One of the foundations of capitalism is the precept that people do what you pay them to do. Companies design compensation programs to encourage employees to achieve corporate goals through safe and ethical conduct. Most parents make a child's weekly allowance dependent on the completion of chores. And as it considers the imaging cuts wrought by the Deficit Reduction Act of 2005 (DRA), Congress should remember that compensation drives behavior. Otherwise, unintended consequences could seriously alter outpatient imaging services in the United States.

Unless changes are enacted, beginning on January 1, 2007, Medicare will reduce payments for the technical component of services done outside the hospital to the lesser of that due under the Medicare Physician Fee Schedule (MPFS) or the Hospital Outpatient Prospective Payment System (HOPPS). Effectively, for MRI and CT studies, this will result in reimbursement at 2007 Ambulatory Payment Classification (APC) rates, not at CPT rates under which independent diagnostic testing facilities are now paid. Samples of the changes in reimbursement by some of the more common CPT codes are shown in Tables 1 and 2.

In 2006, Medicare nonhospital facility outpatient technical reimbursement has already taken a hit. The CMS Multiple Procedure Discount (MPD) cuts payments for multiple examinations done on the same patient on the same day within certain families of studies. This year additional examinations within such groups are reduced by 25%, and in 2007 the discount rises to 50%. Thus, a standard CT chest/abdomen/pelvis with contrast drops from $829.96 without discount to $693.15 this year. Presuming no change in the 2007 conversion factor and enactment of the DRA, this multiple examination will decrease to $510.86 next year, a decrease of about 38% from 2005 technical reimbursement.

Putting aside one's feelings about these changes, what are the likely consequences of such reimbursement cuts? Who are the winners and the losers? This article explores possible financial impact and likely market effects by considering average expenses, typical examination distributions, and anticipated patient volume for a number of types of facilities. Since every situation is different, each reader is cautioned not to accept such estimates and projections as applicable to individual sites or to their actual situation. All interested parties are encouraged to discuss such issues with their appropriate legal, financial, and other advisors.

Historical Perspective

Table 1. Anticipated MRI payment reductions under 2005 DRA. (Click the image for a larger version.)

As of August 1, 2000, CMS (then HCFA) instituted payment for outpatient procedures at hospital facilities under APCs rather than CPT codes under which non-hospital facilities continued to receive payment. CPT reimbursement was established based on the Resource-Based Relative Value Scale (RBRVS), which quantified the relative effort and expense associated with different medical procedures. APC rates under HOPPS reflected the position that hospitals had already received benefit for some portion of outpatient facilities via inpatient payment under the Diagnosis-Related Groups (DRGs) and that reductions from CPT levels were needed to correct this inequity.

Inexplicably, Congress has now taken the position outlined above for the DRA. This abandons years of work and a system (RBRVS) carefully designed by CMS and medical professionals that offered a demonstrable basis for different payments. In March of this year, CMS stated its view that such changes are statutory and therefore outside the regulatory authority of CMS. Thus, CMS does not appear interested in defending the structure that it helped to create and will implement the DRA unless Congress reverses its position.

Basic Economics of Imaging

Table 2. Anticipated CT payment reductions under 2005 DRA. (Click the image for a larger version.)

MRI and CT are usually regarded as high fixed-asset investments, those in which the majority of costs incurred are unrelated to the volume of service. Purchase of equipment, basic personnel, site costs, service expenses, utilities, and overhead are a few examples of costs that are typically incurred (or for which long-term liability is accepted) before the first scan is done. Variable costs, those incurred when the scan is provided such as billing and collection, consumables, and interpretation, are usually a minor fraction of the total. Operating margin is annual profit divided by revenue. This value may be viewed as a measure of the financial health of a business.

High fixed-asset investments may require substantial breakeven examination volumes at an estimated average payment to meet expenses. As the average payment decreases, breakeven volumes must increase proportionately. If breakeven is not achieved, substantial losses can occur. Alternatively, once breakeven is reached, the large majority of additional revenue flows to the bottom line (profit). As examination volume increases, the cost per examination can drop substantially since the fixed costs are distributed over a larger number of scans (see Table 3). Thus, increasing patient throughput (number of examinations per time period) without decreasing quality is a high priority at well-run scan facilities.

Decreased average examination reimbursement will inevitably result in failure of some marginally successful facilities. It is unlikely that patient access to MRI and CT will be adversely affected (except in a few rural areas with limited providers) since surviving sites will compete actively as scan volume becomes available.

For outpatient MRI and CT, the most important determinants for financial impact appear to be:

1. Previous reimbursement via CPT or APC. If a group has previously received CPT rates, the shift to HOPPS rates will pose a substantial loss, as much as a 49% decrease for some examinations.
2. Examination volume. Low-volume sites are likely to have a difficult time increasing revenue or efficiency.
3. Percentage of examinations utilizing contrast. The greatest payment decreases are in MRI examinations with contrast. Thus, the greater the contrast fraction the greater the revenue loss.
4. Percentage of multiple examinations within the newly established families. Hospitals appear more likely sources for such multiple examinations and are therefore more likely to incur greater loss of revenue.
5. Current level of efficiency. A loss of revenue can be weathered by increased examination volume (see No. 2 above) and/or by increased efficiency. Thus, some providers may be able to increase the number of examinations per time unit without sacrificing quality and thus counter loss of revenue per examination. Paradoxically, those centers that have achieved very high patient throughput may be at risk since it may prove difficult for them to further improve their economics via this route. However, these sites are usually very successful and are likely to have lower profit margins but not to fail.

Interestingly, the fraction of a provider's payor distribution represented by Medicare is not expected to be as important since many third-party and other contracts are automatically tied to Medicare rates. If Medicare is markedly reduced, these other contracts will also be lowered proportionately.

LIKELY WINNERS

Table 3. Examples of generic fixed and variable MRI costs. (Click the image for a larger version.)

Not all imaging providers will experience reduced income, and some may benefit from the new law.

• Hospitals now receiving APC reimbursement. Since the DRA applies only to nonhospital providers, institutions billing under the APCs will be largely unaffected. They already enjoy substantially higher payments for many x-ray, ultrasound, and other procedures (APCs for these studies are as much as twice current CPT rates) and are likely to use this advantage to increase their competition for market share in CT and MRI, thereby lowering their costs per examination.
• HMOs and other providers not heavily dependent on payors (eg, Kaiser Permanente). HMOs that self-insure may benefit by reductions in payments for examinations they send outside their facilities. Kaiser, for example, refers a limited number of patients to open-sided MRI units rather than absorbing the costs for this equipment and staffing internally.
• Radiologists paid under the Medicare professional component and not significantly dependent on other income from MRI or CT investment.

Professional components for MRI and CT are unaffected by either the DRA or the MPD. Thus, as imaging providers increase efficiency, some radiologists will have more examinations to read and higher incomes.

LIMITED IMPACT

Other providers of imaging will experience only a limited impact in the wake of the Deficit Reduction Act.

• Hospitals that recently converted their outpatient MRI and CT services to Independent Diagnostic Testing Facilities (IDTFs). Since they have had little time to enjoy the higher rates under MPFS, these institutions would be no worse off than when they were under HOPPS. Further, by switching back to their former status, they may be able to garner payments at preferable APC rates in other imaging areas (eg, radiography, ultrasound).
• Orthopedic clinics installing their own MRI systems.

The MRI examinations least affected by DRA and MPD are studies of the spine and extremities. Orthopedic clinics that have sufficient MRI volume to support internal MRI services are likely to encounter revenue reductions in the range of 10% to 20% compared to CPT rates. These are usually not large enough to reverse the financial advantage of in-house MRI services.

ENDANGERED SPECIES

The imaging providers that are likely to feel the full brunt of the reimbursement cuts include the following:

• Highly efficient imaging centers. Providers that do not have the opportunity to increase market share will see profits shrink substantially.
• Imaging centers that attempt to increase efficiency at the expense of quality. Image quality is the sine qua non of diagnostic medicine. Any perceived decrease in quality is likely to be met with referrer dissatisfaction and loss of market share.
• Providers with intermediate volume. Loss of revenue must be addressed through increasing examination volume and/or increasing efficiency. Some providers who have intermediate volumes are likely to have difficulty in both areas.

POSSIBLE EXTINCTION

Some providers of imaging will find it very difficult to keep their doors open as a result of the DRA and the MPD.

• Low-volume inefficient MRI providers. Independent imaging centers that conduct fewer than 2,000 examinations per year may be highly vulnerable to a revenue loss of 30% to 40%. Some with low-field systems may fall into this category since they have inherently reduced throughput efficiency due to lower signal to noise ratio and usually higher contrast usage than found at high-field sites.
• MRI providers that employ high rates of contrast usage. Contrast MRI examinations show the highest revenue decreases. Thus, MRI providers with patient distributions heavily skewed toward such studies will encounter much larger revenue losses than others. Facilities owned by neurology or neurosurgery groups may be especially at risk. This may also be true for low-field sites where double dose contrast is often needed to obtain the same enhancement as seen at high-field.
• New highly leveraged or otherwise capital-intensive providers. Centers that have recently gone into operation, especially those with premium MRI or CT units, may be highly vulnerable until they achieve breakeven patient volumes. Decreased revenue per examination will force such breakeven volumes to increase substantially.

OPERATING MARGIN AND BREAKEVEN

Figure 1. Breakeven procedure volumes are calculated for each of seven scenarios, assuming a one-third Medicare caseload and the status quo on reimbursement from other payors. (Click the image for a larger version.)

Costs, examination distributions, and other factors have been estimated for a number of possible situations. Annual operating margin (profit divided by revenue) and breakeven (examination volume needed to meet expenses) were calculated for each, assuming reimbursement under MPFS (CPT) and under HOPPS (APC). Parallel numbers were also determined for each, assuming local payor distribution is one third Medicare and two thirds Medicare plus 20% (more likely real world situations). Below are summaries. The details of calculation have been provided to Imaging Economics and are available from the author at .

Scenario No. 1. Independent imaging center with low-field open-sided MRI and 1,200 examinations/year in 2007.

Assumptions: Standard operation of 8 AM to 5 PM, Monday-Friday, 50 weeks per year. Contrast usage is estimated to be 50% of studies. Average 2007 CPT reimbursement is estimated to be $720.24, while that under DRA (HOPPS) would be $427.73 for the same examination distribution.

Results: An operating margin shift from 10% for MPFS to 49% for HOPPS and breakeven volume increasing from 1,057 to 1,991. Presuming only one third Medicare, the operating margin shifts from 20% for MPFS to 32% for HOPPS and breakeven volume increasing from 916 to 1,698. Such endeavors appear highly at risk for failure.

Scenario No. 2. Independent imaging center with low-field open-sided MRI and 2,000 examination volume.

Assumptions: Ditto above with 2,000 examinations per year.

Results: The breakeven volume difference noted above remains the same (1,057 vs 1,991), but operating margin shifts to 39% for MPFS to 0.3% for HOPPS. Presuming only one third Medicare, the operating margin shifts from 46% for MPFS to 12% for HOPPS and breakeven volume increasing from 916 to 1,698. This type of facility appears to be able to survive, but profits are likely to drop substantially.

Scenario No. 3. Independent imaging center with high-field MRI and 2,000 examinations/year.

Assumptions: Contrast usage is estimated to be 30% of studies. Standard distribution of examinations by anatomic region. Average 2007 CPT reimbursement is estimated to be $607.38 while that under DRA (HOPPS) would be $396.32 for the same examination distribution.

Results: An operating margin shift from 19% (MPFS) to 21% (HOPPS) and respective breakeven volumes of 1,518 and 2,588. Presuming only one third Medicare, the operating margin shifts from 28% for MPFS to 8% for HOPPS and breakeven volume increasing from 1,310 to 2,200. These facilities also appear at risk for failure.

Scenario No. 4. Independent imaging center with high-field MRI and 3,000 examinations/year.

Assumptions: Ditto above with 3,000 examinations per year and two technologists.

Results: An operating margin shift from 36% (MPFS) to 5% (HOPPS) and respective breakeven volumes of 1,651 and 2,814. Presuming only one third Medicare, the operating margin shifts from 42% for MPFS to 14% for HOPPS and breakeven volume increasing from 1,466 to 2,462.

Scenario No. 5. Hospital-based high-field MRI with 3,000 examinations/year.

Assumptions: Ditto above with higher general and administrative G&A costs reflecting higher overhead likely in hospitals.

Results: An operating margin shift from 35% (MPFS) to 3% (HOPPS) and respective breakeven volumes of 1,699 and 2,896. Presuming only one third Medicare, the operating margin shifts from 43% for MPFS to 15% for HOPPS and breakeven volume increasing from 1,425 to 2,392.

Scenario No. 6. Orthopedic clinic with high-field MRI with 3,000 examinations/year:

Assumptions: Contrast usage is estimated to be 5% of studies (mostly spines, knees, shoulders with no neuro cases). Average 2007 CPT reimbursement is estimated to be $488.99, while that under DRA (HOPPS) would be $357.05 for the same examination distribution. G&A expenses and film costs are reduced, reflecting in-house operation sharing established services and space and the use of a PACS.

Results: An operating margin shift from 33% (MPFS) to 10% (HOPPS) and respective breakeven volumes of 1,833 and 2,627. Presuming only one third Medicare, the operating margin shifts from 41% for MPFS to 20% for HOPPS and breakeven volume increasing from 1,595 to 2,272.

Scenario No. 7. Hospital-owned independent diagnostic testing facility CT with 5,000 examinations/year.

Assumptions: Somewhat higher overhead and lower efficiency than CT under private control. Four technologists. Please note this analysis does not consider revenue loss from the multiple procedure discount, which can only decrease operating margin and increase breakeven volume.

Results: An operating margin shift from -4% (MPFS) to -16% (HOPPS) and respective breakeven volumes of 5,282 and 6,292. Presuming only one third Medicare, the operating margin shifts from 8% for MPFS to -3% for HOPPS and breakeven volume increasing from 4,415 to 5,207.

Scenario No. 8. Independent imaging center CT with 5,000 examinations/year.

Assumptions: Three technologists. Higher marketing costs but lower overhead. Please note this analysis does not consider revenue loss from the multiple procedure discount, which can only decrease operating margin and increase breakeven volume.

Results: An operating margin shift from 3% (MPFS) to -8% (HOPPS) and respective breakeven volumes of 4,752 and 5,661. Presuming only one third Medicare, the operating margin shifts from 14% for MPFS to 4% for HOPPS and breakeven volume increasing from 3,973 to 4,685.

LIKELY CONSEQUENCES

The numbers associated with the scenarios described are sobering indeed and undoubtedly will be followed by a series of likely consequences.

1. Failure of some independent MRI and CT providers. Low volume and inefficient facilities will be most vulnerable to reduced revenue and most likely to close their doors. According to the 2004 MRI Benchmark Report from IMV International, 45% of the MRI units in the United States were sited in nonhospital locations. Of these, 32% had field strengths of 0.3T or less (the corresponding fraction for hospital-based MRI was 5%). These units are likely to have longer examination times, lower efficiency, and smaller annual examination volumes, potentially rendering them very susceptible to the loss of revenue posed by DRA.
2. A shift in MRI ownership away from the private sector and toward hospitals. According to the 2004 MRI and CT Benchmark Reports from IMV International, 48% of MRI procedures and 17% of CT examinations in the United States were conducted in a nonhospital setting. Since new facilities pose the greatest financial risk (no developed clientele), increases in required breakeven volume will lead to fewer independent MRI sites willing to take that gamble. Hospitals, largely unaffected by the change in reimbursement, will be in a stronger position to undertake new MRI ventures.
3. Delays in purchase and upgrades of imaging equipment. Lower provider profitability inevitably leads to reduced purchase activity in the imaging market. One should note that such delays are likely to occur across all types of diagnostic equipment and not just MRI and CT.
4. Reductions in average scanner capability. Longer delays between purchase of new equipment or upgrades will tend to delay new imaging capabilities in the field. Also, the lower initial cost for used equipment will render it an attractive option for those most affected by revenue loss.
5. Reduced investment in research and development by imaging companies. This will delay the development of new devices and methods. Fewer dollars will be allocated not only for R&D within the companies but also to clinical research sites.
6. Increases in scan efficiency at most surviving sites. Closures of the weakest competitors will allow more scans to become available. Sites that increase efficiency will benefit the most from this additional volume.
7. Greater competition for scan volumes. MRI and CT are high fixed-asset investments. Increased volume leads to lower cost per examination since variable costs are relatively low. Thus, sites are likely to seek additional scan volume to supplant losses of revenue per examination.
8. Increased credentialing and accreditation pressure by the payors. In response to increased competition for examination volume, payors are likely to demand more stringent requirements from their chosen sites. Accreditation, such as that offered by the American College of Radiology, is a likely beneficiary as it provides some level of discrimination for quality of service.
9. Greater interest in the used imaging equipment market. Lower capital cost translates into lower breakeven volume and more profit. Although overall life-cycle costs may not be lower for used equipment (eg, shorter life cycle, less warranty, expenses associated with install and training), their reduced initial cost can be an attractive option to new purchase.
10. Possible changes to traditional scanning policies. Some sites may opt to bring the patient back on subsequent days in order to avoid the multiple procedure discount. For trauma, some facilities may not scan everything that should be scanned. Such changes could decrease site efficiency and exacerbate the patient convenience factor.

SUMMARY

Examination of these data and scenarios clearly shows that MRI is expected to take a much greater hit than CT. Typical operating margin shifts for MRI are 30% to 40%, while those for CT are less than half of this range. Any independent MRI provider now yielding an operating margin of less than 30% must seriously consider the possibility of loss and bankruptcy unless they can find a way to substantially increase volume and/or reduce costs. Those with low volume, poor efficiency, or high contrast usage are especially at risk.

It remains unexplained why Congress, with virtually no outside consultation or input, has elected to burden the diagnostic imaging sector with such drastic revenue reductions. Independent imaging centers are, in general, more efficient and certainly more convenient for the outpatient than hospital-based units. On average, one in every 10 Americans will get an MRI scan this year, and although overutilization is always possible, no clear evidence of such for MRI has been established. It is also interesting to note that per the 2004 MRI Benchmark Report from IMV International, of all the states it is Washington, DC, that has the highest rate of MRI scans per 1,000 population, more than twice the United States average. Perhaps "inside the Beltway myopia" is a real effect.

Robert A. Bell, PhD, is president of RA Bell and Associates, an independent consulting firm specializing in the technical and operational aspects of advanced imaging modalities. He welcomes questions and comments and can be contacted at (858) 759-0150; .