Radiology Business Journal - Winter 2008 by imagingBiz

FOR LEADERS IN MEDICAL IMAGING SERVICES

Winter 2008

A Cautionary Tale

| PAGE 22

FEATURED IN THIS ISSUE The 50 Largest Radiology Practices | page 30 Building the Model Practice | page 36 A History of M&A Activity in Imaging | page 44 w w w. ra d b i z j o u r n a l . c o m

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CONTENTS W I N T E R 2 0 0 8 | VOLUME 1, NUMBER 4

FE ATURES 22

FRA AND FLORIDA HOSPITAL: A CAUTIONARY TALE UNFOLDS By George Wiley

After 40 years, a 47-physician group ceased to exist, a casualty of current medical economics, internal strife, and failed negotiations.

22 30

BIG: THE 50 LARGEST RADIOLOGY PRACTICES By Joseph P. White, CPA, MBA, and Cheryl Proval

BUILDING THE MODEL PRACTICE By Rich Smith

Corporate-style governance, subspecialization, and choosing the right administrative staff members all play roles.

THE PUSH FOR PRODUCTIVITY By Jon Copeland

In an era of declining reimbursement for radiology, one practice is testing the limits of ITâ&#x20AC;&#x2122;s ability to improve productivity.

HISTORICAL REVIEW OF MERGERS AND ACQUISITIONS DIAGNOSTIC IMAGING

By Jonathan A. Burklund

From the go-go years to the present, acquisition strategies in the outpatient diagnostic imaging field have not always worked.

MAINTAINING A STEADY AIM AT A MOVING TARGET By Thomas E. Bartrum, JD

An overview of recent regulatory changes affecting diagnostic imaging.

DEPARTMENTS 8

ADVIEW The Good Ship RBJ By Cheryl Proval

THE BOTTOM LINE Radiology in an Economic Downturn: Strategies for Success By David M. Yousem, MD, MBA

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CONTENTS W I N T E R 2 0 0 8 | VOLUME 1, NUMBER 4

PUBLISHER Curtis Kauffman-Pickelle ckp@imagingbiz.com EDITOR Cheryl Proval cproval@imagingbiz.com ART DIRECTOR Patrick R. Walling pwalling@imagingbiz.com TECHNICAL EDITOR Kris Kyes kris@imagingcenterinstitute.com

DEPARTMENTS 12

(continued)

PRIORS

12 Health Care Delivery, Undisrupted 14 Understanding—and Adapting to—Managed Care Strategies 16 Busting Myths: Joint Ventures and Tax Exemptions

CONTRIBUTING WRITERS Thomas E. Bartrum, JD Jonathan A. Burklund Jon Copeland Neil J. Gonter, MD Rich Smith Steve Smith Joseph P. White, CPA, MBA George Wiley David M. Yousem, MD, MBA ADVERTISING DIRECTOR Sharon Fitzgerald sfitzgerald@imagingbiz.com PRODUCTION COORDINATOR Megan Runyon mrunyon@imagingbiz.com

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FINAL READ The Ultimate Road Trip By Curtis Kauffman-Pickelle

CORPORATE OFFICE Imaging Center Institute 222 Fashion Lane, Suite 109 Tustin, CA 92780 (714) 832-6400 www.ImagingCenterInstitute.com PRESIDENT/CEO Curtis Kauffman-Pickelle VP, PUBLISHING Cheryl Proval VP, CLIENT SERVICES Steve Smith VP, ADMINISTRATION Mary Kauffman

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Radiology Business Journal is published quarterly by the Imaging Center Institute, 222 Fashion Ln., Suite 109, Tustin, CA 92780. US Postage Paid at Lebanon Junction, KY 40150. Winter 2008, Vol 1, No 4 © 2008 Imaging Center Institute. All rights reserved. No part of this publication may be reproduced in any form without written permission from the publisher. POSTMASTER: Send address changes to Imaging Center Institute, 222 Fashion Ln., Suite 109, Tustin, CA 92780. While the publishers have made every effort to ensure the accuracy of the materials presented in Radiology Business Journal, they are not responsible for the correctness of the information and/or opinions expressed.

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A dView On the Good Ship RBJ Reflections on the first year of the journey

By Cheryl Proval

hat a year—what a breathless, heart-stopping, devastating, and hopeful year this has been for just about everyone I know, including all of us here at The Imaging Center Institute, publisher of Radiology Business Journal. The year 2008 is the year that brought, willy-nilly, a thicket of obscure financial terms into the vernacular—toxic assets, stock injections, short selling—and the steepest one-week stock-market decline on record. Suddenly, all of us, individuals and institutions, were in the same boat— unless, like the storied firm of Lehman Brothers, we were not in the boat at all. Banks, hospitals, medical equipment manufacturers, homeowners, and individual investors all suffered sudden and deep paper losses, as we scratched our heads and wondered where it had gone and if it would ever return. Collectively, we inhaled, grasping tightly the purse strings. A great unease spread out over the country, and extended around the world. Of course, we did not arrive at this place overnight, nor will we emerge from our plight in a day, but what is clear is that no matter how sound the fundamentals of a business may appear, if the economics do not support it, if people and insurers are unable or unwilling to pay for our service, and if banks are unwilling to provide the bridge money to sustain operations through the thin times, then we have a problem. In these times, what is required is vigilance, along with a firm hand on the tiller and the courage to enter uncharted waters. When we launched Radiology Business

Journal in April of this year, we did so because, in times of change, it is imperative to keep a keen eye on the compass, as well as on the waters in which you travel. In our first year of publishing this journal, we have brought you in-depth interviews with thought leaders and forecasts by noted consulting firms. We have explored managed care strategies, hospital contracting strategies, mergers and acquisitions, opportunities, threats, and strategies to meet the regulatory demands of a rapidly changing field. One other requisite, in tough times, is to take care of one’s customers. For a radiology practice or department, those customers are legion: patients, referring physicians, payors, and hospital administration. For a journal, the customers are you, the readers, and the vendors who choose to support the endeavor. Before we published our first issue, not a few people were skeptical. Aren’t there enough magazines in the radiology space? Well, we made it through our first year, with the encouragement of many readers and the support of our affiliates and advertisers. To all of you, we extend our sincerest gratitude. In order to acknowledge the support of our advertisers properly, we will break with our policy of not naming vendor names in the journal’s pages on just this

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one occasion, in order to name the companies that agreed to support us in our first year, when all that we had was a mission and a dream. Here they are, in the order in which they first appeared in our pages. Hitachi Medical Systems America FUJIFILM Medical Systems NightHawk Radiology Services GE Healthcare Medical Imaging Specialists Affiliated Professional Services 3DR Laboratories AMICAS Intelerad GE Healthcare/Centricity PACS-IW Hologic Franklin & Seidelmann Exogen Visage Imaging Covidien VIDAR Systems Corp TeraRecon Inc CSI Financial GE Lunar Siemens Medical Solutions Thank you for believing that we had a good reason to exist. By continuing to meet the information needs of our readers and your customers, we hope to earn your support for many years to come. CHERYL PROVAL EDITOR

cproval@imagingbiz.com

THE BOTTOM LINE

Radiology in an Economic Downturn Strategies for Success BY DAVID M. YOUSEM, MD, MBA

n the near term, radiology practices must turn their attention to managing expenses instead of growth. Physicians in radiology who believe that the current economic downturn will somehow bypass their practices, and who do not gird themselves for the new reality, may be left on the scrap heap of failed enterprises. Because we are in a service industry, we are susceptible to the vagaries of available disposable income. Those practices currently exploring strategies for adjusting to the ongoing chaos will thrive. Those not engaging—right now—in strategic planning will suffer. The graphs of increases in imaging services provided to CMS participants are misleading. Not only are the data from 2008 not readily available, they include imaging services provided by nonradiologists, where the largest growth is occurring. While it is clear that selfreferral and subsequent overutilization are hurting our industry, they hide the fact that our own growth in the past two years has flattened, and that was in bullish times. How do we survive when utilization falls? It’s coming. I believe that the decline in health services will result from: • the existence of fewer employersponsored health plans, and an increase in the number of uninsured people; • the performance of fewer elective surgeries, such as cosmetic procedures and vein stripping; • the choice, by injured patients, of medical therapy of rest and immobilization instead of orthopedic procedures; • reductions in screening studies (such as mammography, virtual colonoscopy, and bone densitometry); and • the lag time before any governmentbased or tax-credit–based program is instituted, if any such program is created at all: I predict that the tax credits will be used for basic household expenses and not for medical care, particularly when health care premiums exceed tax credits and the choice becomes one of buying food and making credit-card–debt payments versus purchasing health care coverage.

How do we survive when utilization falls? We must either contract/conserve or combine. One key to surviving when utilization diminishes is to manage compensation expenses. Our largest expenses are salaries and benefits, and now is not the time to be overstaffed. Look carefully at the number of employees engaged in an activity. Compare your situation with industry standards available from peer organizations, such as the RBMA. Consider offering part-time positions and/or outsourcing a limited part of your practice. Is it time to implement voice-recognition dictation fully, to cut transcription costs? Prepare your physicians for the possibility of salary cuts. Be circumspect about your benefits packages. If laying off people is anathema to you, explain to your employees that they may be limited to lower-cost health care/disability programs. Converting to an end-of-year IRA program (for employees who work the full year) may create savings, as opposed to a monthly plan, if you can afford a retirement plan at all. Consider reducing business allowance accounts. Some people will use money unnecessarily if you give it to them; reevaluate what is fair value for practice expenses. Optimize your IT solutions to reduce costs. Is it finally time to go filmless, or is the upfront cost too high? Should you provide CDs instead of film to your patients? Absolutely! Eliminate storage costs by electronic means, even if your physicians want to continue to be film readers. In so doing, you may also be able to reduce film-handling personnel.

EMPLOY ECONOMIES OF SCALE Another key to managing expenses is taking advantage of economies of scale. By employing economies of scale, one can better negotiate with vendors and managed care organizations (MCOs). Consider consolidating radiology groups into larger buying groups. Being a major player in the market will allow the negotiation of more favorable rates with providers and vendors. Consider consolidating capital-equipment purchases with single vendors to obtain greater discounts

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by virtue of the size of the purchase. Bundle purchases and garner savings. The same is true for service contracts. Using a singlesource vendor to service all of your multivendor equipment is common at academic institutions, and it allows excellent savings (and efficiencies, with one-call service requests). Apply economies of scale to malpractice insurance. Ask your carrier what qualityassurance procedures would lead to reductions in your rates: double reading of emergency-department cases, computer-aided detection for mammography, and/or automated physician-notification schemes? Remember that the insurers have also suffered economic losses of investment income in this market. Expect a potential fee hike, but be aggressive about staving this off with innovative ideas. Leave no stone unturned as you seek opportunities to manage expenses. Convert to electronic just-in-time payment schemes. Eliminate postage and mailing costs, as much as possible, and automate the process to reduce the number of administrative billing personnel. Employ just-in-time delivery of supplies. Managing inventory appropriately can reduce storage/maintenance costs, insurance costs, and expired supplies. Lobby Congress to prevent further reimbursement cuts and support legislation against self-referral. Make sure your team is focused and aware of the environment. Engage its members in brainstorming costcutting ideas. Be wary of your accounts receivable in a down market—people are less apt to make their copayments, and MCOs may also delay payments. Stay on top of this. The playing field has changed. Those who are prepared will weather the storm and maintain their profitability. Rather than expecting the revenue growth that has driven our industry in the past, I believe that today’s focus should be on expense management. David M. Yousem, MD, MBA, is professor of radiology, director of neuroradiology, and vice chair, program development, for Johns Hopkins Medical Institution, Baltimore.

PR I O R S {PR I O R S}

Health Care Delivery, Undisrupted

LEADERSHIP

ow to afford health care is not the question we should be asking in these times of unsustainable health care cost increases. The right question to ask is this: How do we make health care more affordable? That is the question tackled by Hwang and Christensen1 in a recent paper published in Health Affairs: Disruptive Innovation in Health Care Delivery: A Framework for Business-Model Innovation. The authors begin by defining disruptive innovation, a concept popularized by one of the authors, Harvard Business School professor Clayton Christensen, which in part explains how complicated and expensive products are turned into simpler, less expensive products. Sustaining innovation is the practice used by successful incumbent organizations to create better products for a discerning customer base. Using a simple graph illustrating the trajectories of sustaining innovations and of disruptive innovations against customer demand, the authors explain that disruptive innovations occur when product innovation outpaces customers’ ability to make use of the new features. The customers willing to pay the highest price typically do not use disruptive products, and new suppliers in a market usually introduce them. Once a disruptive product gets a foothold in a market, however, it improves over time, positioning the upstart to become the new market leader.

The authors offer the example of the PC disrupting the business models that produced mainframe computers, noting that although we spend far more on computers today than in the mainframe era, we are better off, most of us would agree. “The widespread belief that increased spending on health care, particularly on new technologies, is something that must be quelled shows how long we have tried to answer the wrong question,” the authors continue. “When embedded within disruptive business models that capitalize on increased convenience and affordability, new technologies can deliver tremendous value.”

WHY HEALTH CARE RESISTS DISRUPTION The reason health care has resisted disruption, despite the fact that so many new technologies have been introduced, is that these technologies have been introduced in such a way as to sustain hospitals and physicians in solving complex problems. To explain why, the authors analyze the makeup of a business model. A successful business model begins with a value proposition, a product or service that makes practical and economic sense, followed by a set of resources deployed by management to deliver the value proposition, the authors explain. As employees generate the product, processes are distilled, and they become a part of the business model. It is the authors’ belief that an established business model, over time, will determine the types of business propositions that an organization can and cannot

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The widespread belief that increased spending on health care, particularly on new technologies, is something that must be quelled shows how long we have tried to answer the wrong question. deliver. The relationship between business propositions and processes then commences to work in reverse, limiting the types of value propositions that an organization can take to market. Although many companies have had disruptive technologies within their grasp, the authors offer only one example of an established organization that was able to take a disruptive technology to market: That was IBM, which established a separate business model in Florida to develop the PC and allowed the unit to work autonomously, resulting in the demise of the mainframe. The authors categorize business models into three types: solutions shops, built to diagnose and solve problems primarily by the people they hire; value-adding process businesses, which leverage resources into outputs of greater value; and facilitated user networks, in which business transactions occur within a collective. Most hospital and physician practices can be characterized as solutions shops; retailing, restaurants, and automobile manufacturing are examples of value-adding

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LEADERSHIP

{PR I O R S}

process businesses; and insurance and telecommunications companies are examples of facilitated user networks. Although solutions shops are the primary business model in health care, the authors suggest that many activities have developed in health care that would be better delivered in a value-adding processes or user-network model. Examples range from a nurse using a rules-based diagnostic test to verify group A streptococcal pharyngitis to angioplasty. Institutions such as MinuteClinic and certain focused cardiology hospitals can deliver care at a cost that is 60% lower than hospitals and physician practices in which value-adding processes are conflated, the authors argue. Facilitated user networks, in shifting the care out of solutions shops that are ill equipped to deal with diseases to networks in which patients can learn from each other, are the ideal business model for treating many chronic diseases. “Pairing technological enablers with disruptive business models is what leads to greater affordability and accessibility, and this is where

health care entrepreneurs and policymakers must focus their energy if the same degree of innovation is to be brought to health care that has already transformed numerous other industries,” the authors write.

CHALLENGES TO CHANGE Interoperable health information is a critical precursor to creating focused facilities and user networks out of our current mixed model of health care, the authors maintain. “Health IT systems must serve as the connective tissue joining the various pieces of health care delivery into a coherent system that delivers continuity through safe, satisfying relationships,” the authors write. Disruptive innovation, however, presumes the existence of a market of consumers with the incentive to shop for the health care products and services that best meet their needs. The authors suggest that health savings accounts, combined with highdeductible health plans, are the answer, but without business-model innovation, consumers will resist spending their money on services

perceived as costly and inconvenient. Regulatory barriers, such as certificate-of-need policies, federal moratoria on specialty hospitals, and restrictions on physician ownership of medical facilities, are characterized by the authors as attempts to maintain the status quo, even though frequently well intentioned. Cutting reimbursement in an attempt to force solutions shops to figure out a way to become more efficient does not improve health care, the authors argue. They write, “With lower reimbursement, hospitals and physicians struggle even more to fulfill their value propositions of providing complex, inherently expensive medical care, and they become even less inclined to hand off work to value-added processes.” —C. Proval Reference 1. Hwang J, Christensen CM. Disruptive innovation in health care delivery: a framework for businessmodel innovation. Health Aff. 2008;5:1329-1335.

Understanding—and Adapting to— Managed Care Strategies BY STEVE SMITH

I “

t is highly probable that many practices will see their current payor mix change to one in which 80% or more of net patient revenues will be based on negotiated payments,” according to Christopher J. Kalkhof, FACHE, director and national managed care lead, Provider Revenue Cycle Practice, Deloitte Consulting, New York City. That was the opening salvo delivered on October 20, 2008, at the Medical Group Management Association meeting in San Diego during the session, Integrating Your Practice’s Growth and Managed Care Strategies, presented by Kalkhof and Max Ludeke, FACHE, CEO, Doctors Hospital, Houston.

ST R AT E G I C PLANNING

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“Whether negotiated managed care organization (MCO) payment arrangements represent a major or a minor portion of a practice’s net patient revenues in its current operating environment, practices should expect significant change between 2009 and 2010,” Kalkhof says. During the session, Kalkhof and Ludeke discussed the favorable and unfavorable consequences of participating (or not participating) in a specific MCO contract. Desirable consequences of participation in a favorable contract include: • increased patient volume through a physician referral management program and retention of existing patients;

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• the opportunity to negotiate reimbursements and pay for performance at rates that are higher than average; • inclusion in the MCO’s participatingprovider lists and Web sites; • electronic claims payment options, automated eligibility, diseasemanagement programs, and accelerated cash flow; • MCO group and Medicare benefit plans designed to provide subscribers with financial incentives to use in-network physicians; • potentially competitive reimbursement; and • valuable practice-management tools. The potential risks of participation include reduced control and independence on pricing strategy and patient treatment, unavoidably increased contract compliance and administrative costs, and changed referral patterns with physicians and hospitals. In addition, there may be future unit-payment reductions when market dynamics change, increased exposure to economic risk, a potentially unfavorable change in the practice service/profitability mix, and pressure to participate in all-payor products. Increased price-transparency issues are also possible, as are increased accountsreceivable challenges, retroactive payment recouping, payor audits, and reduced cash

flows; patients may be lost to competitors as well. “Most offices have an understanding that because they’ve signed the contract, they’ll get reimbursed at a discount, because the MCO will send them lots of patients,” Ludeke says, “but it doesn’t really work that way.” The scope of the potentially unfavorable impact of managed care on your referrals will depend on the level of managed care penetration in your market, your practice’s business model, your managed care strategy, and your practice’s overall business strategy. Kalkhof adds that seemingly intangible factors will play a role in the favorable negotiation of a managed care contract. “Do not underestimate the power of favorable clinical and service quality (the patientservice experience) on the success of your practice and your MCO strategy,” he says. A superior patient-service protocol can even be a valuable argument for getting paid quickly for the services that you provide. Kalkhof and Ludeke recommend an internal and external assessment of the practice’s business model and competitive landscape before determining whether to participate in a particular contract. These assessments include determining whether the practice’s position in the marketplace is strong, fair, or weak, which will help to ensure that par-

ticipation is being considered for the right reason. “You need an economic model that makes sense for your practice,” Kalkhof says. “You really need to read the contract and understand how you are getting paid. If you are considering a cash-based practice, you have to determine whether there is a sizable uninsured population in the marketplace to support you.” Ludeke adds, “You need to know who you are and what you want. Ask yourself where you are in the marketplace. Analyze your denials, because you must know what a contract costs you: you can’t contract and stay in business if the contract is costing you money. Most important, ask yourself whether you are driving the pricing or whether it is driving you.” In closing, Ludeke offers two tips for reducing claim denials. First, know your patients. Make sure that your staff gets the correct registration for both the payor and the product, each and every time. Second, know your rules. Use system edits, workflow automation, and continuous training to identify issues before any service is rendered. This will help ensure that the most common traps and mistakes are avoided. Steve Smith is vice president, client services, The Imaging Center Institute, Tustin, Calif.

Busting Myths: Joint Ventures and Tax Exemptions BY KRIS KYES

adiology groups should understand the tax implications of arrangements with hospitals before they begin negotiations, according to W. Kenneth Davis, Jr, JD. He presented Tax-exempt Laws and Radiology Groups: Myth Versus Reality on October 17, 2008, at Managing Legal Exposure in Radiology, a meeting held in Philadelphia by the RBMA. Davis, a partner in Katten Muchin Rosenman, Chicago, explains that using the wrong approach to joint ventures and contracts with tax-exempt hospitals can have highly undesirable consequences for a radiology group. Because there is so much misunderstanding of the 501(c)(3) tax

exemption for hospitals, the radiology group should protect itself from unpleasant surprises by knowing the legal requirements imposed on hospitals and their effects on the physician groups that work with them. As federal and state scrutiny of hospitals’ tax exemption becomes more intense, the need for caution in designing joint ventures and contracts will only increase, Davis says. The tax treatment afforded hospitals has never been questioned as often, or as closely, as it is today. The attorneys general of some states are investigating whether tax-exempt hospitals actually provide the community benefits on which their state tax exemptions are based. Davis

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adds that, at the federal level, influential legislators are trying to determine whether more uncompensated care should be required in exchange for hospitals’ federal tax exemptions. Understandably, these trends have made hospitals highly aware of the need to protect their tax-exempt status. If it is threatened, they may lose not only the ability to avoid taxation of their income, but the chance to obtain charitable contributions; the donations on which many hospitals depend are unlikely to be made if the donors will not be granted any tax deductions for their gifts. In addition, hospitals often depend on taxexempt bonds for access to capital.

RADIOLOGY AND TAX EXEMPTION For radiology groups, Davis says, the hospital’s tax-exempt status may be an issue in negotiating exclusive provider agreements, leases, gain sharing, service relationships, and joint ventures. Because radiology is associated with large investments in capital equipment, the use of taxexempt bonds can cause problems. Private business use of more than 5% of the proceeds of a bond, or the property pur-

that they may be looking for instances of excess benefit aggressively, assigning high values to them, and calling for their correction by physician groups. This could be very costly to a radiology practice, so careful documentation is vital.

JOINT VENTURES Davis calls joint ventures the legal category where radiology groups are most likely to benefit from a myth-busting look at the tax-exemption law. The two areas of concern for a tax-exempt hospital that hopes to structure a joint venture with a group of physicians—without jeopardizing its 501(c)(3) status—are ownership and control, he says. A whole-hospital joint venture involves the transfer to the new entity of all assets belonging to the tax-exempt hospital, along with all of its operations. Typically, the original hospital then ceases to exist apart from the joint venture. Until 1998, the IRS applied a simple two-part test to determine whether a joint venture of this kind qualified for tax exemption. First, an exempt purpose, such as health promotion, had to be furthered by the hospital’s participation. Second, the hospital had to act exclusively to further that exempt purpose, with any benefit to the physician group (or other forprofit party to the joint venture) being only incidental. The relative ease of compliance with these requirements ended a decade ago, when the IRS issued Revenue Ruling 98-15. This requires joint ventures to meet three additional criteria in order to remain tax exempt. Any profit-maximization purposes for which they are operated have to be superseded by charitable purposes, the community as a whole must benefit from the entity’s services, and the furtherance of charitable purposes by the joint venture has to be ensured by the tax-exempt partner. Davis reports that these three requirements are often met by structuring the whole-hospital joint venture so that the hospital is clearly in control of the new entity.

R E G U L ATO RY

chased with it, is forbidden, whether that use is direct or indirect. The effective limit may be as low as 3%, since up to 2% of the private-use 5% can be used to pay for the bond-related borrowing process. A management contract for bondfinanced facilities may constitute private use, Davis says, and many bond counselors would define the exclusive provider agreeW. Kenneth Davis, ments so often Jr, JD seen between hospitals and radiology groups as management contracts. The radiology group’s use of bond-financed imaging equipment, therefore, may be private business use. Most hospitals will, as a result, be careful to ensure that management contracts fall within the safe harbors established to permit the hospital to acquire services without risking its tax exemption. Transactions between exempt and nonexempt parties that convey excess benefit to the latter are subject to excise taxes. Excess benefit, Davis says, is defined as value provided that exceeds consideration received; for example, a lease that lets a radiology group use hospital property for less than fair market value could be considered excess benefit. Hospital managers and nonexempt parties are both subject to the excise tax, but the hospital itself is not. Because the hospital must report excess benefits and their correction to the IRS annually, it will attempt to show that the situation has been corrected. This is done by having the nonexempt party pay the hospital, in cash or cash equivalents, the value of the excess benefit plus interest. The hospital and the nonexempt party are both subject to per-diem fines until the correction amount has been paid. For this reason, Davis says, radiology groups must ensure that fair market value is assigned in all dealings with tax-exempt hospitals. Documentation of fair market value must be maintained, with outside appraisal suggested if high values are involved. Hospitals are under pressure from both lower reimbursement and greater regulatory scrutiny, so Davis says

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If a hospital’s agreements with a radiology group have been structured with the proper attention to remaining above suspicion, exemption challenges can be avoided. If mistakes have been made in contracting, however, the hospital may be placed in a position where it can avoid penalties only at the expense of the radiology group— and that expense may be large, if the group cannot document the fair market value of its transactions with the hospital. Davis points out the importance, in negotiations, of distinguishing between real legal issues and those that are actually business concerns that the tax-exempt hospital may present as legal problems related to tax exemption. The 501(c)(3) exemption requires the hospital to be operated for charitable purposes, to avoid political campaigning or substantial lobbying, to serve public (not private) interests, and to serve patients who are unable to pay, as well as all of those who are able to pay, including Medicaid/Medicare enrollees. Charitable purposes can include medical education, training, and research, in addition to health care. The hospital’s board must represent the community; its medical-staff enrollment must be open; and its profits must be used for patient care, facility improvements, and equipment, not private benefit. Of course, a hospital would be unable to serve its charitable purpose unless it conferred some private benefit on others (it must, after all, usually work with employees and contracted service providers). The hospital’s earnings cannot, however, be distributed to individuals or groups or to those considered insiders (who are in positions to influence or control the hospital). Major contributors, board members, shareholders, officers, and founders are defined as insiders, but physicians may or may not be.

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{PR I O R S}

R E G U L ATO RY

Hospital subsidiary joint ventures involve the creation of a new entity for the express purpose of operating that entity jointly with an existing for-profit entity, such as a physician group. A legal precedent has been set in which the court ruled that the subsidiary of the hospital could not be regarded as tax exempt because the joint venture was being operated for a substantial nonexempt purpose (that is, for the financial benefit of the for-profit entity). Joint ventures of this type may be on shaky ground unless the hospital is demonstrably in control of the venture. The third kind of joint venture, the hospital ancillary joint venture, is an entity that has one for-profit entity, like the other two types; the hospital’s part, however, is taken by a hospital subsidiary or affiliate that has the joint venture as only one of its activities—and not as its primary activity, but as an insubstantial one. The main activities of the subsidiary/affiliate must be not only tax exempt, but unrelated to the joint venture. Davis describes deciding who controls this kind of joint venture as a big unanswered question. A Private Letter Ruling (number 200206058) was issued by the IRS in 2001 approving a joint venture of this kind, but 60% of the entity, in this instance, was controlled by a subsidiary of a tax-exempt hospital, making it compliant with the control requirements of the 1998 Revenue Ruling. Among the unknown factors affecting the tax status of this type of joint venture is the effect that a smaller percentage of hospital control would have. In addition, the amount of the hospital subsidiary’s activity that the joint venture represents may be important. As an example, Davis describes a situation in which the tax-exempt hospital subsidiary does not control the joint venture, but the joint venture represents only 5% of that subsidiary’s activities, with the other 95% of its activities being both tax exempt and unrelated to the joint venture. In such a case, the joint venture might pose no

threat to the hospital’s tax exemption, but the profits that the joint venture earns for the hospital might or might not be treated as unrelated business taxable income (UBTI). Paying taxes on UBTI might be undesirable, but would jeopardize neither the hospital’s tax-exempt status nor its ability to attract tax-deductible donations and use tax-exempt bonds. A Private Letter Ruling issued by the IRS in 2004, which may be considered a precedent for hospital ancillary joint ventures, addressed a joint venture (selling video seminars for teacher training) between a tax-exempt university and a forprofit company. The joint venture was set up to divide equally the two partners’ investment, governance, ownership, returns, allocation, and distributions. For the university, the joint venture represented an insubstantial percentage of total activities; for this reason, its tax-exempt status was not jeopardized. In addition, the university was not required to pay UBTI taxes on its profits from the joint venture because its activities were considered substantially related to the purpose (education) for which the university had taxexempt status in the first place. For most ancillary-services joint ventures (for example, imaging joint ventures) undertaken by a hospital and a radiology group, the same fundamental principles may apply, Davis says: The hospital’s activities will further its tax-exempt purpose (health care) and the joint venture will constitute an insubstantial portion of its total activities. Insubstantial, in such cases, may be defined as involving less than 15% of the hospital’s overall personnel, staff time, assets, revenue, and expenses; nearly all ancillary joint ventures with radiology groups will meet these criteria. The hospital’s 501(c)(3) tax exemption and incoming charitable donations, therefore, will not be at risk. The real taxrelated concern for hospitals is whether its income from the joint venture will be taxed as UBTI. There is a simple test to determine this, Davis says. If the services provided by the joint venture are such that they would fall within the definition of the hospital’s charitable purpose if the hospital were to provide those services by itself (in the absence of any joint venture), then the profits are unlikely to be taxed as UBTI.

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There could be a problem, however, if the joint venture acts in some way that is inconsistent with the hospital’s tax-exempt purpose, and the hospital is unable to exercise any control over that inconsistent action. The hospital should have what Davis calls trump rights: the ability to prevent joint-venture actions that are incompatible with its charitable purpose (along with the ability to cause actions consistent with that purpose). For example, the joint venture must not discriminate in treating patients, and it should have a charity-care and/or community-benefit policy in place. The hospital should be allowed to modify that policy as needed to protect its tax exemption. The important message here, Davis says, is that the joint venture does not need to give any other rights to the hospital in the name of preserving the hospital’s tax exemption, so long as the hospital’s participation is insubstantial. If trump rights are provided, the hospital and the radiology group can own and control the joint venture equally. Davis adds that a 50–50 governance calls for the existence of a mechanism for resolving disputes, since neither party will be in sole control. Under a management services agreement, the hospital can choose to delegate much of the administrative responsibility for the joint venture to the radiology group (again, with the hospital’s trump rights preserved). It is also wise to anticipate future unfavorable regulatory changes by including, in the joint venture’s design, the ability to dissolve it equitably, should this become necessary. A mechanism through which the radiology group can obtain fair market value for any disadvantages created by the hospital’s exercise of its trump rights can also be part of the joint venture’s structure. As pressures favoring increased consolidation of radiology continue to grow, more hospitals and radiology groups are likely to evaluate their options not just in mergers and acquisitions, but in designing better hospital contracts and joint ventures. If both parties understand what they can expect to gain, as well as how to avoid unnecessary risks, these pursuits can create mutual benefit. Kris Kyes is technical editor of Radiology Business Journal.

Major Advances in Osteoporosis Assessment: New NOF Guidelines and the WHO’s FRAX Risk-assessment Tool BY NEIL J. GONTER, MD

steoporosis is a major publichealth problem, with an estimated 44 million US residents at risk for fracture.1 Muchneeded direction can be provided by new guidelines from the National Osteoporosis Foundation (NOF) and the new FRAX® tool from the World Health Organization (WHO). Since there often are no warning signs before a fracture, improving the assessment of risk will prevent potentially debilitating consequences. Older guidelines did not assess the effects of age, sex, history, genetic factors, and ethnicity on osteoporosis-related risk, but the updated NOF guidelines provide clearer direction. In addition, WHO’s FRAX tool uses an algorithm that determines the likelihood of fracture in the next 10 years. One of the most important factors is bonemineral density (BMD), usually expressed as a T-score and determined using dualenergy x-ray absorptiometry. BMD alone, however, does not capture the full risk, since increased fracture risk may be present well before an osteoporotic T-score.2

NEW GUIDELINES AND FRAX The new NOF guidelines are the most clear and specific issued to date (Table 1). They include groups at high risk, such as older men; anyone with a possible osteoporosis-related fracture; and individuals with specific risk factors, such as age and history of fracture. They also include multiple ethnicities; previous guidelines addressed only white females. Table 1. New NOF Guidelines Postmenopausal women and men 50 and older who present with the following should be treated: • Hip or vertebral fracture (symptomatic or on studies) • Other fractures and T-score of –1 to –2.5 at the hip or spine • T-score ≤ –2.5 at the hip or spine and secondary causes such as steroid use or immobility • T-score of –1 to –2.5 at the hip or spine and 10-year probability of hip fracture ≥3% or 10-year probability of any major osteoporosisrelated fracture ≥20%, based on FRAX®

The WHO’s new FRAX tool predicts the 10-year risk of both hip fracture and other major osteoporotic fractures (including spine and forearm fractures) in men and women. The tool is currently available online at www.shef.ac.uk/FRAX/. In addition to being available on the Web, FRAX is available as a convenient software option on some bone densitometers. FRAX predicts 10-year fracture risk based on a patient’s BMD and risk factors (Table 2). The data are individualized based

ture risk and recommended treatment facilitates decision making, physicians must evaluate each patient individually and decide, with their patients, whether treatment is appropriate.

CONCLUSION

With the use of the NOF guidelines and the new FRAX tool (either online or on the bone densitometer), the ability to evaluate and treat men and women of different ethnicities has been greatly enhanced. These advances should be used, Table 2. Clinical Factors Evaluated by FRAX in addition to clinical Age Secondary causes of osteoporosis judgment, to make deciFemoral-neck bone-mineral density Parental history of hip fracture sions regarding the prop(T- or Z-score) er treatment for individBody-mass index History of steroid use (≥3 months) ual patients. Knowing History of fracture High alcohol use (≥3 units/day) the new NOF guidelines and incorporating the History of rheumatoid arthritis Smoking FRAX tool into daily on sex; ethnicity (white, black, Asian, and practice will improve the ability to detect Hispanic); and country of origin (the (and begin treatment for) this widespread United Kingdom, France, Italy, Japan, disease. Spain, Sweden, China, and Turkey). FRAX can make predictions based on clinical risk Neil J. Gonter, MD, is an internist and factors alone or in combination with BMD, rheumatologist with Rheumatology Associates but the combination will produce a better of North Jersey, Teaneck, NJ, who interprets result than either would alone. bone-densitometry studies for Hackensack The FRAX tool makes its predictions University Medical Center, Hackensack, NJ. using the largest collection of osteoporosis He is an osteoporosis consultant for data ever assembled. WHO analyzed nine OsteoporosisConnections.com and an assistant large prospective studies of more than professor of clinical medicine at Columbia 60,000 subjects worldwide; they had University, New York City. 5,563 fractures, including 978 involving the hip. The FRAX algorithm uses the References identified risk factors in these populations 1. National Osteoporosis Foundation. to target the fracture risk for individuals Clinician’s guide to prevention and treatwith various characteristics. ment of osteoporosis. Available at: Osteoporosis treatment is cost effective http://www.nof.org/professionals/ when the 10-year probability of hip frac- cliniciansguide_form.asp. Accessed ture reaches 3% or more, or when the 10- October 28, 2008. year probability of a major osteoporosis- 2. Licatam A, Johnston C. Identifying related fracture is greater than 20%. This postmenopausal women at risk for fraceconomic analysis3 is based on a drug cost ture. Female Patient. 2007;32:18-25. of $600 per year plus associated costs, as 3. Dawson-Hughes B, Tosteson ANA, well as on estimates (specific to the United Melton LJ 3rd, et al. Implications of States) for fracture incidence, morbidity, absolute fracture risk assessment for osteomortality, cost of fracture treatment, and porosis practice guidelines in the USA. quality of life. Although knowing the frac- Osteoporos Int. 2008;19:449-458.

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STRATEGIC RELATIONSHIPS | A Cautionary Tale

FRA and Florida Hospital: A Cautionary Tale Unfolds After 40 years, a 47-physician group ceased to exist, a casualty of current medical economics, internal strife, and failed negotiations By George Wiley

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he first inkling that the public had that anything was amiss between Florida Hospital and its radiology group occurred in March 2008, when a story appeared in the Orlando Sentinel revealing that Florida Radiology Associates (FRA), which had been interpreting for the hospital since 1968, was ending the 40-year relationship. At the core of the failed negotiations, the story says, was FRA’s demand that Florida Hospital offset a significant compensation gap resulting from unrecompensed or poorly recompensed Medicaid and indigent billings for emergencydepartment and other services that FRA provided. The story adds that the hospital, instead of compensating the independent radiology group, had offered to take over FRA’s billing, an offer the radiology group declined. FRA sources were quoted as saying that a full 40% of the group’s work was now occurring on nights and weekends—peak times for uninsured patients to appear in the emergency department. FRA was doing its own night and weekend reading, per its contract. No outside teleradiology coverage was being provided by either FRA or the hospital, according to sources in the radiology group. On March 3, when FRA gave notice that it would terminate its contract, a deadline was set: June 3, the term of the contract. After that, FRA would no longer

be interpreting for the hospital. Negotiators had that long to find at least a temporary solution, or the hospital had that long to find an alternative solution on its own. According to FRA radiologists involved, the decision to terminate the contract was an effort to inject a more urgent tone into further negotiations, with the endpoint being a more suitable contract with the hospital. One FRA source reports that the radiologists indicated that they would have been willing to work without a contract during negotiations. Instead, negotiations came to a stop. The hospital formed its own in-house radiology group, Radiology Specialists of Florida (RSF). It then hired away 32 of the 47 FRA radiologists to join the hospital’s in-house group. FRA, as an independent practice, collapsed. The former FRA radiologists who chose RSF were now hospital employees. FRA administrators made a brief facesaving effort to keep the group going with its skeleton crew of radiologists, but that turned out to be for naught. By late May, FRA had laid off the bulk of its 64 billingsupport personnel. By late September, it had disposed of its headquarters building. A highly specialized, independent radiology practice that had provided interpretations to Florida Hospital for 40 years was no more. FRA’s doctors who had joined RSF had, in the words of one

The vituperative forum posts and word of mouth made the demise of FRA a sort of cause célèbre in the radiology world. If a hospital could shift unilaterally to an employee model with a big group like FRA, were other independent practices that read for hospitals at risk? former FRA doctor, been transformed into radiology hospitalists. While negotiations were collapsing and the hospital was forming its own group, online radiology forums were buzzing, with much of the comment coming from those who were obviously close to the Florida Hospital scene. Cowards, scabs, and worse terms were used to describe the doctors who chose to leave FRA to join RSF. Ironically, though, those who did join RSF may have achieved much of what FRA had been aiming for all along. The hospital hired a teleradiology service to provide final readings for the emergency department at night. It also reportedly offered attractive salaries to the former FRA doctors, effectively giving them a big pay increase. The vituperative forum posts and word of mouth made the demise of FRA a sort of cause célèbre in the radiology world. If a hospital could shift unilaterally to an employee model with a big group like FRA, were other independent practices that read for hospitals at risk? One forum comment states that the demise of FRA has taken on the stamp of an urban legend. Some FRA doctors who are no longer with the hospital agreed to explain that legend, as long as their names were not

used. The hospital issued a one-paragraph statement on its position. Later, a hospital administrator agreed to an interview.

FRA’s Narrative Negotiations between FRA and the hospital, according to more than one source, had been ongoing for five or six years, at least. Essentially, one issue was at the heart of things: the radiology group was losing income because it couldn’t collect from patients coming to the emergency department. This lost income left FRA holding the bag on recruitment. It could not recruit radiologists because it could not pay them enough to commit. All of this was putting more and more pressure on the FRA doctors, who were reading high volumes for what they believed was diminished pay. According to its Web site, Florida Hospital, a not-for-profit acute care network, is composed of seven Orlando hospitals, including an 880-bed hospital in the city center. Florida Hospital has a total of 3,025 beds and operates 15 walkin urgent care centers. With more than a million patients per year, the hospital ranks itself as the busiest in the United States. It also claims the highest number

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STRATEGIC RELATIONSHIPS | A Cautionary Tale

of Medicare patients of any hospital in the country. It calls itself central Florida’s third-largest employer, with an estimated 18,000 employees. The in-house radiology group, RSF, employs 47 radiologists, the same number that FRA had. The hospital’s radiology department conducts an estimated 1 million imaging procedures annually, according to its billing agent. A 2007 report in Medical News Today indicates that Florida, with a population of more than 18 million, has about 3.8 million people without health insurance. One

number of places and start for what FRA radiologists were getting as partners. If the hospital continued to expand, FRA couldn’t continue to expand to share that volume increase because it couldn’t recruit. The hospital had, in 2004, announced just such an expansion plan, according to its Web site’s news archive. The recruitment problem was so severe, another former FRA physician says, that unless the economics were resolved, attrition would eventually kill the group. FRA had to do something or it

As negotiations crawled along, a faction of the more aggressive FRA radiologists grew increasingly frustrated. FRA’s negotiating team (its executive committee) was too much in league with the hospital, they charged. The more aggressive FRA radiologists circulated a petition to dissolve the executive committee and form a new one. About 80% of the FRA doctors signed the petition. fourth of those under 65 have no health coverage. In the past eight years, the number of Florida uninsured has increased by 38%. All these figures support FRA’s reported increase in emergency-department workload and subsequent uncollected billings. According to former FRA physicians, the emergency-department workload also evolved from one of basically interpreting radiographs into one of reading high numbers of CT scans.

The First Coup The Medical Group Management Association (MGMA) collects data that let specialists see how they rank, compared with their peers elsewhere. One former FRA radiologist notes that the group was always trying to compare itself with the market. According to MGMA data, it was working in the 90th percentile and getting paid in the 25th percentile. The group needed to correct that. The disparity between work and pay was a killer when it came to recruiting, the source adds. Potential recruits would look at the offer and see that they could go to a

would not exist after a while. The source says that the group was headed for failure because of working conditions. There was an inability to attract and keep high-quality radiologists to do the intense work at the level of skill required. It was a hard job, the source says, that outstripped the complexity of any academic position in terms of what was seen and done on a daily basis, as well as in volume. The radiology business model, based on professional billings, came up against the hospital model, based on technical fees, the source adds. As long as the FRA radiologists kept reading under the reimbursement arrangement defined by the

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group’s contract, the hospital was happy to let demand push up the numbers on the imaging-volume side, the source says. The hospital’s only incremental cost for additional patients is contrast media, since the technologists are already paid to be there, the source explains, adding that Florida Hospital may have earned $150 million from imaging in 2007. FRA wanted the hospital to share those earnings from technical-component payments by subsidizing the hours that radiologists spent on night and weekend emergency-department cases for which no payment was collected. According to one source, FRA had added five partners just to deal with the emergency department and Medicaid workload, while income from the effort would not have supported even one partner. As negotiations crawled along, a faction of the more aggressive FRA radiologists grew increasingly frustrated. FRA’s negotiating team (its executive committee) was too much in league with the hospital, they charged. In 2006, or perhaps in late 2005, the more aggressive FRA radiologists circulated a petition to dissolve the executive committee and form a new one. According to more than one source, about 80% of the FRA doctors signed the petition. At a rancorous meeting, the executive committee was informed of the petition and its results. It was legal, since FRA was a professional association with corporate bylaws, but the executive committee was reportedly outraged. While its members could have run for re-election, they resigned on the spot instead. Several of them left the group and took other positions at outlying centers or hospitals under the Florida Hospital aegis, as more than one source notes. While the new executive committee now had a mandate to negotiate more assertively with the hospital, a price had been paid. One could argue that the overthrow of the original executive committee came back to haunt FRA. The palace coup created fissures that never closed. The abrupt and forceful changing of the guard left lingering damage. As the new executive committee would learn when its own turn on the hot seat came, FRA had planted the seeds of its own destruction.

STRATEGIC RELATIONSHIPS | A Cautionary Tale

Instead of going straight to a more productive outcome, the negotiations between FRA and the hospital, under the new executive committee, appeared to head sideways. One source says that the hospital would never put anything in writing. It apparently did make an offer, but not one FRA could accept. One radiologist explains that there were many complex conditions in that offer, which incorporated many changes made to the old contract. The first year looked good because there was a bonus pool applied to salary, but that bonus pool was not guaranteed after the first year. The pension and health care plans offered were less favorable than the previous ones. The hospital reportedly offered radiologists something in the neighborhood of $500,000 per year plus the bonus pool, in addition to paying the malpractice tail. In retrospect, this sounds, at least on the compensation level, much like the offer that was reportedly accepted, according to more than one source, by the RSF doctors who signed individual contracts to join the hospital as employees. Instead of focusing on new contract terms initially, hospital administrators apparently argued that FRA’s bookkeeping was flawed and that FRA was missing out on collections that it could have obtained, had it been billing correctly. This may have been the reason that the hospital offered to take over FRA’s billing. According to one radiologist, the hospital suggested that FRA was missing out on as much as $7 million in collectibles. The real amount, the source adds, turned out to be only a few hundred thousand dollars, but that result came only after long and time-consuming audits. To clarify the situation, FRA agreed to let the hospital’s auditors study its books, but in return, FRA wanted the auditors to take a look at the hospital’s radiology books. One source says that the radiologists believed that half the billing information from the hospital was erroneous, based on bad data. The long audit process may have been clarifying on some fronts, but it apparently didn’t solve anything, and it may have allowed time for negotiations to harden.

says, the hospital had been paying FRA a premium for three-month contract extensions. Two extensions had been used when the hospital asked for a third, but this time, refused to pay for it, a source says. FRA declined the third extension, the source adds. One radiologist describes this as when everything hit the fan, with the declined extension being completely unacceptable

one FRA doctor that the group was called lazy, inconsiderate, and uncaring. The talk about pay, this doctor adds, was a move to incite the medical staff against FRA by mentioning numbers. Radiologists don’t control what different specialists are paid, but telling primary care physicians and pediatricians that radiologists refuse to work is a bad idea when these other doctors are not making half as much.

According to FRA sources, the hospital called an emergency meeting of its medical staff, at which details from the FRA negotiations were disclosed, including proposed pay levels.

to some level of hospital administration. The hospital walked away from negotiations, this physician adds. At that point, according to radiologists involved in the negotiations, FRA, groping for leverage, announced that it was terminating its contract as of the June 3 deadline. There is no question that FRA’s contract termination notice put Florida Hospital between a rock and a hard place. Without radiologists, how was it going to meet the imaging needs of its patients? According to FRA sources, the hospital called an emergency meeting of its medical staff, at which details from the FRA negotiations were disclosed, including proposed pay levels. An FRA representative was invited but chose not to attend, the sources say. Some physicians who were there told

Termination During the negotiations, one source

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According to a survey of salaries from 2003 to the present by Allied Physicians, Inc, radiologists are among the most highly paid physicians. A beginning radiologist in this survey earned $201,000 per year; this rose to $354, 000 after three years of employment, with a maximum of $911,000 for the most experienced. In contrast, at the same levels of experience, pediatricians earned $135,000, $175,000, and $271,000; internists earned $154,000, $176,000, and $238,000; and emergency physicians earned $192,000, $216,000, and $295,000. Whether it was schadenfreude or other factors that accounted for the lack of backing for FRA from the medical staff, there did not appear to be much support. As the FRA story approached its denouement there was, apparently, silence from clinicians. As one online forum post notes, there were failures at multiple levels, and outrage from the medical staff was absent. Almost immediately following the breakdown of negotiations, Florida Hospital began advertising for radiologists. According to a forum post that claims to include a copy of an advertisement, the hospital was looking for radiologists of all types and was offering an

extremely competitive base salary, occurrence-based malpractice insurance, vacation time, health insurance for the physician and family, relocation, retirement, and a signing bonus. Besides signing on new physicians, the hospital was also, according to FRA doctors, prepared to use teleradiology services to provide both night and day coverage until it could build RSF. As analysts later noted, teleradiology has changed the negotiating landscape for hospitals and radiology groups. As it turned out, however, the hospital never had to resort to teleradiology beyond what it is now providing in night coverage.

Coup Two The hospital had another big card to play. It offered jobs to FRA radiologists willing to quit FRA and join the new inhouse group, RSF. At some point in the negotiation process, FRA had employed its own consultant. According to more than one FRA doctor, that consultant now urged FRA to stick to its guns and retain its last remaining bit of leverage, a noncompetition clause that prevented FRA physicians from working for the hospital for a specified time. At some point, the hospital, according to FRA sources, warned FRA radiologists that they might not be hired by RSF if they didn’t quickly rescind the noncompetition clause. All the RSF jobs might be gone, and it would be too late for them to get work. Other stratagems were reportedly used by both sides to enhance leverage in what turned out to be the last days for FRA. The Orlando Sentinel carried a story that FRA had sent a letter warning hospital physicians that outsiders—teleradiology services—could soon be interpreting their patients’ scans. Did they really want faraway strangers providing diagnostic readings for patients in Orlando? According to FRA sources, the hospital sent its own letters. One set was allegedly sent via registered mail and therefore delivered during the day, when many of the radiologists were at work, but many of their spouses were likely to be at home. The doctors were about to lose their jobs, the letter warned. This

was done just to upset the spouses and to pressure the radiologists, one FRA doctor believes. As June 3 edged onto the visible horizon—and as the housing market in Florida continued its downward slide, making selling a home a tough task— some FRA radiologists were reportedly trying to convince their colleagues to take up the hospital’s offer to join RSF. According to sources, two days after an FRA vote to support the negotiating team and continue the holdout, another (reportedly secret) ballot was distributed to FRA doctors. This time, they capitulated. A majority voted to rescind the noncompetition clause. In short order, a domino line of FRA radiologists fell the hospital’s way. Two thirds of the FRA physicians signed on with RSF. The long journey was over, and FRA had lost. Some describe the capitulation as having been led by the old hands, some of whom were still bitter about the overthrow of the first executive committee two years earlier. While the rescindment of the noncompetition clause wasn’t a changing of the guard vote like the first coup, it might as well have been. When a core group of FRA negotiators went back to the hospital to interview for new jobs with RSF, they were not hired. One of them insists that this was not for professional reasons, but because the actions of those on the executive committee during negotiations were not seen as being in the hospital’s best interests.

The Hospital’s Side Initially, Florida Hospital’s media-relations team issued a one-paragraph summation of the FRA/RSF story as its only comment. It reads, “Effective June 3, 2008, Florida Radiology Associates terminated their contract with Florida Hospital. In the interest of a seamless transition of patient care, Florida Hospital entered into an agreement with Radiology Specialists of Florida to provide exclusive radiology services to the seven-hospital system, effective June 4, 2008. 32 of the 47 members of Florida Radiology Associates chose to join Radiology Specialists of Florida and to continue to

provide high quality services to Florida Hospital’s patients. This relationship has been a success for our patients, Florida Hospital, and the radiologists.” The hospital’s senior vice president, Terry Owen, later agreed to comment. “There were very fine quality radiologists in Florida Radiology Associates,” he says. “We had a long relationship with them, and after an extended period of negotiations on their agreement—negotiations that they initiated—they provided a letter of termination of the contract. At some point, we just decided it was time to move forward. It was very clear.” Asked whether the hospital had wanted, all along, to bring the FRA doctors into an in-house, employee-model radiology practice, as some radiologists charge, Owen says no. “I don’t know where those allegations came from. It was never the hospital’s intent. It was never the first choice or the second choice in our discussions,” he says. Owen declines to discuss specifics of the negotiations. “I’m not sure it’s appropriate for Florida Hospital to talk about what happened in negotiations with a group of physicians on its medical staff. I don’t think that’s productive, nor particularly helpful,” he says. Asked what the hospital’s position had been on FRA compensation, he says, “We believe there was a peer-fair transaction for the independent group.” Asked to respond to FRA’s contention that it was being inadequately compensated because of uncollected billings, Owen notes, “I think what you just said was that they felt they had an ineffective business model. Their model wasn’t working.” Asked why the negotiations had broken down, he says, “Lack of progress—that’s generally why negotiations break down.” Did it become personal? “Never—on either side.” He declines to discuss what accountants may or may not have found in studying the books on both sides. He does not want to talk about any letters that the hospital may have sent. He does not want to speculate on how the negotiations might have ended differently. “We have high regard for the long relationship with

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STRATEGIC RELATIONSHIPS | A Cautionary Tale

In any organization, when negotiations break down and you have an impending point in time where you won’t have coverage, you have to take appropriate action to ensure continuity of care and patient safety. —Terry Owen, senior vice president Florida Hospital, Orlando

FRA. We had a very long, mutually beneficial relationship. We want to honor that legacy,” he says. Asked what the hospital’s strategy had been to make sure it had coverage once FRA had terminated its contract, Owen says, “In any organization, when negotiations break down and you have an impending point in time where you won’t have coverage, you have to take appropriate action to ensure continuity of care and patient safety. Being good stewards, we took appropriate action.” Owen says that Florida Hospital then provided night teleradiology coverage for RSF. He notes that the teleradiologists are all licensed in Florida and working from the United States. “I don’t know the volumes,” he says. “We’re getting quality work, which we had before with FRA.” He won’t say what salary offers were made to the RSF radiologists or discuss the economics of teleradiology or the department. Asked if efficiency has changed since RSF assumed responsibility, he says, “I think every hospital is looking at—and every radiology department is looking at—efficiency throughputs. We are looking at that. I couldn’t give you any metrics on how it’s changed. Clearly, that’s an issue in today’s radiology world.”

strategy. It’s one of the tools you have to make sure you provide quality patient care to fulfill the mission of your organization.” He continues, “We have not, in the framing of taking over, brought in other independent practices. For services we need to provide to the community, if a (medical) group says, ‘We can no longer function this way; what other options are available to us?’ that is one of the tools in our arsenal that’s available to us that we can use to continue to provide quality care to our community. It’s not that we have looked to that for our own sake.” Asked if the advent of teleradiology has changed the dynamics of negotiating with independent radiology groups or changed the way the hospital could provide coverage, Owen agrees to discuss the situation, but only industry-wide, not for the hospital specifically. “On the industry-wide level, the DRA made a lot of challenges occur instantly; a lot of fetters, which created another dynamic,” he says. “We’ve got rapidly growing demand for radiology, in terms of the number of exams, around the country, and it’s difficult.” He adds that technology has had a heavier impact on radiology than on any other area of medicine with which he’s familiar. He says, “It creates a lot of

Employee Models Owen talks at greater length about whether the employee-based model is becoming increasingly popular with hospitals, not only for radiology, but for other departments as well. “Around the country,” he says, “you’re seeing a lot of hospitals doing employment options. It really depends on a site-by-site and issue-byissue situation. It’s not necessarily the first

28 RADIOLOGY BUSINESS JOURNAL | Winter 2008 | www.radbizjournal.com

changes in the marketplace that we didn’t even know were available a few years ago.” Teleradiology services change technology, for example, and, “In the PACS world, now, there is remote reading even inside a system. Where the medical staff is used to having a radiologist there, to some degree, you don’t even need that there. It’s just a different dynamic. A part of the medical community is going through great change. That’s water that everybody is in,” he adds. Asked what the mood was like on the RSF staff and whether attrition was expected because of lingering bitterness over the FRA negotiations, Owen says, “We think it is very important for delivering a quality product that we have good teamwork in the department. I believe we’re achieving that. I would hope that the radiologists are very pleased and enjoying the practice of radiology and enjoying the work,” he adds. “We’re very pleased with RSF and the people we’re dealing with; it’s gone very well. We hope everybody works as long as they want, as long as they’re able, as long as they’re productive, and as long as it’s a win-win.” Owen concludes, “We had great respect for the radiologists in FRA. We’re disappointed the negotiations broke down—and now it’s time to move forward.” It may be time to move forward for some, as Owen says, but it has been hard to move forward for all. For those radiologists who lost their jobs in the final transfer of power between FRA and RSF, there is lingering disbelief, a feeling of betrayal, and even sorrow. A former FRA negotiator who now works for several clinics while looking for a steadier job (with the security of a regular paycheck) says that no one from the old group has been in contact. Another FRA negotiator reports having an excellent job, but still feels tossed under the bus by the vote to rescind the noncompetition agreement. This doctor adds that the group was toppled too easily, and that this does not bode well for the future of large hospital groups.

The View From 30,000 Feet Whether FRA’s experience bodes ill for other hospital radiology groups may be the key question in its aftermath. Should what happened at Florida Hospital put

other groups on alert? Did FRA badly overplay its hand? Was there another scenario in which the hospital, as some argue, bit off too big a chunk with its employee model, taking a step that could leave its radiology operation running in the red? To Alan Kaye, MD, a Connecticut radiologist who follows the industry, hospitals are putting increasing pressure on radiology groups to handle higher volumes and reduce turnaround times. The FRA story, he says, “may be a signal that this is one potential ramification of increased service demands placed on radiologists.” He adds, though, that the answer isn’t yet known. “The 30,000-foot view is that this is a signal that the relationships between radiologists and hospitals are in a state of flux. I’m reluctant to say this is bad for radiologists, but this is a flashing yellow.” Kaye points out that for the radiologists now with the hospital’s in-house group, RSF, the outcome may have been good. “Maybe this was a win for the radiologists. For all we know, it may be what the radiologists wanted. Some physicians might view this as a plus by not having to be distracted from medicine. We don’t know what the long-term ramifications will be for the hospital or the group,” Kaye says. Kaye sees something else that is worrisome in the story—the threat that teleradiology can become when a hospital uses it as leverage in negotiations. “Teleradiology has created a two-edged sword,” he says. “On one hand, it allows radiologists to comply with some of the demands on them and still maintain a lifestyle. On the other hand, teleradiology has created a wedge a hospital can use by outsourcing—by creating a perception it’s easy to replace radiologists. To the extent a hospital thinks it’s easy to replace radiologists, they have more leverage in a discussion. That’s important to understand.” In Kaye’s view, Florida Hospital was lucky that most of the FRA physicians chose to join RSF. “If we start down the road of teleradiology as a solution, you oversimplify a very important part of patient care and make radiology the equivalent of a lab test. That’s not to the

benefit of the patient. When the referrer knows who’s reading, and the nuances of an interpretation, that is very important to patient care,” he says. Kaye says that radiologists need, most of all, to make sure that they satisfy the demands of the medical staff. “That’s the ultimate security, the medical staff,” he says. “For all we know, the support of the medical staff may have been the lever that got the radiologists who stayed on a good deal.”

Jeopardizing Care For Howard B. Kessler, MD, who was first to call the FRA experience a cautionary tale, the mistake that FRA made in negotiations was to draw a line in the sand that threatened to disrupt patient care. Kessler, who operates a Philadelphia-based consultancy as well as practicing radiology, says that one of his strongest messages to radiology groups is

that hospital administrators know how to negotiate far better than they do, Kessler emphasizes. Administrators negotiate all the time. Radiology groups, conversely, usually have to learn on the job. “Administrators understand the game; they know what the pressure points are, and they know how the radiology group operates. If this group in question voted to dissolve restrictive covenants, then that is what other groups should really look at,” he says. Kessler does advocate restrictive covenants, so that if a group dissolves, the hospital still cannot steal the radiologists, but his overarching message is that radiology groups need to head into negotiations with a well-considered message. “It’s incumbent on a group to create a compelling, logical story. Groups need to do their homework. They should recommend how they might propose to cut costs, and create a

A hospital should not be put in the position where it’s held at gunpoint by radiology groups. The hospital has no choice but to provide patient care. The cautionary tale for radiology groups is that to lose sight of that is a bad negotiating tactic, and it sets the stage for lost trust. —Howard B. Kessler, MD Philadelphia

that patient care should never be used as a negotiating chip. “Once you play the card of, ‘We’re leaving unless you give us this,’ the likelihood of an amicable solution drops precipitously. Groups need to figure out what’s important to them, where they need to move forward, and what they’re going to live with,” he says. “A hospital should not be put in the position where it’s held at gunpoint by radiology groups. The hospital has no choice but to provide patient care. The cautionary tale for radiology groups is that to lose sight of that is a bad negotiating tactic, and it sets the stage for lost trust.” Radiology groups need to understand

story where if we make less, it costs you (the hospital), and we can neither perform nor recruit,” he says. Hospitals also have to be careful, he warns. In taking a group in-house, “You are basically rolling the dice,” he says. “What you’re getting can’t be measured for years.” Kessler says that groups that are prepared to negotiate will do well. Of groups that come in aggressively, with the assumption that they’re not replaceable, he says, “The naked city is littered with groups that couldn’t be replaced.” FRA is one of them now. George Wiley is a contributing writer for Radiology Business Journal.

www.radbizjournal.com | Winter 2008 | RADIOLOGY BUSINESS JOURNAL 29

RADIOLOGY | 50 Largest Practices

THE 50 LARGEST RADIOLOGY PRACTICES By Joseph P. White, CPA, MBA

hy compile a list of the 50 largest radiology practices? We acknowledge that the list is far from complete, and that there may be some inconsistencies in the way that respondents answered the questions. Some radiology groups chose not to respond, and some may not have been aware that the survey was being done, so they are not included in the list. We do believe, however, that this is a pretty good start. We expect greater accuracy next year and more respondents every year. The benefits of such a survey are well understood in other fields. In the accounting world, each year, we wait for a couple of organizations to publish their annual list of the largest accounting firms in the country. I see three main benefits of this distinction. • It can be a source of organizational and employee pride to be able to say that you are one of the largest groups in the country. • It can be used as a recruiting tool for new radiologists; some will see bigger as better. • It can possibly be of benefit in contracting. My interest in such a survey goes beyond mere curiosity. I have been asking the following question for a few years. If there are national and international accounting and law firms consisting of more than 2,000 owners and 20,000

employees, why are there not national radiology groups? In the past five years, we have seen the number of larger groups grow, but we really could not say, for sure, how much or how quickly. Now, we will have some method of trying to track the ebb and flow of practice size (even if it is an imperfect beginning). Both LarsonAllen and Radiology Business Journal are very aware of the sensitive nature of the revenue portion of the survey, and we will respect and guard that information closely. Thank you for participating. Joseph P White, CPA, MBA, is principal, health care, for LarsonAllen, Minneapolis, the 18th largest CPA firm in the United States.

The 50 Largest Radiology Practices Defy Simple Categorization By Cheryl Proval

hen it comes to productivity, the results of the first annual survey to identify the country’s 50 largest radiology groups indicate that average revenue per FTE radiologist, in general, does bear a positive relationship with the size of the group. On the other hand, administrative challenges probably do the same, with the median number of FTE employees climbing from 57 in the groups with fewer than 35 FTE radiologists to 675 in those groups

30 RADIOLOGY BUSINESS JOURNAL | Winter 2008 | www.radbizjournal.com

with more than 65 FTE radiologists. Overall, the results of this survey suggest a wide variety of medical business models with as many anomalies as there are commonalities, revealing a rich and multifarious practice environment. The median number of FTE radiologists for the 50 largest radiology practices is 42.5, and the median number of employees is 161. The median number of imaging centers owned matches the median number of hospital contracts: seven. Jointly sponsored by Radiology Business Journal and LarsonAllen, Minneapolis, our survey went out to the ImagingBiz.com mailing list. Subsequent telephone calls were made to known groups of size to encourage their participation. Very few responses were added from these groups, however, with many citing the requirement to submit revenue data (total revenue and net operating revenue) as a cause for concern. We gave respondents the choice of granting us permission to publish the revenue data or keep them private, and most elected privacy. Ultimately, we elected to keep all revenue data private. This affected our criteria for ranking, which we initially expected to include both the number of FTE radiologists and net operating revenue. This ranking is based purely on the number of FTE radiologists, which puts the Boston academic site Brigham & Women’s Hospital at the top of the list, although its academic mission probably helps place its revenue per FTE more nearly in line with the median revenue for

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7 1 million

800,000

406,207

750,000

Figure 1. Median number of imaging centers.

Discussion

Figure 2. Median number of procedures performed.

Key:

550

300

134

<35 FTE radiologists 36 to 50 FTE radiologists 51 to 65 FTE radiologists >65 FTE radiologists

Figure 3. Median number of employees.

For purposes of analysis, we have grouped the practices into four categories: those having fewer than 35 FTE radiologists, 35 to 50 FTE radiologists, 51 to 65 FTE radiologists, and more than 65 FTE radiologists. As mentioned above, the average revenue per FTE radiologist increases with each step up in group size. Looking at the median revenue per FTE by group size, however, the 36-to-50 cohort takes a slight dip below the lessthan-35 group, suggesting that true economies of scale kick in for groups of more than 50 radiologists. Because we have chosen not to share the revenue data, you will have to trust us on that. Not surprisingly, the median number of imaging centers, the number of hospitals served, and the number of procedures performed all rise along with group size, with one exception: Groups with more than 65 radiologists own fewer imaging centers than the groups of 51 to 65 radiologists. Groups with fewer than 35 FTE radiologists perform a median of 406,207 procedures, have a median of 62 employees, maintain a median of three hospital contracts, and own a median of 4.5 imaging centers. Groups with 36 to 50 FTE radiologists perform a median of 750,000 procedures, have a median of 134 FTE employees, maintain a median of six hospital contracts, and own a median of six imaging centers. Groups with 51 to 65 FTE radiologists perform a median of 800,000 procedures, have a median of 300 employees, maintain a median of 10 hospital contracts, and own a median of nine imaging centers. The largest groups, with more than 65 FTE radiologists, perform a median of 1 million procedures, have a median of 550 FTE employees, maintain a median of 13 hospital contracts, and own a median of seven imaging centers (see Figures 1 through 4).

4.5

the groups having fewer than 35 FTE radiologists. Clearly, factors other than size appear to affect revenue per FTE; these include an academic setting, imaging center ownership, and the absence of hospital contracts. A practice that ranks near the bottom of the list that had no hospital contracts has the second-highest revenue per FTE radiologist.

RADIOLOGY | 50 Largest Practices

Figure 4. Median number of hospital contracts.

32 RADIOLOGY BUSINESS JOURNAL | Winter 2008 | www.radbizjournal.com

There is, however, an inverse relationship between median revenue per FTE employee and the size category, with the smaller groups earning higher revenue per FTE employee than each successively larger group. The largest of the groups (with more than 65 radiologists) employ small armies of staff members, ranging from as many as 846 at American Radiology Services, Baltimore, to as few as 18 at Advanced Radiology Services in Grand Rapids, Mich, which was the third largest group by FTE radiologists, but also the group that employed the fewest FTE employees. Next year, we will be much more specific in our questions to verify that, for instance, all 450 FTE employees reported by Brigham and Womenâ&#x20AC;&#x2122;s are employed by the radiology practice and not the hospitalâ&#x20AC;&#x2122;s radiology department. We also will specify that academic departments report only their clinical FTE radiologists and not include research FTEs. We asked respondents to include data for the years 2007 and 2008, and although we only shared the data from 2008, a clear trend of the big getting bigger emerges. We can report that four of the 86 practices that responded have lost members, a dozen have stayed the same size, and the rest have added FTE radiologists. Of the total respondents, including the practices that did not make the 50 largest practices ranking, 46 practices provided income data. Of those, seven practices report flat revenue for 2008 over 2007 and six practices report declines in revenue, but the remainder report growth. A total of 86 practices responded to our survey, and we regret that we were unable to include 36 practices. One midsized teleradiology company entered, which leads us to question what it is that distinguishes a practice from a teleradiology company. Several practices in the list of the largest 50 have significant teleradiology components to their businesses, but they also cover local hospitals or own imaging centers. We decided not to include teleradiology-only companies. We plan to expand this list next year to include the 100 largest radiology practices, and we welcome your thoughts on how to improve and build on this survey. Cheryl Proval is editor of Radiology Business Journal; cproval@imagingbiz.com.

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The 50 Largest Radiology Practices 2008 Rank

Group Name

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Brigham and Women’s Hospital Department of Radiology Advanced Radiology Services PC Austin Radiological Association St. Paul Radiology American Radiology Services Massachusetts General Hospital Radiology Radiological Associates of Sacramento Medical Group, Inc Inland Imaging Radia Inc, PS Consulting Radiologists, Ltd Southwest Diagnostic Imaging Suburban Radiologic Consultants Charlotte Radiology, PA Center for Diagnostic Imaging, Inc Riverside Radiology Associates Radiology Associates of Tarrant County Rhode Island Medical Imaging Eastern Radiologists, Inc Wake Radiology UC Davis — Department of Radiology Florida Radiology Imaging Jefferson Radiology Radiology Associates, PA Clinical Radiologists, SC Northwest Radiology Network Desert Radiologists Imaging Healthcare Specialists Medical Group, Inc Radiology Associates of Hollywood Cedars-Sinai Imaging Medical Group Atlantic Medical Imaging, LLC West County Radiological Group Inc Mid-South Imaging & Therapeutics, PA Advanced Medical Imaging Consultants, PC Nassau Radiologic Group, PC Radiology LPN Radiology and Nuclear Medicine ProScan Imaging Red Rock Radiology St. Joseph’s Imaging Radiology Consultants of Iowa FWRadiology Radiology Associates of San Antonio, PA Seattle Radiologists Foundation Radiology Group Utah Valley Radiology Associates, PLLC Steinberg Diagnostic UIC Physician Group North State Radiology Southtowns Radiology Associates Windsong Radiology

Location

CEO

Boston

Gary Gottlieb, MD, MBA

Grand Rapids

Marilyn R. Savidge

Austin

Doyle Rabe

St. Paul

—

Baltimore

Bob Carfagno

Boston

David Torchiana, MD

Sacramento

Mark Leibenhaut, MD

Spokane

Steve Duvoisin

Everett

Ben Harmon, MD, MBA

Minneapolis

Timothy F. Signorelli

Phoenix

Lisa Mead

Minneapolis

Jim Tierney

Charlotte

Arl Van Moore, Jr, MD

Minneapolis

Robert Baumgartner

Columbus

Marcia Flaherty

Fort Worth

Lynn Elliott

East Providence

Elizabeth A. Simas

Greenville

Michael McLaughlin, MD

Raleigh

Robert E. Schaaf, MD

Sacramento

Claire Pomeroy, MD

Maitland

Paul M. Duck

East Hartford

Mark Grossman

Little Rock

John Meadors, MD

Springfield

Thomas C. Dickerson

Indianapolis

Homer F. Beltz, MD

Las Vegas

William P. Moore, II

San Diego

Murray Reicher, MD

Pembroke Pines FL

—

Los Angeles

Barry D. Pressman, MD

Galloway

Robert M. Glassberg, MD

St. Louis

—

Memphis

Dexter Witte, MD; Worth Saunders, MHA

Fort Collins

S. H. Podolski, III, CPA, CIA, CHBME

Garden City

Annette Marinaccio

Milwaukee

Asamot Bagatov

Topeka

Johannes Heyns, MBChB

Cincinnati

Stephen J. Pomeranz, MD

Las Vegas

Lorne Caughlin

Liverpool

Alan B. Foster, MD

Cedar Rapids

—

Fort Wayne

Joe Wolfcale

San Antonio

Wendy Lomers, CPA, MBA

Seattle

Sandra Benson

Pittsburgh

Brandon W. Chan, MD

Orem

Jim Jenson

Las Vegas

David Steinberg, MD

Chicago

Kunal Vora

Chico

Laverna Hubbard

Hamburg

John Bellomo

Williamsville

John J. Sung, CPA, MBA

Cosponsored by Radiology Business Journal and LarsonAllen. Ranked by FTE Radiologists Lead Physician

Lead Nonphysician

FTE Radiologists

FTE Employees

Imaging Centers

Hospital Contracts

Procedures 1,000,000

Steven Seltzer, MD, FACR

Brian Chiango, RT, MBA

450

Konstantin Loewig, MD

—

89.2

772,536

Greg Karnaze, MD, FACR

—

700

1,300,000

Joseph Tashjian, MD

—

Susan Wyatt, MD

—

846

—

James Thrall, MD

—

78.8

181

770,000

Mark Leibenhaut, MD

Fred Gaschen

77.8

826.6

1,037,047

William Keyes, MD

Kathleen Wilson

650

660,000

Jack Little, MD

—

191

1,100,000

Richard M. Levey, MD

—

134.1

963,000

Rod Owen, MD; Christian Dewald, MD

Lisa Mead

625

1,250,000

Kevin Gustafson

—

300

750,000

Arl Van Moore, Jr, MD

Mark Jensen

61.3

285

923,014

Kurt P. Schellhas, MD

—

750

400,000

Mark Alfonso, MD

Ron Hosenfeld

800,000

Richard Jensen, MD

—

350

1,200,000

Richard B. Noto, MD

—

51.2

161

625,000

Michael McLaughlin, MD

Walter Lindstrand

206

650,000

Robert E. Schaaf, MD

William H. Johnson

350

675,000

Raymond Dougherty, MD

Marjorie Gorthy

34.5

392,275

Gary Felsberg, MD

Shannon Stewartson

118,000

William Glucksman, MD

Mark Grossman

289

—

John Meadors, MD

Taunia Stadter

160

775,000

Charles E. Neal, MD

Thomas C. Dickerson

750,000

Homer F. Beltz, MD

Linda Wilgus

108

750,000

Robert Poliner, MD

—

235

1,000,000

Jon M. Robins, MD

Thomas Cleary

280

240,000

Mark Schwimmer

Dan Strub

34.3

51.1

800,000

Barry D. Pressman, MD

Lynne Roy

450,000

Robert M. Glassberg, MD

Michael J. Jenoriki

278

510,922

Jeffrey Thomasson, MD, FACR

Carol Hamilton, MBA

477,508

Dexter Witte, MD

Worth Saunders, MHA

630,000

John Bodenhamer, MD

—

385,000

Jay Bosworth, MD; Paul Cayea, MD; Paul Lang, MD —

375

300,000

Ilya Petrescu, MD

Georghe Hagi

500,000

Johannes Heyns, MBChB

David Smith, FACMPE

406,247

Stephen J. Pomeranz, MD

Mike O’Brien

325

—

249,600

Richard Schwartz, MD

Lorne Caughlin

400,000

Alan B. Foster, MD

Olga M. Stanton

110

—

William R. Neff, MD

Kathryn M. Epley

22.5

467,449

Tim Grissom, MD

Deb Overcash

540,000

Kenneth Sandoval, MD

Wendy Lomers, CPA, MBA

260

506,000

Michael J. Peters, MD

Tricia West

101

200,000

Brandon W. Chan, MD

Timothy J. Pisula

475,000

Carl Black, MD

Jim Jensen

19.8

375,000

David Steinberg, MD

Marc Williams

337

260,000

William Nicholas

—

150,000

Laverna Hubbard

Gary Stromberg, MD

222,687

—

Mary Turkiewicz

300,000

Janet Sung, MD

Deanna L. Schiller, MBA

172

—

335,919

SUCCESS | The Model Practice

Building the Model Practice Corporate-style governance, subspecialization, and choosing the right administrative staff members all play roles By Rich Smith

hat does the ideal radiology practice look like? It is likely to include subspecialization, according to Lawrence R. Muroff, MD, FACR, president and CEO of Imaging Consultants Inc in Tampa, Fla. He believes that subspecialization strengthens the hand that a practice holds. “If, for example, you are a superb women’s imager, you may be seen as indispensable to your hospital’s breast surgeons, which makes your practice just that much less vulnerable to the institution’s administrative whims,” he says. “Subspecialization also serves as a defensive wall against encroachment by other medical specialties: Cardiologists and others tend to be less successful at capturing your turf if you can provide something they cannot.” Subspecialization was a strategy that Riverside Radiology Associates, Columbus, Ohio, arrived at over time, the 70-radiologist group’s president, Mark Alfonso, MD, recalls. “Our doctors are fellowship trained in all of the radiology subspecialties, including musculoskeletal, neuroradiology, mammography, body imaging, nuclear medicine, and interventional radiology,” Alfonso says. “We did not start out this way; we evolved into subspecialization after realizing it’s not enough merely to describe findings. One must also speak the

language of the referring physicians, which helps them tremendously with patient management. As a result, we have become well known as a center of excellence for radiology within Central Ohio, branching out statewide.”

The Corporate Governance Model A highly efficient governance structure also is characteristic of exemplary radiology practice models. Without that, a group will find itself at a distinct competitive disadvantage, according to Muroff, a respected, nationally known practice advisor. “An efficient governance structure enables the group to act decisively, appropriately and—in the best of circumstances—

36 RADIOLOGY BUSINESS JOURNAL | Winter 2008 | www.radbizjournal.com

proactively,” he says. “It also permits good decisions to be made speedily. Speed is important because you need it to help you get out in front of the competition. For example, if you’re going to introduce a new service, it’s better to be the first in the market to do so rather than the seventh, since the first one up with the new service is the one with the best chance of dominating the market.” You are less likely to be first if your decision-making apparatus is creakily encumbered, he explains. Muroff believes that the optimal governance structure for radiology groups is the one embraced by companies outside of health care. “Call it the standard corporate model,” he says. “Radiology practices can benefit from adopting this model because

they, themselves, are corporate-type businesses. They may see themselves as small, neighborhood businesses, but given that they typically bring in $5 million to well over $100 million a year, they hardly qualify as such. Neither can they be run like a neighborhood business.” Some radiologists blanch at the suggestion of patterning their practices after the likes of Microsoft or Federal Express. They see medicine and business as mutually exclusive. Muroff contends that it is wrongheaded to view things that way. “There is nothing to say that good business and good medicine cannot coexist,” he says. “In fact, a compelling argument can be made that, if you practice good business, you will be able to practice far better medicine, since you’ll have more resources at your disposal.” Two features of the corporate model of governance are a mission statement and a business plan. “Many organizations turn their mission statements into warm and fuzzy public-relations tools, but that is not their purpose,” Muroff insists. “A mission statement spells out the goals of the organization in a way that provides guidance to the leaders and to the rank and file of the organization. A business plan provides even more specific guidance in the form of timelines for accomplishment and structures for assigning tasks and securing accountability.”

Governance Infrastructure The corporate model places the ultimate responsibility for carrying out the mission statement and business plan in the hands of a CEO, but a mistake that many radiology groups make after hiring one is failing to maintain frequent interaction with that leader. “I’ve seen radiologists, after finding and bringing aboard an excellent nonphysician business executive, think that they’re now free to be clinicians and just read images all day,” Muroff says. “It can’t work that way. There needs to be ongoing dialogue between the business leadership and the radiologists.” That dialogue is most productive when it flows through an executive committee made up of a demographically representative sample of the practice. “If the executive committee reflects the composition of the group, decisions it makes

will probably be appropriate to more of the diverse interests composing the group,” Muroff says. In addition to the executive committee, Muroff recommends at least three other committees: finance, marketing/ business development, and operations. The last is particularly important because, in order to be efficient, the corporate model of governance must enjoy the support of an effective business infrastructure.

way of supporting documentation. Our administrative staff consisted, by and large, of high-school graduates: We didn’t need people with an advanced education because the nature of the administrative work being handled in-house was not particularly sophisticated or specialized.” Smith continues, “Now, we have a salaried practice administrator holding a master’s degree, and we’ve replaced the bookkeeper with an accountant whose job description grew into that of a con-

We’ve gone from being a small outpatient office of just a few radiologists to a full-fledged set of businesses that include joint ventures with our hospital, a billing operation that handles 120,000 CPT® codes annually, and another half a million claims and payment transactions. —Geoffrey Smith, MD, FACR, president Casper Medical Imaging, Casper, Wyo

The need for practice building and good governance is not confined to large practices. Casper Medical Imaging in Casper, Wyo, is a group of six radiologists (some of whom are fellowship-trained subspecialists). It staffs a hospital and an outpatient imaging center, and it leveraged a solid administrative team to fuel practice growth. Geoffrey Smith, MD, FACR, group president, also serves on the ACR Board of Chancellors as a representative for small and rural practices. He says, “We’ve gone from being a small outpatient office of just a few radiologists to a full-fledged set of businesses that include joint ventures with our hospital, a billing operation that handles 120,000 CPT® codes annually, and another half a million claims and payment transactions. Over a decade ago, we outsourced all of our business management and financials to a company located in another state,” Smith says. “Internally, we handled collections and some bookkeeping. We had a bookkeeper who assembled checks and handed them to someone to be signed—and did so without providing much in the

troller. The quality of personnel we’re employing in our business office has also increased dramatically, with many of them being college educated. We still outsource, but only those few functions involving complicated financial or legal issues.” An important goal for Casper Medical Imaging is to make sure that its administrative team does not fall into counterproductive habits. It achieves this with the help of a personnel manual created 15 years ago and updated a number of times since then. “The manual is a halfinch–thick package detailing everything an employee of ours needs to know in order to be an effective, contributing member of our staff,” Smith says. “It’s turned out to be foundational in our cultivation and management of a sizable number of employees in an increasingly complex business environment.” Casper Medical Imaging also has a mechanism in place for preventing friction among employees and promoting cohesiveness. Smith says, “We have a liaison committee made up of one radiologic technologist and one front-office staffer.

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SUCCESS | The Model Practice

They spend a fair amount of time planning the annual Christmas party and other social functions, but they also address small problems involving our internal communications or day-to-day processes—problems not big enough to make their way to the middle-management level, but still consequential enough to cause discord or disruption, especially if not dealt with and allowed to fester.”

Your technological capabilities all have to be the best possible, so that you can provide the level of service necessary to put your practice in the strongest competitive position. —Mark Alfonso, MD, president Riverside Radiology Associates, Columbus, Ohio

The Technology Piece Beyond subspecialization, good governance, and a solid business infrastructure, a radiology group, in order to be considered ideal, requires the support of cuttingedge technology. “Without the technology piece, you can’t really claim to have an ideal practice model,” Marcia Flaherty, CEO of Riverside Radiology, explains. Riverside Radiology has done well with that particular element, judging by the equipment that it owns. “We have a PACS, which we acquired in 2003,” Alfonso says.

“Having this system in place is what allowed us to take our subspecialty model and then spread it, bringing images to the subspecialist versus sending bodies to various locations to read. In support of PACS, we developed, from the ground up, an IT infrastructure that made it possible to create a company, so that we could outsource our PACS capabilities to practices and hospitals that cannot afford the PACS structure we have developed.” Alfonso voices the view that any technology acquired by a group—whether in IT or modalities—must be state of the art. “Otherwise, it’s like owning a sports car with four flat tires. Your technological capabilities all have to be the best possible, so that you can provide the level of service necessary to put your practice in the strongest competitive position,” Alfonso says. To illustrate the point, Flaherty mentions several recent technology initiatives undertaken by the practice. “We’re working on the development of 3D reconstruction across our infrastructure, which will support the work of our radiologists in a more effective fashion and, by extension, increase our customerservice focus,” she says. “This fits right in with our subspecialty model because the 3D reconstruction capability allows us to provide more specific

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information and remarkable images to the referring physicians.” She adds, “We also have a number of integrated systems we rely on not only to provide interpretations, but also to manage the functions of our practice. These include systems for billing, electronic medical records, dictation, email, texting, and other communication tools. This infrastructure is allowing us to increase the support for our radiologists at the hospitals we cover by developing our own 24/7 transcription service. The reality is that it’s hard for these hospitals to have transcriptionists available on a 24/7 basis, but without 24/7 transcriptionist support, it poses a challenge for us with regard to turnaround time. What we’re doing, in response, is using our technological capabilities to support a pool of transcriptionists who can, from one location, provide aroundthe-clock service to all of these different facilities.” Clearly, the ideal radiology practice model consists of many elements that require much planning and no small investment of resources. Some groups may conclude that the investment is too costly and that the rewards are too few. Muroff believes that would be a mistake. “Moving toward the ideal is not just a worthwhile goal, but an imperative for any group that wants to survive in the years ahead,” he says. “The next 10 years are going to be far more difficult for radiology than the 10 years now past. Groups will need to be the best they can be, and striving for the ideal ought to be at the top of their list of things to do.” Rich Smith is a contributing writer for Radiology Business Journal.

THE EXCELLENCE FORMULA

adiology group practices can take the following seven steps to transform their practice models into something much closer to the ideal. First, change before change becomes a necessity. Lawrence R. Muroff, MD, FACR, president and CEO of Imaging Consultants Inc in Tampa, Fla, says, “Strive to anticipate opportunities and then structure your group appropriately to take advantage of those. The same is true of problems: Anticipate them and structure yourself appropriately to deal with them.” Second, enlarge. “Try to have the greatest possible geographic reach so as to offer the widest access to patients,” Muroff says. “This will give you more clout with third-party payors. Radiology groups prosper when the reimbursement per procedure is better. If you’re geographically big enough, you have a better chance of receiving appropriate payment.” Third, diversify income sources. “Do not rely on just the revenues you receive from your hospital contracts,” Muroff says. “We’re in the midst of a near epidemic of hospital contract terminations. If that happens to you and there are not alternative income streams, your group cannot exist. Ways to diversify include having contracts with other hospitals; opening one or more imaging centers; using your technology assets to provide night-call coverage for smaller practices, specialty reads, and virtual locum tenens services; and giving expert testimony in courtrooms.” Fourth, make clerical staff members feel that they have a stake in the success of the practice. Geoffrey Smith, MD, FACR, president of Casper Medical Imaging in Casper, Wyo, says that this is critical to ensuring that administrative employees collectively pull the oars with as much strength as possible, and also that they pull in the same direction at the same time. Inculcating the staff with a stakeholder mentality can be accomplished by, among other things, rewarding them with bonus pay for hitting productivity targets and by conducting team-development exercises. Fifth, choose wisely. Smith says that it is easier to build a cohesive team of employees if one starts by hiring only top-quality

people who, from the start, share management’s vision. “We look for individuals who are intelligent and conscientious,” he notes. “From an attitudinal perspective, we try to recruit those who are self-starters—those who are motivated to succeed and don’t need much coaxing.” Sixth, say hello. Muroff believes that a practice’s growth or survival prospects improve when its radiologists make a habit of stepping into the exam room to introduce themselves to patients. “Tell the patient how delighted you are to have him or her with you today and that you are the doctor who will be reading the images about to be taken,” he recommends. “The ACR has done studies demonstrating that the majority of patients a radiologist interacts with have no idea that the radiologist is a physician. It’s hard to image radiologists being able to justify high rates of reimbursement when the general public doesn’t even believe radiologists are physicians. The public perception is that the radiologic technologist—or, more commonly,

the referring physician—is the one who reads the images.” Seventh, increase the knowledge and skill sets of all members of the group. “The more training the radiologists, the technologists, the administrators, and the support staff receive, the better equipped the practice is to provide excellent customer service,” Muroff says, “and service is the name of the game.” —R. Smith

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PRODUCTIVITY | IT Infrastructure

TheforPush Productivity In an era of declining reimbursement for radiology, one practice is testing the limits of ITâ&#x20AC;&#x2122;s ability to improve productivity By Jon Copeland

n retrospect, 10 years ago, it took us many months to accomplish our first DICOM modality integration of a RIS and a CT scanner at Inland Imaging, Spokane, Wash. The standards were vague and communications between systems were difficult and incomplete, but at that time, it was a great accomplishment. Although other industries had done this form of machine-to-IT integration for some time, it was relatively new for health care. Today, we have more than 500 different units (representing modalities that include CT, MRI, ultrasound, and digitizers) connected via DICOM to our RIS/PACS, and we can add a new device in a matter of minutes. The ability to share health information via DICOM, HL7, and other standards has come a long way in the past decade. At Inland Imaging, our imaging centers achieved efficiencies using IT (RIS, PACS, and voice recognition) that enabled them to handle increasing volumes with the same, or significantly fewer, medical records personnel, drivers, transcriptionists, and core (front-desk) staff. Our technologists display their patient worklist via

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DICOM Modality Worklist for the day and take control of that workflow. We no longer print and hang film. We no longer have a need for darkrooms. We do not have to chase down prior films or worry about them being delivered in time to view along with the current examination because most priors are already on our PACS. We no longer hand deliver more than 20,000 film jackets monthly. Our referring physicians and other health care providers access reports and images online. We have more than 5,000 remote user accounts on our Web-based report- and image-viewing system today. Our radiologists perform remote consultations with referring physicians while both are looking at exactly the same images, without either physician having to leave his or her office. Our technologists and radiologists have the same real-time communication and consultation capability. Our report-turnaround times are dramatically improved due to voice recognition. Patient care has also improved; we have made great progress. William Keyes, MD, president of the Inland Imaging division, is an Inland Imaging neuroradiologist and is in charge of IT. He says, â&#x20AC;&#x153;PACS and DICOM Modality Worklist technology help our technologists by providing a greater

degree of standardization and quality control. Our standardized PACS presentation states facilitate the training of the technologists and allow them to rotate easily through different areas.”

Key to Subspecialization The success of PACS and related technologies in moving exams to the radiologist—versus moving the radiologists to the exams—has allowed a growth opportunity in subspecialization. Radiology groups have grown much larger to generate the volumes that enable them to subspecialize. These larger groups tend to serve multiple medical centers and hospital systems, multispecialty clinics, and other nonradiologist-owned technical imaging service providers. This fragmentation of workflow is particularly challenging when coupled with expectations of higher productivity and higher quality. As Inland Imaging expanded to different cities, serving multiple health care entities, a whole new set of efficiency and quality problems emerged. We encountered many disparate information systems. The level of the different IT staffs’ RIS knowledge and ability, and their willingness to cooperate in IT strategies, varied dramatically. We were expected to use multiple PACS viewers

and dictation systems, and to sign reports in multiple systems. We were receiving exam information from five or more RIS types, three kinds of hospital information system (HIS), three voicedictation or voice-recognition systems, and other systems. Not only were there technical hurdles, but security and general data-sharing policies also needed to be aligned. In order to move examinations around seamlessly, we decided to provide our own common IT infrastructure for workflow, productivity, and quality. We called this our franchise model of IT. We also needed to convince our customers that our own franchise IT model was of as much benefit to the hospital or other entity as it was to Inland Imaging, and that it would not disrupt their existing IT solutions. We chose to build a layer of software technology to rest on top of the assorted RIS, PACS, and other health IT systems that we encountered. Our goal became having one radiologist worklist, one voice-dictation/voice-recognition system, one report-signature queue, and one aggregated source of data to use in analyzing productivity, quality, and a number of other factors, all independent of the host or source systems.

Using interface engines and application programming interface tools, we were able to make our own software layer relatively transparent to the host or originating PACS, RIS, HIS, electronic medical record, or other system. In the design of our new workflow systems, we avoided causing problems for the existing systems already established in the assorted clinics and hospitals that we served. We built systems to fill in the gaps that we saw in meeting our needs. We built dispatching, worklist-monitoring, and electronic forms systems so that we could move exams to Phoenix, Seattle, or Spokane— wherever the radiologist best suited to interpreting that examination was situated—without faxing paperwork.

Maintaining Quality Increasing the overall velocity of radiology exams through the enterprise required changes in quality-control systems. The radiologists responded by establishing a physician-led quality committee and a small department focused on quality control and measurement. Today, that department focuses on: • standardizing report formats and general content by subspecialty or division; • reviewing a statistically significant

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PRODUCTIVITY | IT Infrastructure

sample of physician reports for errors, which are often related to voice recognition, and giving findings back to each dictating radiologist and to the IT staff to fine-tune the voicerecognition systems; • assisting in performing structured, formal peer review on a routine basis; and • establishing and supporting critical- and urgent-findings tracking systems and processes. In describing the resulting Inland Imaging quality initiative, Keyes says, “We measure quality through our interactive peer-review system. The peer-review system needs to be simple and readily accessible; otherwise, it is not going to be used. Our focus is on giving the radiologist more exam-viewing time by requiring less time to be spent on activities like dictation, exam sorting, and clinical and procedural information gathering.” He continues, “We have created individualized and exclusive worklists to prevent lost studies, and we electronically tally the work each day in order to avoid wide fluctuations in workload between similar work slots. In addition, we can begin viewing the study while it is in progress. We no longer need to wait for all the paperwork because it is all immediately available online. This is of particular importance with stroke and other emergency-department–related imaging.” Our goal was to increase productivity and quality while eliminating as many hassle factors as possible. As we proceed in our efforts to improve throughput and quality with systems and process improvement, success is not always linear. Our systems, in some cases (at least initially), have actually slowed us down or shifted work, causing some disruption. For example, although our report turnaround has greatly improved due to voice recognition, and the radiologist no longer batch signs reports 24 hours later, while trying to remember the nature of the exam, voice recognition has placed the burden on the radiologists of correcting some errors that were previously corrected by transcriptionists. To remedy this, we created standardized report templates, by specialty, to improve report consistency while reducing the rare misses of the voice-recognition systems.

Our mantra here was kill the parrot, meaning reduce dictation of data elements that can be captured upstream elsewhere in the process and automatically inserted into the report. Jon Copeland

Kill the Parrot Another example is that we now have the ability to insert signs, symptoms, and other data into our reports automatically, thus reducing dictation time for the radiologist. Our mantra here was kill the parrot, meaning reduce dictation of data elements that can be captured upstream elsewhere in the process and automatically inserted into the report. As a consequence, we are working on getting the upstream data collected more accurately for these inserted data elements. The spelling and word case need to be perfect when they are entered upstream or the radiologist will need to make corrections to the inserted data, and might as well dictate them. We are making a process-improvement effort to identify the workflow and the key points at which these data need to be validated. This level of accuracy was not previously expected of our technologists, assistants, and schedulers, and achieving it may take more time on their part, but this will ultimately save the radiologist dictation time. Another challenge that we continue to address, as a group, is that one technology solution or workflow does not fit all modalities or workflow types. We continue to experiment with applying different configurations of our systems to create faster workflow scenarios while maintaining quality in screening mammography, radiography, and other areas with extremely high volumes. Many people have asked me when our systems will stop evolving. The answer is the day we stop doing radiology. We are all under pressure to increase productivity and dependence on IT. We believe that process improvement and quality assurance are

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crucial to leveraging IT. We realize that getting things right the first (or even second) time around may not happen; that’s why they call it continuous process/quality improvement. As long as we are willing to make efforts to improve quality and productivity together, our push for productivity will be successful. Jon Copeland served for 11 years as CIO of Inland Imaging and its affiliated companies in Spokane, Wash. Currently, he is CEO of Inland Imaging Business Associates, a division of Inland Imaging. Copeland has been in radiology/health care IT for 14 years and spent time prior to that in the distribution, process manufacturing, and biotechnology industries; jcopeland@inlandimaging.com.

MERGERS AND ACQUISITIONS | Historical Review

Historical Review of Mergers and Acquisitions in Diagnostic Imaging From the go-go years to the present, acquisition strategies in the outpatient diagnostic imaging field have not always worked By Jonathan A. Burklund

s we sit on the precipice of a meltdown in the credit markets, I am reminded of a quote from Winston Churchill: “Those who forget history are bound to repeat it.” In 1998, a hedge fund called Long Term Capital Management (LTCM) bought securities using approximately $30 of debt for every $1 of equity, and eventually owned a portfolio valued at $125 billion (not including its assets off the balance). Later that same year, the Russian bond crisis set off a chain of events that precipitously reduced the value of LTCM’s portfolio, quickly eroding its equity value and thereby requiring massive write-offs. The Federal Reserve invited the large Wall Street companies to its headquarters to devise a bailout strategy, for fear that the failure of LTCM would negatively affect the credit markets. Does this sound familiar yet? As a result, 13 companies participated in a $3 billion bailout of one hedge fund. The only two companies that did not participate, because it was too risky, were Bear Stearns and Lehman Brothers. Had the heads of these two companies dusted off the credit analysis used in evaluating the LTCM bailout and applied it to their own balance sheets in 2008, they might very well be going concerns today. Merger-and-acquisition activity in the diagnostic imaging industry has often suffered from the same selective amnesia. Perhaps the repetition of some bad history can be avoided through the review of mergers and acquisitions in diagnostic imaging over the past 15 years.

1993—1997

1998—2000

Go-go years

BBA and multiple arbitage fallout

• Stark rules catalyzed the sale of doctor-owned facilities

• Balanced Budget Act dramatically reduced reimbursement

• Access to debt made it easy for entrepreneurs to acquire centers

• Bloated balance sheets plus lower revenues equals restructuring

• Large companies created in a short period: - US Diagnostic Inc - Medical Resources Inc

• US Diagnostics Inc reduced debt by selling off centers • Medical Resources Inc executed a massive debt-for-equity conversion

• Little to no true operational integration

Trends in mergers and acquisitions in diagnostic imaging.

44 RADIOLOGY BUSINESS JOURNAL | Winter 2008 | www.radbizjournal.com

The timeline from 1993 to 2008 (see figure) is divided into five distinct periods: the go-go years, the Balanced Budget Act and multiple arbitrage fallout, the days of cheap credit, the DRA and the overbuilding hangover, and the revenge of the operator.

1993 Through 1997 The go-go years: The original Stark law was enacted in 1989 and prohibited self-referrals only in clinical laboratory services. In 1993, an amendment was made to the Stark law (Stark 2) that went beyond clinical laboratory services and into several other health care services, most notably diagnostic imaging. With the stroke of a pen, Congress unwittingly catalyzed the creation of the modern diagnostic imaging industry. Historically, diagnostic imaging centers had been predominately owned by physicians, many of whom referred patients to these centers. As a result of Stark 2, doctors were required to divest themselves of their interests in these cen-

ters, creating a glut in the market. Concurrently, acquisition financing was readily available for energetic entrepreneurs who wanted to roll up the industry. In the early days, before too many players entered the market, valuations were quite reasonable, ranging from three to four times EBITDA. Two companies quickly emerged as industry leaders: US Diagnostic Inc and Medical Resources Inc. Their darling status in the investment community was primarily the result of their successful financial engineering. US Diagnostic Inc and Medical Resources Inc closed a series of acquisitions at around three to four times the target companies’ EBITDAs while maintaining a public market implied valuation of six times EBITDA. Furthermore, these acquisitions were completed using debt, not equity, which created instant value for the shareholder by improving the earnings per share of US Diagnostic Inc and Medical Resources Inc. This multiple arbitrage strategy worked so well that it allowed manage-

2005—2007

ment teams to focus less on key fundamentals, such as local market clustering, that would maximize local staff efficiencies and increase negotiating leverage with managed care payors. As the market heated up, more and more competition developed in the diagnostic imaging markets. Valuations crept up to six to seven times EBITDA, increasing the need for more debt. In a four- or five-year period, US Diagnostic Inc and Medical Resources Inc acquired more than 100 centers each. Not surprisingly, many of the acquisitions were in disparate markets and were poorly integrated.

1998 Through 2000 The Balanced Budget Act and multiple arbitrage fallout: In 1997, Congress passed the Balanced Budget Act, which drastically reduced reimbursement rates for diagnostic imaging. For large diagnostic imaging companies, the Balanced Budget Act, coupled with rapid growth in the previous years, triggered a number of negative consequences, including

2001—EARLY 2005

LATE

Days of cheap credit

DRA and overbuilding hangover

Revenge of the operator

• During the economic downturn, investors sought recession-resistant investments

• Uncertainty surrounding DRA

• Good operators have weathered the storm caused by DRA and are seeking new acquisitions

PRESENT

• New modalities (such as PET) created promise of increasing growth rates

• Easy credit for new centers during earlier period caused a flood of centers in the marketplace, reducing samestore sales growth for all centers

• Credit was abundant; it was easy to buy or build

• Largest strategic buyer was performing poorly

• Health care finance companies hoping to finance acquisitions once again

Activity highlighted by numerous financial sponsors with access to debt markets

• Independent financing sources reducing exposure to the sector or folding

• Hospital companies continue to seek to diversify into outpatient diagnostic imaging

- MedQuest — JP Morgan - River Oaks — CapStreet - DIG — Evercore • Financial buyers typically outbid strategic buyers due to the greater need to deploy capital, the growing leveragability of centers, better access to capital, and greater optimism

• Private equity sponsors interested in investing in the sector

Positive data points • RadNet’s operating performance • Alliance’s performance • CML’s acquisition of ARS • Memorial Hermann’s acquisition of River Oaks Imaging and Diagnostic

On the other hand • RBMs coming on strong

www.radbizjournal.com | Winter 2008 | RADIOLOGY BUSINESS JOURNAL 45

MERGERS AND ACQUISITIONS | Historical Review

decreasing revenues (and, therefore, cash flow); bloated balance sheets; geographically disparate centers; and poorly integrated operations. As would be expected, these factors resulted in poor performance at US Diagnostic Inc and Medical Resources Inc and caused them both to consider restructuring options. In April 2000, after negotiating several waivers, Medical Resources Inc filed a Joint Plan of Reorganization under Chapter 11 in connection with an agreement with its lenders to convert $75 million in debt into 90% of Medical Resources Inc’s common stock. In July 2000, US Diagnostic Inc received shareholder approval for its restructuring plan, in which the company would sell off its centers and distribute the cash from the sales, first to the debt holder and second to the shareholders. Ultimately, US Diagnostic Inc raised $188 million from the sale of several of its centers and significantly reduced its outstanding senior debt. The remaining centers eventually were acquired by PresGar Companies in 2002.

2001 Through Early 2005 The days of cheap credit: This period, which can also be called the onslaught of the private equity investors, saw the greatest number of large mergers and acquisitions, for several reasons. Among them were that during the economic downturn, investors flocked to health care companies, considering them a recession-resistant investment; that new imaging modalities, such as PET, created the potential for increased unit and revenue growth; and that credit was abundant. On the last point, credit was available not only for acquisitions, but also for new centers. It was as if anyone who could spell MRI was able to get debt financing for equipment and leasehold improvements, as well as for initial operating losses. Private equity investors liked investing in the diagnostic imaging industry because of its dependence on capital expenditures and, in turn, cheap capital. The rationale went as follows: as an independent company, it would have to finance its capital expenditures and acquisitions with expensive debt, perhaps at an interest rate of 10%. As a portfolio company of a large

private equity company, however, with many a bank fawning to do business with it, the same company would enjoy a lower cost of capital (for example, 8%). As a result, a private equity fund could bring synergies to the table immediately in the form of interest-expense savings; here we go again with financial engineering. In addition, larger diagnostic imaging companies dramatically reduced their activity in mergers and acquisitions, as they remained focused on adapting their operations to the new economic realities caused by the Balanced Budget Act’s reimbursement cuts. As a result (see table), private equity companies dominated mergers and acquisitions during this period, typically outbidding strategic acquirers.

Late 2005 Through 2007 The DRA and the overbuilding hangover: On February 8, 2006, George W. Bush signed the DRA into law. This act made sweeping changes to Medicare and Medicaid, most notably in the form of reimbursement cuts in diagnostic imaging. While this legislation was enacted in early 2006, the discussions of the cuts began in

Diagnostic Imaging Comparable Transactions Date

Target

Buyer

04/30/08

River Oaks Imaging

Memorial Hermann Healthcare System

Implied Equity Value (millions)

Latest 12 Months’ Revenue (millions)

Latest 12 Months’ EBITDA (millions)

Equity Value/ Revenue

Equity Value/ EBITDA

—

$58.6

—

12/21/07

American Radiology Services

CML HealthCare

$151

146.4

$22.5

6.7x

07/06/06

Radiologix

Primedix

208.9

254.6

44.4

0.8x

4.7x

10/12/05

PET Scans of America

Alliance Imaging (KKR)

06/26/05

Comprehensive Medical Imaging

InSight Health (JW Childs)

04/05/05

Diagnostic Imaging Group

10/29/04

Center for Diagnostic Imaging

—

2.2x

—

48.3

—

11.7

—

4.1x

Evercore Capital Partners

253.7

119

2.1x

7.2x

Onex Partners

183.5

—

06/23/03

CDL Medical (23 mobile sites)

InSight Health (JW Childs)

66.4

10.9

6.1x

03/28/03

American Radiology Services

Advent International Corp

115

—

12/04/02

US Diagnostic

PresGar

1.2x

3.3x

09/06/02

River Oaks Imaging

CapStreet Partners

73.4

15.6

4.9x

08/16/02

MedQuest

JP Morgan Capital

411

198.8

52.4

2.1x

7.8x

07/02/01

InSight Health

JW Childs

448.1

214.3

82.5

2.1x

5.4x

Low . . . . . . . . . . . 0.8x . . . . . . . . 3.3x High . . . . . . . . . . . 3x . . . . . . . . . 7.8x Mean . . . . . . . . . . 1.7x . . . . . . . . . 5.6x Median . . . . . . . . 2.1x . . . . . . . . . 5.4x

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mid-2005, raising concerns that the rate for IDTFs could be reduced to the hospital outpatient rate and that reimbursement for imaging contiguous body parts might be cut by an unknown amount. These questions created uncertainty and made it impossible to project the future earnings of diagnostic imaging companies. To make matters worse, the overbuilding of centers led to an oversupply of imaging services and to fierce competition in most markets. Increasing competition had the dual detriments of reducing the same-store sales growth for all centers and emboldening managed care payors to make draconian reimbursement cuts for commercial patients. As a result of these market dynamics, mergers and acquisitions halted. Many of the private equity companies that invested in the previous era wrote down their investments or received lower-thanexpected returns on capital. The one transaction that was the exception, which was executed at an unusually low multiple of EBITDA, was the Primedix acquisition of Radiologix in July 2006. Since the DRA had been passed by this point, Primedix was able to quantify the impact that such reimbursement cuts would have on the Radiologix EBITDA, thus eliminating the uncertainty relating to future earnings.

2008 Revenge of the operator: The Primedix–Radiologix transaction marked the beginning of a new era in diagnostic imaging mergers and acquisitions: one marked by well-financed, high-quality operators. Good operators have weathered the storm caused by DRA and are now thriving. The two public companies in the sector, RadNet and Alliance Imaging, have been reporting strong earnings growth over the past several quarters. When looking at an acquisition, the operator first asks whether the target fits into its business strategy. With the everincreasing influence of radiology benefit managers and continued pricing pressure from managed care payors, diagnostic imaging companies need to cluster their centers in geographically defined markets

in order to maintain some balance of power. In addition, hospital companies, hoping to diversify their revenue bases in the outpatient sector, are expanding their footprints within their markets by acquiring diagnostic imaging centers. Financial engineering and multiple arbitrage, while

Conclusion The need for industry consolidation has never been greater; diagnostic imaging unit growth is increasingly scrutinized, radiology benefit managers are gaining more influence, and reimbursement cuts always loom. To succeed, diag-

The need for industry consolidation has never been greater; diagnostic imaging unit growth is increasingly scrutinized, radiology benefit managers are gaining more influence, and reimbursement cuts Jonathan A. Burklund always loom. To succeed, diagnostic imaging companies need programs of mergers and acquisitions to increase their regional market presence and squeeze operating efficiencies out of the system. nice to have, no longer drive the acquisition decision. Today, operating strategy and market presence do. This new era is made evident by the two most notable transactions in the sector this year: Memorial Hermann Healthcare System’s acquisition of River Oaks Imaging and Diagnostic and CML HealthCare’s acquisition of American Radiology Services. Memorial Hermann, which is one of the largest hospital systems in Houston, acquired River Oaks to increase its presence in the diagnostic imaging market, thereby providing its patients with a greater number of access points. CML, a Canadian company, obtained an important beachhead in the US diagnostic imaging market through the acquisition of American Radiology’s cluster of Maryland centers. While financial metrics were important in these acquisitions, they were not the only considerations. For another bright spot in this era, private equity companies are hoping to reenter the industry, since they believe in the long-term viability of the industry and its need for consolidation. This time, however, they are focusing their due diligence on operational efficiencies and growth strategies, not just short-term financial synergies.

nostic imaging companies need programs of mergers and acquisitions to increase their regional market presence and squeeze operating efficiencies out of the system. Over the years, there have been acquisition strategies that have worked and others that have not. Those that have not have typically been based solely on financial metrics, such as multiple arbitrage or interest-rate synergies. There has also been a temptation to acquire diagnostic imaging businesses using too much debt. Just because the bank is willing to lend it does not mean it is the proper amount. Remember Lehman Brothers and Bear Stearns. The companies that will be able to navigate in the ever-changing sea of diagnostic imaging are those that can grow through acquisition, but focus first on operational integration and synergies. If those are done properly, creating value will surely follow over the long term. Jonathan A. Burklund is a managing director in the health care investment banking group of Stanford Group Co and has specialized in the diagnostic imaging sector for the past 10 years; JBurklund@StanfordEagle.com.

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DIAGNOSTIC IMAGING | Regulatory Changes

Maintaining a Steady Aim at a Moving Target An overview of recent regulatory changes affecting diagnostic imaging By Thomas E. Bartrum, JD

lthough the Bush administration may ultimately be viewed by history as the zenith of the conservative philosophy of less regulation, such laissez-faire treatment has not extended to the diagnostic imaging segment of the health care industry. Since the passage of the DRA, CMS has issued a barrage of proposed and final regulations affecting suppliers of diagnostic imaging services. As if a new wave of proposed and final regulations every six months were not bad enough, CMS has unduly complicated the process through a series of sweeping regulatory changes, false starts, and alternative approaches, while ignoring or reversing many of its own long-standing positions. A neutral observer of this process could easily reach two conclusions: First, CMS desperately wants to reign in the utilization of diagnostic imaging services so as to manage its spending on such services better; second, CMS lacks a comprehensive strategy to achieve its goal. In fact, at times, it seems that CMS is just throwing regulatory restrictions against the wall to see what will stick. Unfortunately, CMS’ approach is creating havoc in the diagnostic imaging segment of the health care industry. The uncertainty resulting from such an approach has made strategic planning, capital equipment budgeting, access to capital, and evaluation of strategic opportunities extremely difficult for most diagnostic imaging suppliers. CMS’ approach has also resulted in considerable confusion among diagnostic imaging suppliers as to their current regulatory obligations and what, exactly, they can and cannot do with respect to their imaging operations. Given the current enforcement environment generally (and with respect to diagnostic imaging suppliers specifically),

such confusion needlessly exposes diagnostic imaging suppliers to considerable risks, including false-claims exposure, loss of Medicare billing privileges, and inappropriate referral relationships.

Recent Regulatory Changes In the final Medicare Physician Fee Schedule (MPFS) update for fiscal year (FY) 2008 and phase III of the final Stark regulations, CMS made the following regulatory changes affecting diagnostic imaging suppliers, which are currently in effect. New IDTF Supplier Standards.—In the FY 2008 update, CMS continued to expand the supplier standards applicable to IDTFs. The following new standards, which went into effect on January 1, 2008, most directly affect diagnostic imaging suppliers. IDTFs Are Now Prohibited From Sharing Space or Equipment and From Subleasing Operations.—Most IDTFs are now prohibited from sharing space, sharing diagnostic-testing equipment, or subleasing their operations to another person or entity enrolled in the Medicare program. CMS, however, recognizes two exceptions to this general prohibition; they are for mobile IDTFs and for IDTFs that are colocated within a hospital.

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Further, for those IDTFs that shared space with another Medicare-enrolled entity or individual as of the date of the final FY 2008 update, CMS delayed—until January 1, 2009—the effective date of the prohibition on space sharing. CMS, however, made it clear that such a delay did not have an impact on the effective date of the prohibitions on sharing diagnostic-testing equipment and subleasing operations. The impact of these regulatory changes is that IDTFs, unlike physician practices furnishing imaging services, can no longer enter into block-lease arrangements to share equipment and overhead expenses. Effective Date of Initial Enrollment.— The effective date of initial IDTF enrollment is now the later of either the filing date of the 855B (so long as the 855B is subsequently approved by the contractor) or the date that the IDTF commences furnishing services at its practice location. CMS takes the position that so long as the applicant responds in a timely manner to requests for additional information, the application will relate back to the date of the original submission; however, if the 855B is rejected or denied, the filing date would be the date that the applicant submits a new 855B (assuming that the new 855B is complete at the time of filing). This approach can be a problem because Medicare contractors more readily reject 855B applications today than in the past. Clarification of Existing IDTF Supplier Standards.—In the FY 2008 update, CMS also continued to refine the supplier standards applicable to IDTFs. Many of the clarifications were helpful to diagnostic imaging suppliers, and they finally took into consideration certain practical realities. The following regulatory clarifications to the IDTF supplier standards are most significant and are currently in effect.

Liability Insurance.—CMS clarified that failure to maintain comprehensive liability insurance, as required by the supplier standards, will result in revocation of the IDTF’s billing privileges, retroactive to the date of such a coverage lapse; that the IDTF must furnish CMS with the contact information regarding coverage for the issuing insurance agent and underwriter; and that such coverage must be in the amount of both $300,000 per location and $300,000 per incident. Reporting Obligations.—CMS limited the 30-day reporting obligation to changes in ownership, changes of location, changes in general supervision, and changes in adverse legal events reported to CMS. All other IDTF changes of enrollment information must be reported within 90 days, in accordance with CMS’ general change-of-information reporting obligation. Nonetheless, in our experience, many Medicare carriers will not pay for new diagnostic tests until after such diagnostic tests have been added to the enrollment file through a change-ofinformation filing. Beneficiary Complaints.—CMS clarified the appropriate beneficiary-complaint process by restricting such a process to written complaints, by clarifying the information that must be obtained by the IDTF, and by requiring that such records be maintained at the physical site of the IDTF (or the home office, for mobile IDTFs). Supervising Physicians.—CMS clarified that the restriction that supervising physicians can only provide supervision to three IDTFs only applies to furnishing general supervision, and it removed the language regarding supervising physicians being responsible for the overall operation and administration of the IDTF. CMS also clarified that its concern is with concurrent supervision, so a mobile IDTF that visits multiple locations would be treated as a single IDTF; however, if the entity has multiple mobile units operating, each unit would be treated as a separate IDTF site for purposes of the restriction on furnishing general-supervision services. New Stand-in-the-shoes Concept.— In phase III, CMS adopted a new standin-the-shoes approach to analyzing certain indirect relationships between physi-

cians and entities furnishing designated health services. Specifically, the regulations required referring physicians— whether owners, employees, or independent contractors—to stand in the shoes of physician organizations, which serve as an intervening organization between the referring physician and the entity furnishing designated health services. As a result, the relationship between the referring physician and the entity furnishing designated health services must comply with the more demanding direct exceptions to the Stark law’s prohibition on self-referrals (such as the personalservices or equipment-rental exceptions) rather than with the indirect-compensation exception. For purposes of the stand-in-the-shoes analysis, a physician organization is generally defined as a physician, including a professional corporation of which the physician is the sole owner, a physician practice, or a group practice. The stand-in-the-shoes concept went into effect on December 4, 2007, for new contractual relationships; however, CMS delayed the effective date during the original term or current renewal term of any arrangement that satisfied the indirectcompensation exception as of September 5, 2007. At the end of such an original term or the renewal term, the stand-inthe-shoes provision would then apply to future contractual relationships. CMS subsequently delayed the effective date until December 4, 2008, for compensation arrangements between an academic medical center component and a faculty practice plan, as well as between an entity furnishing designated health services and an affiliated group practice within the same integrated health delivery system that is exempt from taxation under section 501(c)(3) of the Internal Revenue Code. In the recently published final FY 2009 Inpatient Prospective Payment System (IPPS) update, CMS tweaked the stand-inthe-shoes provisions somewhat. It is most significant that these changes, which went into effect on October 1, 2008, only apply the stand-in-the-shoes concept to physician owners or investors, allow nonowner physicians and physician owners with only titular ownership (that is, no right to receive distributions) to choose to stand in

the shoes of their physician organizations. The changes do not apply the stand-inthe-shoes concept to an arrangement that satisfies the exception to the Stark law for academic medical centers.

Scheduled Regulatory Changes In the final MPFS update for FY 2009, CMS took the following steps. More Flexible Approach to the Purchased-diagnostics Rule.—In the FY 2009 update, CMS adopts a more flexible approach to the purchased-diagnostics rule (which is scheduled to go into effect on January 1, 2009) than the approach finalized by CMS in the FY 2008 update. CMS adopts a two-alternative approach to determining whether the physician performing the professional component or technical component of a diagnostic test shares a practice with the billing physician or supplier that is sufficient to avoid the anti-markup provision of the purchased-diagnostics rule. Specifically, the physician performing the professional component or technical component (the performing physician) will be deemed to share a practice with the billing physician or other supplier (the billing entity) and, therefore, will not be subject to the anti-markup provision if, first, the performing physician furnishes substantially all (at least 75%) of his or her professional services through the billing entity; or, second, if the performing physician is an owner, employee, or independent contractor of the billing entity and the technical component or professional component is performed in the office of the billing entity. Further, CMS expands its definition of the office of the billing entity to include “any medical office space, regardless of number of locations, in which the ordering physician or other ordering supplier regularly furnishes patient care, and includes space where the billing physician or other supplier furnishes diagnostic testing, if the space is located in the same building (as defined in §411.351) in which the ordering physician or other supplier regularly furnishes patient care,” as finalized by the FY 2009 update. This approach offers greater flexibility in structuring relationships so as to avoid

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DIAGNOSTIC IMAGING | Regulatory Changes

application of the anti-markup provision. For instance, given the proper structure, two physician groups could block lease imaging equipment in the same building where they furnish the full range of patient-care services without implicating the anti-markup provision of the purchased-diagnostics rule. The revised final rule, however, will make it difficult for physician practices that have set up diagnostic services in a centralized building (under the Stark law’s in-office ancillaryservices exception) to avoid implication of the anti-markup provision where the physician performing the professional component or technical component does not furnish substantially all of his or her professional services through the practice. Diagnostic imaging suppliers should understand that the purchased-diagnostics rule only applies to the extent that the billing physician or supplier also orders the diagnostic test. For instance, if an imaging center receives an order for a diagnostic test from an unrelated physician, and the imaging center furnishes the technical component but contracts with a radiologist to read the professional component, neither the technical component nor the professional component would be subject to the purchased-diagnostics rule (because the imaging center did not order the diagnostic test). In the event that the anti-markup provision applies, the payment to the billing physician or other supplier for the technical component or professional component (as applicable) would be the lowest of: • the performing physician or supplier’s net charge to the billing physician or supplier (without regard to any charge that is intended to reflect the cost of the equipment or space leased to the performing physician or supplier by or through the billing physician or supplier); • the performing physician or other supplier’s actual charge; or • the fee-schedule amount for the diagnostic test that would be allowed if the performing supplier directly billed for the test. Per-click Arrangements Are Generally Prohibited.—Effective October 1, 2009, the rental of office space, the rental of equipment, fair market value, and indirect compensation exceptions to the Stark law will prohibit per-unit or per-click compen-

Percentagebased rental agreements are prohibited. Thomas E. Bartrum, JD

sation arrangements in situations where such charges reflect services furnished to patients referred by the lessor. CMS has also indicated that it will treat on-demand rental arrangements as being per-click arrangements subject to the prohibition. The change will not, however, prohibit blocklease arrangements, so long as the block of time is not set artificially low so as to be, in effect, a per-click arrangement. It should be noted that the per-click prohibition would not generally affect radiologists since, under the so-called consultation exception, radiologists typically do not make referrals under the Stark law. Likewise, the per-click prohibition has not been extended to personalservice or employment arrangements. Under-arrangement Transactions Are Subject to Stark Law.—Effective October 1, 2009, CMS expands the definition of an entity furnishing designated health services to include the person or entity that performs the designated health service. As a result, under-arrangement service providers will generally be subject to the Stark law, and physician ownership of such service providers will have to comply with an applicable exception to the Stark law for physician owners to continue to make referrals to such service providers. For instance, cardiologist owners of a hospital–cardiologist joint venture to furnish 64-slice CT angiography (CTA) to the hospital, under arrangement, would be prohibited from referring patients to the hospital for CTA services unless their ownership interests could be structured to fit within an ownership-interest exception to the Stark law (which, except for rural arrangements, will generally be unavailable). Here again, radiologist ownership in such joint ventures will generally be allowed, since radiologists typically do not make referrals under the Stark law. In commenting on the regulations (73 Federal Register 48434, 48726 [2008]),

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CMS explicitly stated, “We do not consider an entity that leases or sells space or equipment used for the performance of the service, or furnishes supplies that are not separately billable but used in the performance of the medical service, or that provides management, billing services, or personnel to the entity, to perform [designated health services].” Unfortunately, to date, CMS has refused to give meaningful guidance as to when such arrangements cross the line and result in the performance of designated health services. Percentage-based Rental Arrangements Are Prohibited.—Effective October 1, 2009, CMS will prohibit the use of percentage-based compensation arrangements under the rental of office space, rental of equipment, indirect compensation, and fair market value compensation exceptions when the percentage is tied to revenue raised, earned, billed, collected, or otherwise attributable to the services performed or the business generated in the office space or with the equipment. CMS, however, refrained from extending the percentage-based compensation prohibitions to other nonprofessional service arrangements (for example, management and billing arrangements). New IDTF Standard Requires Medicare Enrollment for Both Mobile and Fixed-site IDTFs.—Effective January 1, 2009, CMS will require all mobile entities furnishing diagnostic imaging services to Medicare beneficiaries to enroll in the Medicare program. The requirement is an attempt by CMS to ensure that mobile imaging suppliers meet the IDTF supplier standards, as set forth at 42 CFR §410.33(g), and that the owners of such suppliers are otherwise eligible to participate in the Medicare program. New IDTF Standard Requires Mobile IDTFs to Perform Direct Billing.—Effective January 1, 2009, mobile IDTFs will have to bill directly for diagnostic services that they furnish to Medicare beneficiaries. In the final FY 2009 update, CMS provides an exception to this general requirement for services furnished by a mobile IDTF to a hospital under arrangement. Effect of Revocation of an IDTF’s Billing Privileges.—An IDTF that has had its Medicare billing privileges revoked must, as of January 1, 2009, submit all

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DIAGNOSTIC IMAGING | Regulatory Changes

outstanding claims for services furnished prior to revocation within 60 calendar days of the effective date of revocation. The 60day period represents a significant reduction from Medicare’s prior timely claim-submission regulations, which allowed such claims to be submitted for up to 27 months after the effective date of the revocation.

Abandoned, Postponed, or Future Changes In the final FY 2009 update, the following previous proposals were abandoned, postponed, or held in reserve for future implementation. CMS Will Not Require Physician Practices to Enroll as IDTFs.—In the final FY 2009 update, CMS abandons, for the time being, its proposal that physician practices furnishing diagnostic-testing services must enroll as IDTFs. Relying upon the enactment of section 135 of the Medicare Improvements for Patients and Providers Act of 2008, which requires the DHHS secretary to establish an accreditation process for those entities furnishing advanced diagnostic-testing procedures (including MRI, CT, and nuclear medicine), CMS indicates that it will continue to monitor the issue and, if necessary, will finalize the requirement in the future. CMS Makes No Changes to the Inoffice Ancillary Services Exception.— Although CMS has repeatedly expressed its concern that the in-office ancillary services exception is being used as a loophole to allow physicians to capture unrelated ancillary revenue streams, CMS has not adopted any significant changes to the in-office ancillary services exception. The changes to the purchased-diagnostics rule, however, will severely limit the usefulness of the exception for certain ancillary services housed in a centralized location. Further, CMS continues to monitor the use of the exception and stands ready to modify the exception as necessary to address any perceived concerns about program abuse. IDTFs and Other Entities Furnishing Designated Health Services Will Not Be Required to Stand in the Shoes of Related Entities.—In the FY 2008 update, CMS had indicated that it was considering whether, and under what circumstances, it would be appropriate to have the entity furnishing designated health

services stand in the shoes of another entity. CMS went on to propose that it might be appropriate for such an entity to stand in the shoes of any entities that it owns or controls. In the proposed FY 2009 IPPS update, CMS seemed to say that such treatment might be appropriate to deem the entity furnishing designated health services to be standing in the shoes of any organization in which it has 100% ownership interest. CMS, however, has decided not to move forward on this proposal. CMS Continues to Allow Percentagebased Compensation Arrangements in Independent-contractor and Employment Relationships.—In the FY 2008 update, CMS had proposed revising the definition of set in advance for purposes of the Stark law’s compensation exceptions, so that percentage-based compensation arrangements could only be used for compensation directly resulting from a physician’s personally performed services. Although CMS has subsequently limited the use of percentage compensation arrangements for the space rental, equipment rental, fair market value, and indirect compensation exceptions, this proposed change was never implemented. CMS, however, has indicated that it continues to have concerns about percentagebased compensation arrangements and may further restrict their use in the future.

Impact on IDTFs Diagnostic imaging suppliers enrolled in the Medicare program as IDTFs would appear to be disproportionately affected by CMS’ recent regulatory changes. In particular, the prohibition on sharing space/equipment or subleasing operations results in IDTFs being unable to share the cost of expensive diagnostic equipment with other potential users of such equipment in the community. This puts IDTFs at a competitive disadvantage, compared with hospital outpatient imaging providers and physician practices, both of which can share expensive diagnostic equipment if such arrangements are properly structured. Such an outcome results in perverse policy incentives because, in effect, CMS is creating an incentive for diagnostic imaging suppliers not to enroll in Medicare as IDTFs, which results in imaging services being furnished in a less regulated environment.

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Impact on Physician Practices Several of the regulatory changes discussed here will require physician practices furnishing diagnostic imaging services to reevaluate their contractual relationships. Overall, however, the changes do not appear to be too draconian. For instance, most physician practices will be able to amend existing percentage-based and perclick lease arrangements to a comparable flat-fee lease arrangement. To the extent that a physician (or his or her practice) furnishes services, under arrangement, to a hospital, it will be necessary to determine whether the physician will be making referrals to the underarrangement service provider and, if so, whether the physician’s ownership interest can be structured to comply with an exception to the Stark law. If the arrangements are appropriately structured, physician practices will be able to continue to enter block-lease arrangements that comply with the Stark law while avoiding application of the anti-markup provision of the purchased-diagnostics rule.

The Future The silver lining, if any, of the onslaught of regulatory changes affecting diagnostic imaging suppliers is that CMS seems to have developed a better understanding of the diagnostic imaging segment of the health care industry—and appears, finally, to be taking a more practical approach to regulation, recognizing that there are legitimate suppliers of diagnostic imaging services. Further, in several recent speeches, CMS officials have indicated that they are unlikely to make a number of material changes to the Stark regulations in the short term. Instead, we should expect CMS to continue to tinker with the scope and application of changes. At the very least, this should give the industry some stability, so that diagnostic imaging suppliers can concentrate on operations, instead of on responding to proposed regulatory changes. Thomas E. Bartrum, JD is a shareholder in the Nashville, Tenn, office of Baker Donelson Bearman Caldwell & Berkowitz, PC, where he focuses his practice exclusively on federal health care regulatory issues affecting health care providers; tbartrum@bakerdonelson.com.

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Breast-imaging Workstation Debuts FUJIFILM Medical Systems, Stamford, Conn, has introduced the Breast Imaging Diagnostic Workstation (BIDW), available to any facility that has implemented full-field digital mammography. The workstation complements the company’s Computed Radiography for Mammography (FCRm) solution and provides broad workstation interpretation capabilities for facilities that may use another vendor’s PACS. The stand-alone workstation delivers full support for computeraided diagnosis and MQSA overlays, as well as Synapse PACS functionality. (800) 431-1850; www.fujimed.com

Enhanced Thin-client 2D, 3D, and 4D Tools Visage Imaging, Carlsbad, Calif, will show a new version of its CS/ThinClient/Server platform at the upcoming RSNA meeting. Enhancements to 2D, 3D, and 4D visualization are featured, including CT and MR angiography, cardiac analysis, perfusion analysis, and oncology applications. All tools are fully integrated within the platform, which is scalable from the imaging center setting to meet the needs of the enterprise. (888) 3D-VISAGE; www.visageimaging.com

54 RADIOLOGY BUSINESS JOURNAL | Winter 2008 | www.radbizjournal.com

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High-field, Patient-friendly MRI Solution Hitachi Medical Systems, Twinsburg, Ohio, will showcase OASISTM at the upcoming meeting of the RSNA. The open architecture of Hitachi’s proprietary 1.2T vertical-field magnet meets the demands of advanced studies and image quality with an unobstructed viewing angle to alleviate patient anxiety, thereby decreasing scan time and increasing throughput. Combining the high-performance MRI electronics of the best high-field equipment—fast gradients and multichannel radiofrequency (RF) technology with Hitachi-designed Zenith RF coils—with Hitachi’s proprietary 1.2T, open-architecture verticalfield magnet, OASIS represents a new generation of MRI systems, providing diagnostic confidence, patient comfort, and investment value. (800) 800-3106; www.hitachimed.com

Single Worklist Unifies Multiple PACS Intelerad Medical Systems, Montreal, has announced the availability of InteleOneTM, a software and networking solution designed to unify multiple PACS workflows across facilities, based on the IntelePACS architecture. The solution employs standards-based interfaces with existing RIS and PACS to provide a unified solution for reporting radiology studies. Radiologists are provided with a single universal worklist, a single viewer, a single dictation (or voice-recognition) solution, and a single signing worklist for all studies, regardless of the different PACS and RIS solutions running at each facility. Radiological studies can be routed from many different acquisition sites and integrated into the InteleOne master database for reading and case management alongside relevant prior studies. (514) 931-6222; www.intelerad.com

Online Teleradiology Auction Telerays, Houston, has launched the nation’s first teleradiology auction site, where buyers and sellers can offer and buy reading services. Houston-based radiologist Daniel Roubein, MD, CEO of Radiology Reading Centers of America, launched the service. Radiologists must become credentialed, which takes 7 to 30 days, and can bid only on contracts from hospitals and imaging centers that have preapproved them. Clients post their requests, preapproved radiologists begin bidding, and the contract is won by the lowest bidder, who downloads the cases and uploads the reports. Telerays takes a 15% share and also provides billing services. (832) 778-9729; www.telerays.com

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{MA R K E T place} Final Reads Plus Billing Services NightHawk Radiology Services, Couer d’Alene, Idaho, has developed two new services to meet the needs of teleradiology clients. FinalsPLUS combines NightHawk’s Final Interpretations with the company’s state-of-the-art revenue-cycle management, designed to provide painless coverage, day or night, by providing billing services. Digital Locums is designed to resolve the unpredictable productivity that practices receive from traditional locum tenens. Flexible pricing allows for a cost-effective short-term fix or a longterm solution to staffing needs. (866) 400-4295; www.nighthawkrad.net

Software Provides Assist in Dementia Diagnosis Royal Philips Electronics, Andover, Mass, has developed decision-support software designed to assist in the diagnosis of dementia using FDG–PET. Areas of the brain causing dementia typically exhibit reduced glucose uptake (hypometabolism); these areas show up as subtly different shades of gray. The software, developed with researchers at the University Medical Center HamburgEppendorf, Germany, is designed to enable less experienced readers to recognize the subtle variations of the three most common neurodegenerative diseases—Alzheimer disease, Lewy-body dementia, and frontotemporal dementia—in three steps. The software is not yet commercially available. 011 (31) 40-27-43703; www.philips.com/newscenter

Widely Deployable Advanced Visualization Solution TeraRecon, Inc, a leader in advanced visualization technology, delivers Aquarius iNtuitionTM, a client-server solution that offers comprehensive, robust, real-time clinical tools and applications that are easy to use and deployable throughout a health care enterprise. Clinicians throughout the patient-care cycle can customize their clinical workflow to achieve an accurate diagnosis and treatment plan quickly and efficiently. Automated segmentation, centerlines, and quantification are just a few of the broad range of tools designed to enhance efficiency. Aquarius iNtuition is designed to bridge the clinical workflow and dataflow gaps in image acquisition, postprocessing, interpretation, and diagnosis. (877) 354-1100; www.terarecon.com

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DV E RT I S E R

Index}

Affiliated Professional Services (800) 841-5200 www.affilprof.net ....................................11 AMICAS (800) 490-8465 www.amicas.com ......................................3 Covidien (888) 744-1414 www.covidien.com ..................................43 CSI Financial (800) 383-6303 www.csifinancial.com ..............................39 Franklin & Seidelmann (866) 437-7237 www.franklin-seidelmann.com ..................15 FUJIFILM Medical Systems (800) 431-1850 www.fujimed.com ....................................5 GE Healthcare (800) 886-0815 www.gehealthcare.com ............................60 GE Healthcare/Centricity® PACS-IW (888) 303-PACS(7227) www.dynamic-imaging.com www.gehealthcare.com ..............................7 GE Healthcare—Lunar (888) 795-8627 www.gehealthcare.com/ YourPracticeIsAtRisk ................................21 Hitachi Medical Systems America (800) 800-3106 www.hitachimed.com ................................2 Imaging Center Institute (714) 832-6400 www.imagingcenterinstitute.com ..............31 Intelerad (514) 931-6222 www.intelerad.com..................................19 Medical Imaging Specialists (800) 510-0680 www.medicalimagingspecialists.com............9 NightHawk Radiology Services (866) 400-4295 www.nighthawkrad.net ............................59 RBMA (888) 224-7262 www.rbma.org ........................................57 Siemens Medical Solutions Molecular Imaging (888) 826-9702 www.usa.siemens.com/mi ........................53 TeraRecon Inc (877) 354-1100 www.terarecon.com ................................33 Visage Imaging (888) 338-4724 www.visageimaging.com/ ........................25 VIDAR Systems Corp (800) 471-7226 www.vidar.com........................................51 3DR Laboratories (502) 569-1025 www.3DRinc.com ....................................13

FinalREAD

The Ultimate Road Trip Just in time, radiology providers are arriving at an understanding of their unique branding propositions. By Curtis Kauffman-Pickelle

re we almost there? That refrain is familiar to anyone who has ever taken young children on a long road trip. The kids get anxious and are easily bored, you get a bit cranky, and the trip seems to take a lot longer than you remember it taking, back when you took the same route unencumbered by responsibility for the necessities of others. Ironically, in retrospect, the travelers can recall only the fun parts of the journey, remembering the highlights of shared experiences, challenges overcome, and interesting sites visited.

finishing our first round of singing 99 Bottles of Beer on the Wall. A major difference, of course, is that I never lose my enthusiasm for this journey, and I cherish the relationships that I have developed while being a guide and supporter for these fellow travelers. I guess I really am a true road warrior. The good news is that we’re getting close to being there. There is much more of a realization today that the road signs signaling key milestones are pointing clearly in the right direction, making it obvious to most that a renewed attention to the principles of business is the best way to ensure

Consumer-driven health care is arriving, and although it is not quite here yet, it is destined to become a reality with which the business of radiology will need to come to terms. Such is the situation we find ourselves in with the current state of the medical imaging profession, as it morphs into something other than what we remember it being. The journey has been long and hard, but we seem to recall, with nostalgia, the good old days of radiology, as we face even more difficult paths ahead. I sometimes feel like that proverbial driver, as I help radiology groups and imaging executives navigate the roads on their respective journeys toward the full realization that their practices have, in fact, become businesses, in every sense of the word. It seems that we have been talking about it for years, and yet we are only just

success in today’s crowded imaging marketplace. In years past, it was a lot easier to make it up as one went along on the journey, but that is no longer acceptable. Now, one needs definite guideposts and data points with which to measure progress. How is radiology a business, and why does it matter? As more information becomes available to patients and payors about costs, outcomes, quality, methods, turf issues, and other determinants of success, it becomes increasingly clear that patients/consumers will demand more from tomorrow’s providers of care. They will not be content with subpar customer service. They will not

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be content to wait for access to the system. They will not be content with indefensible costs and vague descriptions. Consumerdriven health care is arriving, and although it is not quite here yet, it is destined to become a reality with which the business of radiology will need to come to terms. Successful businesses are governed by fundamental principles that relate to how best to differentiate themselves in the hearts and minds of their constituents and stakeholders. These customer groups can and do build loyalty to brands, organizations, service groups, and other enterprises based on the entity’s ability to articulate these differences in terms that the customer understands (and to which he or she can relate). Typically, this means finding the benefit to the customer, rather than the service feature that the entity is proud to describe. The fundamental business proposition for today’s—and tomorrow’s—successful radiology practice, imaging center, or hospital outpatient group is to identify, and to articulate persuasively, the benefit to the customer of doing business with it. Why should customers come to you? In what way will they benefit? How are you different? In other words, what is in it for them? The groups that figure out how best to deliver on these basic tenets of business will be those that thrive in a consumer-driven health care arena. Where is your organization on the journey to achieving this ability? Are you there yet? Curtis Kauffman-Pickelle is the publisher of Radiology Business Journal and is the CEO of The Imaging Center Institute, Tustin, Calif; ckp@imagingbiz.com.