need to approach volumes, in the range of 11 to 12 studies per day, at their average reimbursement experience, to have any hope of achieving income greater than break-even.

Compounding the issue, in this instance, is a lack of population growth and, beginning in 2006, the introduction of a number of in-office imaging sites in the area, especially for MRI.  In this small market, competition is a zero-sum game.  Whatever volume growth comes through increased utilization per population, will likely be absorbed by these new “imaging facilities”, resulting in a decrease of volume at the imaging center and other traditional sites of service.

We have seen this scenario, or very similar scenarios, playing out in number of small markets across the country.  We believe, and, initial data appears to support the contention that we will see a number of smaller operators being forced to make very tough decisions, including exiting the market.  The net result may very well be reduced access for patients, and increasingly limited competition. In similar markets, we have seen patients forced to drive, or fly upward of 100 miles to a facility with access better than 7 days to three weeks out.  Only time will tell whether these results are a good thing, or a bad thing for these communities.  We think it is very, very bad.

At the other end of the spectrum, we find a multi-site  imaging center operator (Physician Owned), with the full spread of imaging modalities, significantly less impacted by DRA 2005 for a variety of reasons.

In this case the imaging centers experience less than 25% Medicare and Medicaid content, have a broad spectrum of referring physicians from different specialties, resulting in much fewer studies impacted by the multiple procedure discount, and significantly fewer, more heavily cut MRI or CT studies with, or with and without contrast.  Although this practice sees a greater volume of MRA and CTA than the single modality center described earlier, such content in these drastically reduced reimbursement codes is still fairly low. Total impact – less than 3% to net revenues.  But added volume contributed to an overall increase of 5.5% net for the period compared to prior year.

Principal contributors to the increase in revenues have been new patient volume, and increased, year over year, utilization per population as certain modalities have broader clinical application for the diverse community medical staff (well marketed practice).  In this case, the facilities scan patients from seven o’clock in the morning until 11 o’clock at night six days a week.  The added volume creates absorption of fixed costs, without material increases in variable costs associated with the delivery of service.

It is interesting to note, in this case, the owners made significant investments in new technology in 2004 and 2005 directed at increased efficiency, more competitive imaging technology differentiators, expansion of PACS capabilities, web-based image distribution, and other infrastructure investments necessary to accept greater volume and increasing access.  Pre-planning paid off!

In recent valuations of certain Imaging Centers performed in late 2006 and early 2007, we, of course had to factor in out year DRA 2005 impacts to future streams of revenues.  In one case, where Medicare & Medicaid volume was in excess of 40%, and new imaging providers were seen to be extracting volume from the facility, and payor policies demonstrated constricted reimbursement, the valuation resulted in substantial losses for the corporation, leaving the total value at “net asset value” only (value of equipment and other assets including AR, less liabilities).  Shock and Awe!

In other valuations performed, the difference between pre-DRA value and post-DRA value resulted in a substantial decrease in indicated value and owner equity, since the dominant contributors to revenues were MRI, CT and PET/CT modalities (high fixed cost elements).  Fortunately, the valuation was performed well in advance of any owner pending action, and allowed the practice to identify opportunities for action and implementation of certain strategies that could materially affect value in the future.

The rest of the imaging universe lies somewhere between the first case and the second case depending on local market demographics, local payer initiatives, service level experience, and local experience with respect to the growth of in-office imaging in the community, local infrastructure cost containment initiatives, and all of the other factors contributing to or denying profitability.

For sure, the take way is – THIS IS A VOLUME GAME – PERIOD!

The other shoe that has not yet dropped fully, is commercial payer price containment policies.

Clearly, in late 2006 and so far in 2007, we have seen early-stage initiatives attempting to mirror DRA 2005 from a number of the national commercial payors.  Almost all payors have introduced pre-authorization and pre-certification policies, some more draconian than others, depending on the imaging utilization management company they have selected to establish and enforce their policies.  Some payors jumped all over the multiple procedure discount very early on.  In some cases policies were consistent with the CMS policy of a 25% discount on multiple body parts at the same episode of care. Still others decided to be substantially more aggressive with 50% discounts, or in one case we know of, a national payer floated a policy which would pay nothing for any studies following the initial study.

Predicting exactly what major payer policies may portend for imaging centers, organized Radiology, and “other diagnostic imaging providers” is difficult to determine with specificity.  However, it would be foolish for any of us to expect these payors to do anything different than what CMS has already done.  We expect a loud “ME TOO”.

Market clout, development and implementation of elegant center differentiation, and other market-specific discriminators, cost containment initiatives, and well considered strategic action plans, will be the primary weapons we will need to maintain a reasonable return on investment for imaging center owners, or even to survive, over the next three to five years.

In our considered opinion, with results we have seen to date, it is reasonable to assume we will see a major shakeout in the diagnostic imaging sector.  At the moment, it appears the larger and more experienced imaging centers, and other outpatient imaging providers, are more likely to survive the storm – because they can.  Whether they choose to do so is another matter.  Smaller operators are going to need to, quickly, implement creative strategies for top-line growth, seriously address operational efficiency and cost containment, ensure service delivery excellence, and aggressively address local market differentiation, if they are going to hope to continue well into the future.

What, when, who and how are local, on the ground decision sets.  What works for one center, may not be appropriate, or enough for another.  What is clear, is that doing nothing and hoping all this will go away, is a kiss of death.

And, now we have insight into CMS 2008.  The saga continues.

Anyone having fun yet?

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