Diversifying revenue sources sounds like a straightforward concept - add marketable products, then increase sales by finding new buyers. If the product line in question is radiological images, however, diversification can be anything but straightforward. Successful diversifying depends on the radiological group's practice model, but it depends just as much on the group's business model. That is why Fred Gaschen, executive vice president of a major radiological group in Sacramento, Ca, lays down this mantra: "The most important piece when you're diversifying is to have a strategic plan.

"We have a formal process," adds Gaschen, "a strategic planning committee and a new initiatives committee. We talk about everything, and we keep asking each other, What's on the horizon?' We complete a financial pro forma, and everything has to meet our mandated ROI (return on investment)."

For this article, Gaschen and five other experts, physicians, and administrators, were asked to share their thoughts on diversification of income in the radiology practice. The results were, to say the least, a coat of many colors. Perhaps the best place to start is with an overview. One person in a position to provide that overview is Lawrence R. Muroff, MD, a radiologist who has given up his clinical practice to become president of Imaging Consultants, a Tampa, Fla-based company that helps radiology groups plan diversification. Muroff's credentials include a professorship in radiology at the University of South Florida. He is also a CT and MRI forensic reading expert on legal cases.

Muroff says the reasons for a practice to diversify are basically threefold. First, to lessen dependence on existing revenue sources, especially if a group gets its income by reading for a single hospital. Second, to augment existing income. Here, Muroff says, radiology groups often "misjudge the lucrative aspects." The final reason to diversify is to extend one's sphere of influence. This could include taking on a new hospital or providing nighthawk teleradiology coverage for rural hospitals, for example. It could mean getting large enough to add subspecialty coverage, says Muroff.

DIVERSIFY HOW?

Fred Gaschen

Just what the avenues for diversification turn out to be is best left to other respondents, who describe what they are actually doing, but Muroff does pinpoint areas where diversification may be advantageous. He looks, first of all, at the relationship between radiology groups and the hospitals they read for. "Many hospitals bar their radiologists from opening imaging centers, and then another radiology group opens an office across the street from such a hospital," he says. "I think the best thing a hospital can do is to encourage radiologists to put up joint venture offices in its catchment areaand joint ventures are going to increase because of the changing Medicare reimbursements on outpatient imaging."

Lawrence R. Muroff, MD

Muroff also says joint ventures can protect radiology groups' contracts with hospitals. If the hospital and the radiologists who read for it combine to lease an MR machine for seven years for an outpatient center, for example, then the length of that lease effectively becomes a contract extension for the radiology groupl. "It solidifies the practice," says Muroff. He states that there is an "alarming trend" of hospitals and radiology groups severing relationships. "It could be service issues, it could be personality issuesit happened here in Tampa. Radiologists in general are not well suited to adversarial-type negotiations, but hospitals, which face labor disputes all the time, are used to being adversarial," he says. "It becomes a difficult healing process." He suggests radiologists should not be cavalier about leaving hospitals. If the radiology shortage abates, they may wish they had that income.

Muroff cautions radiologists against diversifying into ownership of multi-specialty clinics that include nonradiology doctors, despite the fact that doing so may seem like turf protection. "Cardiologists feel if blood flows near it or through it, it's theirs. They have taken all the cath-angio, all the cardiology ultrasound, all the cardiology nuclear medicine," he says. "I have seen a few radiology practices hire cardiologists, but that has been the major exception to the rule. Radiologists don't have the time or the commitment to start multi-specialty clinics."

The jury is still out, Muroff says, on the economic viability of single-modality screening centers based on walk-in patient demand and not on physician referral. "CT screening is a new area of initiative," he says, "but we are not sure what the national society position on this will be. Some patients are clearly benefited, but the caveats are many."

Asked about mergers and consolidations as a strategy, Muroff admits to being in favor of larger practices. "A larger practice can offer a lot more services," he says. But there is a downside. "As a practice increases linearly, problems increase exponentially."

One of the advantages of a large practice, he adds, is that it can implement a formal governance structure, a key step. "That should include a president of the group, a small board of trustees, a fees and finance committee, an operations committee that deals with staffing, and a business and marketing committee." Far too often, radiology groups don't have these structures in place and they make emotional and ill-advised business decisions, Muroff warns. "There is a pathological addiction to democracy in radiology which leaves some groups in total paralysis. The partners make a decision, and then four more come back from vacation and they balk. I've seen that happen a lot, and that prevents diversification as well."

A LARGE GROUP PRACTICE

Ronald L. Arenson, MD

One group that adheres closely to Muroff's large-practice model, complete with a formalized governance structure, is Radiological Associates of Sacramento (RAS), where Fred Gaschen is executive vice president. RAS is a physician-owned practice that operates 18 imaging centers and reads for a number of hospitals. It has 69 physicians and owns about 80 modalities, including one PET scanner. It conducts 1,800 procedures per day, reads 450,000 studies per year at its outpatient centers and another 250,000 at hospitals. It employs 700. It is, says Gaschen, the dominant group in the Sacramento market. "We sometimes think of ourselves as our own little megalopolis," he says. Expansion has been a key strategy to diversify and increase revenue.

James Thrall, MD

Along with physical growth, RAS has concentrated on adding modalities to capture technical fees along with professional fees for diagnostic reads. Gaschen calls the modalities "product lines," and he points out that in Sacramento the technical fee for a PET scan is over $2,000 while the professional fee is less than $100. Of course, the technical fees are offset by the cost of buying or leasing the equipment. And buying the equip-ment does entail risk. Gaschen uses his group's purchase of computer-aided detection (CAD) readers, alternators, and processors to provide CAD services for 275 screening mammograms a day at 12 different loca-tions, as an example. Medicare and many insurance companies are now reimbursing for CAD, Gaschen says. He likens it to a second opinion read done by computer. The technology cost roughly $750,000, and it required that RAS hire five more technicians. It has not paid for itself yet, but Gaschen is confident that it will. He says the CAD purchase is a good example of how the RAS leadership makse decisions. "We looked at it and thought it was a better quality product for our patients. There was not  a great demand for it, but nobody else in town was doing it, so we said let's do it."

The CAD purchase is also an example of how a large radiology group can make diversity snowball. When the company bought the technology, some insurers contracted to RAS balked at paying. They didn't balk long. "We convinced them they had to pay for it," Gaschen says. He will not detail how, but he adds, "Suffice it to say we were successful." Group size can mean clout, in other words.

CAD also fits into a RAS effort to "vertically integrate mammography," Gaschen says. This means that routine mammography, which is not a big profit center, is tied to CAD reads when called for, and that RAS mammographers have also been trained to perform stereotactic breast biopsies in the outpatient centers. The procedures are also performed by the group's interventional radiologists in hospitals, "but the mammographers are the most facile," Gaschen says. "We do between eight and 10 stereotactic biopsies per day, and they're done by four different people. That's diversification." Because the better-paying procedures spin off the routine mammography, the routine screening mammography is optimized in a business sense, Gaschen notes. "Mammography was the right thing to do even when it was done at a loss. But then Medicare increased reimbursement, and volumes increased, and CAD helped turn it around. The more screening mammograms you do, the more stereotactic biopsies you will do."

Gaschen says RAS has made some mistakes. One was to get into a nonradiology business. "We got off-track, and we regretted it," Gaschen says. "One of the things [we learned is] when you talk about diversification, stay within radiology, don't get into real estate." RAS has also turned a deaf ear to several pleas from smaller radiology groups that want it to provide nighthawk coverage for them. "We don't want to sell our services to other groups," Gaschen says.

Looking toward the future, Gaschen says, "One of the next things on the horizon is coronary CT angiograms. We need to be a part of this. To get a 16-detector CT may be within range for some large cardiology groups, but not for the small groups. So the small cardiology groups can go to a hospital and do them thereor you can let them do the procedures at your imaging center. They would get the professional component and you would get the technical component." That may well be the RAS group's next step.

ACADEMIC CHALLENGES

Radiology departments at teaching hospitals have to be especially inventive in the ways they diversify, and they often must diversify to get the bills paid. "The productivity of the true academic radiologist is less than the radiologist in private practice," says Ronald L. Arenson, MD, chairman of the radiology department at the University of California at San Francisco's medical school. "You can't support your academic salaries if you live on professional fees alone. Then add to that the costs of fellows and teaching at the medical school. It's a real challenge. Diversity is really the only answer."

While there are sources of academic income like federal research grants that private practices do not normally have, Arenson says that at best grants are a break-even proposition. At UCSF, outpatient imaging centers are not an option. Administrators have barred radiologists from starting joint ventures in order to open off-campus imaging centers in an attempt to capture some part of technical fees. "They believe that it will open up a Pandora's box," Arenson says. "They feel other departments will want a piece of the pie."

So Arenson is basically forced to scramble for funding any way that he can. He has lobbied hard to get salary funding from his medical center, but that covers only about a third of salaries, he says. Increasing productivity is an option that has been pursued. But to press the productivity pedal down harder would drive academic radiologists away altogether, because they would not have the time for research that they have now, Arenson says.

One thing UCSF has done is to market the teaching skills of its radiologists. "We do 30 courses per year in CME (continuing medical education), and we put out a CD and a CD-ROM series. That generates significant income," Arenson says.

In one inventive venture, UCSF has contracted with an Israeli company to market second opinion readings. "We provide second opinions to countries around the world, and in consultations with other departments," Arenson says. "We are changing the diagnosis in approximately 40% of the cases. That's incredible." The second opinion consults, which are handled over the Web, are also being marketed to banks and credit card and phone companies abroad, which then promote them to their clients. In return, UCSF gets a substantial up-front umbrella fee, but it must then do the readings at a substantially reduced price. "We're doing only about 10 a day," Arenson says. "It pays well because of the up-front money, but if we do too many, we'll go broke."

A final money source for UCSF's radiology department is funds raised from donors. "Fund-raising is becoming more and more important to us. We now have three endowed chairs, which pay half or more of the salaries of those chairs," says Arenson. He is hopeful that the doors for joint ventures may swing open soon. "We are looking at a joint venture on a cyclotron," he says. "It would be the hospital, ourselves, and possibly third parties. We could then use others' expertise to distribute isotopes to other universities."

WET WARE

In a second academic setting, at Massachusetts General Hospital (MGH) in Boston, which is the teaching hospital for Harvard Medical School, the fetters have been taken off the formation of joint ventures for off-campus imaging centers.  James Thrall, MD, is a diagnostic radiologist. He is chairman of the radiology department at MGH. He is a professor of radiology at Harvard. He oversees the radiology department's professional corporation, Partners, which is a subsidiary of the parent corporation that runs MGH.

Mass General's radiology department is massive. The Partners are the 85 faculty radiologists who staff the department and teach at Harvard. In addition, says Thrall, there are 70 trainee radiologists, composed equally of residents and fellows, and more than 100 PhD scientists who work on the many MGH radiology research projects. "Functional MRI was invented at Mass General," Thrall says. He says MGH does about 500,000 studies per year, and an additional 35,000 at joint venture off-campus imaging centers, the latter "heavily weighted to CT and MRI."

MGH radiology receives about $45 million per year in aggregate funding for research; of that, $21 million comes from the National Institutes of Health, Thrall says. The radiology group also benefits from its "patent portfolio," as Thrall terms it, and from the royalties on those scientific advances, which have meant the formation of many companies. The distribution formula at MGH allows 25% of such profits to go to the radiology department, and those figure into the radiologists' salaries, says Thrall.

While MGH has been aggressive on the research end, it has been just as aggressive in other marketing efforts. "We asked ourselves what were the core competencies and what was the knowledge base in our department," says Thrall, "and we came to the conclusion we were into Wet Ware. Wet Ware is what's between your ears. We set out to see how many different ways we could sell that." Among MGH's successes:

• Marketing specialty reads via teleradiology;
• Completing 3-D renderings of images for specialists who want special images;
• Contracting with drug companies to monitor the efficacy of treatments under trial, by measuring tumor changes on images, for instance;
• Offering radiological consulting, so far in about 18 states and five foreign countries, according to Thrall.

The radiological consulting includes productivity analysis, departmental profiles, relative value units per employee and per scanner, PACS readiness evaluation, virtual radiology training, equipment purchasing, and vendor selection.

MGH radiology goes so far as to market itself constantly inside its own hospital, which has a staff of about 1,500 physicians. Thrall says his department has five full-time employees who walk the halls, bringing physicians up to speed on any new imaging techniques offered by radiology. "You don't want cases to leak out of the MGH system to other imaging centers," Thrall says. Radiology profiles all the MGH doctors and puts those with low referral rates on an "underachievers list." They are visited. "When we see an underachiever become an achiever, we know the intervention has worked," says Thrall. "The effort has paid for itself big-time."

COMMODITIES

Marvin D. Kantor is chairman and CEO of Wendt-Bristol Inc, a company that owns five imaging centers in and around Columbus, OH. Wendt-Bristol employs six radiologists to read in-house. It is heavily involved with teleradiology. It sends its MRI and CT scans to be read under contract by doctors at The Cleveland Clinic, which is about 100 miles to the northeast.

Kantor is not shy about calling x-rays a commodity, and his diversification has been along the lines of marketing that commodity. He markets MRI and CT in bulk to insurers. "You purchase 100 MRIs a month at a flat rate, and when the patients come through, we debit and credit the amount. We bill only for the professional fee," he says. "This is the most advanced marketing thinking, which  has to be the wave of the future."

Kantor compares the imaging center now to the automobile business when it was transformed by rentals and leasing. "It's a valid analogy," he says. "The difference is in how you perceive yourself. If you perceive yourself as a service waiting for a call, you are going to be waiting for a bus that left a half hour ago. We have a commodity that we manufacture to sell. It's a global fee. We own the equipment and the technologists. The only difference is who gets what and where does it go."

Kantor adds, "Basically, an imaging center lives on fixed costs. You have a revenue gain when you cut expenses. Film is the soft underbelly. You need the volume obviously." A good deal of Wendt-Bristol's volume is in mammography. One of Wendt-Bristol's centers is dedicated to women's breast imaging. The company also has five mobile mammography units. "It's a major, major operation," says Kantor. "We do our own in-house stereotactic breast biopsies. We do more bone density examinations than most hospitals."

The company also leases space to cardiologists to do angiography.

Kantor says physician groups and patients must both be served if the image-as-commodity philosophy is to work. "We see the physician groups as the kings in all this," Kantor says. "We're the technicians. That's all we do. Most imaging centers have a play-doctor role. I'm not sure that's correct. We have no interest in providing medical services per sethat's not our thing."

If referring physicians are kings, then patients are the lords and ladies to Wendt-Bristol, Kantor emphasizes. Male employees wear ties. Patients are never called by their first names. Parking is free. The women's center has a Japanese garden. Works of art are on the walls of all centers. "We'll pick you up and take you home," says Kantor. "We don't even use the word patient.' If you are waiting more than 15 minutes, the person who booked you has a problem with us. You must bring the fear level down. The independent imaging center must realize it has a consumer market."

Kantor says he has no plans to expand beyond Ohio, with perhaps one exception, opening PET centers. Wendt-Bristol has one PET scanner in its network now, and a cyclotron to augment it. The ability of PET to do stage-monitoring of diseases makes it the tool of the future. "At the present time we see the imaging business as all technology driven," Kantor asserts.

BUT IS IT REALLY DIVERSIFYING

Does calling modalities "product lines" and aggressively marketing them, really add up to diversifying? "I don't buy it," says Daryl Favale, CEO of Computerized Management Services (CMS) in Simi Valley, Calif, a Los Angeles suburb. "To diversify means one of two thingseither entering a different market to cut risk, or entering a new market to get economies of scale. I really don't see radiologists doing either of those two things."

Favale's company provides management services, including billing and contract negotiation, to medical groups, especially to radiology groups contracted to hospitals. CMS helps the groups and hospitals set up joint-venture imaging centers. Favale calls this "vertical integration" because the radiologists then capture a piece of the technical fees in addition to the professional fees. He says radiologists have become much savvier about combining mammography with breast biopsy, for instance. "But to me that's not diversification, that's marketing what you already have better."

Favale says in a few instances he has seen radiology groups successfully involve themselves in development of software or special equipment, but he is adamant that radiologists first and foremost stick to their traditional knitting. "There is a radiology shortage, and if it gets too severe other practitioners will move into the void. Radiologists will lose their core business, and that's not a good thing."

Favale says he is telling his clients to vertically integrate and get better at marketing what they already have but to stop there. "Radiologists have plenty to do. I don't think they should be starting new businesses," he says. "That doesn't mean don't put in a PET scannerthat's not new business, that's the natural evolution of what you already do."

Favale also urges caution with mergers and consolidations. "I have mixed feelings," he says. "When groups merge and consolidate, the relationships between the radiologists and the referring physicians start to dilute. The other thing is that the service levels start to drop because no one hospital means as much to the larger group."

So there are two sides to the diversification coin, although some of the differences appear largely semantic. Can the whole panorama of technology and marketing change that is being called diversification be summed up? Bluntly, who is the winner? Muroff of Imaging Consultants was asked this question.

"In a Pollyanna way, I'd like to say the patient is the winner," he says. "Specialization has so many benefits for the patient. But sometimes nobody benefits except an entrepreneur who is feeding off the practice."

George Wiley is a contributing writer for Decisions in Imaging Economics.