Medical imaging reeled from a potentially devastating one-two punch this year. For much of 2008, the industry struggled to shrug off the effects of a telegraphed blow in the form of the Deficit Reduction Act (DRA) of 2005. The DRA's initial reimbursement cuts left many imaging operators unable to achieve financing or affordable credit lines. With nowhere to turn, 12 to 14 percent of outpatient centers folded or were sold in 2007-08.¹Other centers conserved their energies and waited for a reversal of fortune-only to be blindsided this fall by a plummeting economy, which ensured additional job cuts and reductions in state and local health programs in 2009.

Hunkering down was certainly a popular stance for many outpatient centers this year, as they struggled to curtail spending just to remain standing. A few centers, however, did more than simply stay on their feet in '08-they trimmed fat, launched aggressive expansion campaigns and enjoyed enviable levels of success.

Success stories

Among those who thrived, Alliance Imaging of Newport Beach, Calif., a national provider of diagnostic imaging services, will post a $125 million after-tax profit this year despite a DRA drubbing and $5-per-gallon diesel fuel, which its mobile units consume. Paul Viviano, Alliance president and CEO, attributes his company's success to a strong executive team that anticipated the need to cut $14 million in expenditures without sacrificing customer care or service. The organization also built 20 new sites using sound criteria and strict due diligence to help ensure success. Furthermore, Alliance found oncology a good horizontal growth strategy to add to its imaging business, and now owns 18 oncology centers. Demonstrating a similarly swift reaction to the challenges of 2008, Radiology Associates of Sacramento (Calif.) acquired three competitors and expanded its women's imaging business.

With successes like these in turbulent times, why did so many operators still flounder and fail? The answer lies in factors such as business strategy, executive bench strength, cash liquidity, leverage and efficiency of billing and customer service. While important, economies of scale aren't as crucial as these functions. Also vital: sound business development initiatives. Amazingly, the health care industry often operates not as a business, but rather as a service that aims to break even. Five years ago, a company could post strong earnings despite poor business skills. Now that reimbursements have plummeted, companies live from one payroll to the next. In light of this, many industry consultants and analysts have deemed 2007 and 2008 an over-correction in aggressive expansion of independent diagnostic testing facilities (IDTFs), where nonradiologist physicians offer imaging in their offices. While that assessment may be true, it doesn't negate the fact that only healthy, well-run imaging companies can grow and prosper in this tough market.

Companies that blended sound business practices with cost controls without compromising service likely used the following tactics in '08: controlling costs, leveraging purchasing power, preserving non-Medicare reimbursement rates, adding break-even modalities, catering to customers, partnering, smart purchasing and refinancing (see box for specifics).

What lies ahead

In 2009, we can expect outpatient centers to operate differently. The health care market will feel the effects of lost jobs and financial depression come January. Fortunately, many operators began employing sound business skills this year; they'll need to hone those skills in '09. Centers also will need to function more like small businesses and less like heavy-hitter entrepreneurs. They should seek to increase scan volume using strong incentives to promote existing products and services.

But this also means that in 2009, operators must emerge from their shells to address front- and back-end billing and collections practices. I'm amazed at how much is being left on the table for both small and large companies. The larger the entities, the more money they seem to leave behind as a percentage of bad debt. Shoring up old legacy systems because of a CFO's comfort level is the most compelling and damaging reason why millions of dollars remain on the table. Upgrading radiology and billing systems is a must to maximize profits. However painful it may be to think about purchasing or changing systems that could momentarily disrupt cash flow, operators must realize that 2010 will be the year that outdated systems finally catch up with their businesses. To that end, smart operators will continue to invest in better systems or consider outsourcing to proven entities to reduce bad debt.

Next, opportunity is being created again with stagnant industry growth, closures and consolidations coupled with increased utilization. In the last three years, outpatient center operators grew by only 13 percent, compared with 47.6 percent in the previous three-year period.¹Most operators stubbornly stayed the course for the right reasons, but ultimately, this intractable stance could lead to disaster. Hospital-owned, joint-venture-owned outpatient centers or large radiology groups/companies are positioned to succeed only if they strike a balance between growth and continual focus on core strength.

However, many centers didn't change their course because the economics of today's medical imaging industry don't measure up to the economics of yore, and they're unsure how to react. Some already operate in cash-poor positions or in saturated markets that make growth difficult.

Be prepared: By the end of 2009, operators large and small will face radiology benefit and network management companies that require American College of Radiology (ACR) accreditation, onsite radiologists, extended hours and the provision of at least four to five modalities.

Encouraging signs

The good news: Industry analysts such as 3d Health Inc. predict that almost every modality will see an increase over the next five years, ranging from 11 percent for mammography to 76 percent for CT. New applications will drive this demand, and payers will become more organized about controlling this utilization.

This is where RIS and billing system reporting capabilities will become crucial-not only to justify payment for services but also to help centers remain preferred providers. To further that goal, companies will require these reporting capabilities to provide pricing transparency to customers as high-deductable health plans proliferate.

Next year, attention will focus on new and existing service lines such as women's health, pediatric cardiology, gastroenterology and oncology-specifically, modalities such as 4-D ultrasound, 3T MRI and its application, breast MRI and functional imaging. Centers began moving toward many of these services in 2008, and we should see dramatic changes on this front as existing facilities add new equipment. Also, operators may expand into other undeveloped niche areas within their geographic areas by opening new facilities or making acquisitions to identify services that are complimentary to their current ones, particularly in nonsaturated markets.

Vertical integration of services also will play a larger part in next year's imaging operations. Radiology businesses that offer lab services to their patients for a variety of blood workup studies are growth areas. Acquiring or partnering with organizations to add different lines of business that input volume into current business may also be a strong trend in 2009.

Additionally, horizontal integration may take hold. Most likely, acquiring organizations with like products and services to access specialized skills within the community and gain more payer clout will be more prominent. More hospital and radiology groups, for instance, are entering into joint venture projects with a focus on children's care services and blending imaging/oncology.

Center operators also will strive to diversify their portfolios and acquire organizations from different industries to insulate assets and protect the business. What's more, financial and lending markets will reopen credit lines, albeit with stringent criteria, and feasibility studies will be the key to many business plans.

Positive reinforcement

Overall, 2009 should force operators to become more creative in their approaches to thriving in this variable landscape and learn the value of good business practices and hard-core optimism. Most people are cynical about applying optimism in the business world; some even say it's wrong to think it can make a difference. But studies show that business managers and physicians with higher levels of optimism are more accurate and careful in decision-making tasks and in diagnoses.²Staying emotionally positive during these turbulent times will be your center's greatest underlining resource.

References

1. 3d Health Inc. (Feb. 25, 2008). Outpatient outlook 2008 (The future of healthcare): Outpatient imaging: The next five years.

2. Staw, B., & Barsdale, S. (1993). Affect and managerial performance: A test of sadder-but-wiser vs. happier-and-smarter hypothesis. Administrative Science Quarterly, 38(2), 304-31.

Steven R. Renard, MBA, CHE, is chairman, president and CEO of Diagnostic Radiology Services, a Roseville, Calif.-based provider of consulting services for the diagnostic imaging and radiology industries.

How They Did It

8 Tactics for Imaging Center Success in Turbulent Times

1. Controlling costs. Operators analyzed business operations and found more efficient ways to run the business, closely examining labor lines, refinancing options, and methods of decreasing bad debt and increasing collections.

2. Leveraging purchasing power. Operators developed master supply lists and streamlined vendors via requests for proposals (RFPs) to attain better purchasing power; other industries have used such practices for decades.

3. Preserving non-Medicare reimbursement rates. By proactively working with payers to develop competitive pricing, operators did what they could to preserve reimbursement, including working with radiology business management (RBM) companies.

4. Adding break-even modalities. Centers looked for ways to expand without high overhead. One way was to incorporate additional modalities that would enhance bottom-line performance of existing CT and MRI services. Plain film and mammography have made one-stop shops for payers and patients much more attractive, driving additional MRI, positron emission tomography (PET) and CT business.

5. Catering to customers. By sprucing up waiting areas and front offices, center operators are adapting to customer-centric views of how their health care facilities should look and feel. New centers are being designed to appeal to women, who are more likely than men to share their experiences after visiting a center.

6. Entering partnerships. Some centers in highly competitive markets have benefited from joint venturing with other radiology groups and hospitals. In 2008, some centers sold their practices to larger national entities with better economies of scale that could secure larger managed care contracts and attain financial stability.

7. Smart purchasing. Realizing that to make some, you've got to spend some, centers increasingly invested in PACS, radiology information systems (RIS) and Web portals to enhance efficiency, especially in areas pertaining to patient authorization.

8. Refinancing. Centers lucky enough to refinance debt by slashing thousands off monthly payments did so earlier this year before commercial lending institutions slammed the door on many providers.

-Steven R. Renard, MBA, CHE