Image conscious: The growing use of doctor-owned scanning centers

The river of revenue flowing out of physician practices into the coffers of diagnostic imaging centers is prompting some groups to try to build a dam by taking matters into their own hands.

Physician groups, feeling the pinch of declining reimbursements, are increasingly opening their own diagnostic imaging centers so they can hold on to revenue that previously left the practice with patients sent elsewhere for expensive scans and studies.

"It's just addressing the issues of the business of medicine, trying to make ends meet. [Opening our own imaging center] offers us an opportunity to capture that revenue that we were sending somewhere else," said Joseph Cincotta, MD, whose multispecialty group in Lemoyne, Pa., opened an imaging center nearly seven years ago.

Experts say many of these ventures are profitable, though they are not without risk.

The financial commitment necessary to launch a diagnostic imaging center and maintain its equipment can be daunting: into the millions of dollars. Additionally, the legal implications of physicians owning such facilities must be carefully considered to stay clear of laws prohibiting self-referral. And recent reports from the Center for Studying Health System Change and the BlueCross BlueShield Assn. have suggested that insurers are questioning the high costs of imaging services and increasingly taking steps to restrict coverage of them.

But more and more physicians appear to be willing to take on the risks in hopes of benefiting from added revenue as well as from increased access and convenience for themselves and their patients. And with demand for diagnostic imaging services increasing as technology advances, it appears unlikely that the trend will slow any time soon.

"Imaging is proliferating, and forecasts are that it is expected to continue," said Douglas Smith, a partner with Barrington Lakes (Ill.) Group Inc., a radiology consulting and management firm. "Clearly, over the past five years there has been a steady increase of the utilization of imaging services in the hospital setting, outpatient setting and in the physician office."

Not just for radiologists

Though the number of diagnostic imaging centers opened each year is not available, numbers certainly show that imaging itself is a busier field. The American College of Radiology estimates that between 1998 and 2001, procedures involving MRIs grew about 16% while use of CTs, sonography, nuclear medicine and interventional radiology grew between 7% and 15%.

And looking at just one type of service in the burgeoning field of cardiac imaging, the American Society of Nuclear Cardiology estimates that about 5 million cardiac nuclear imaging procedures are now performed annually, up from about 3 million five years ago.

Although imaging is traditionally the arena of radiologists, physicians of all specialties are now opening their own imaging centers. Some might offer multiple services, while others feature only x-rays. For Dr. Cincotta and his colleagues in Heritage Medical Group, opening a multimodality imaging center made sense when the group came together in 1998 to form a 52-physician multispecialty practice.

"As part of that startup, one of the underlying principles was asking ourselves: What can we do together that we can't do alone? And how can we capture some of the revenue that we generate that is going other places?" Dr. Cincotta said.

Startup costs were significant, with the price of the equipment and facility build out alone roughly $1.7 million. The group also paid a consultant to help create a business plan and structure the ownership of the center, and paid to lease space for the center.

Housed in a building with other medical services, the center offers x-rays, mammography, fluoroscopy, bone density scans, ultrasound, CT scans and MRI services. The group contracts with a radiology group to read the studies.

Without MRI, the center was bringing in about $2.5 million in gross revenue and $500,000 in profit annually. Group executives planned to spend about $1 million adding MRI services, and expected profits to jump accordingly.

Dr. Cincotta said if he had to do it over again, he might tweak what services are offered. For example, he said fluoroscopy has proven to be highly labor intensive and low on profit margin. But overall, he said, it has been a positive business venture for the group, it has served patients as a convenience and it has helped physicians in the group have more control over scheduling.

Other physicians choose to share the financial risks of opening an imaging center with another entity such as a hospital, an imaging development company or another physician group.

Historically, Smith said, these joint ventures involved partnerships between hospitals and radiologists, who got involved because they were considered nonreferring physicians, so it was easier for them to allay legal concerns about self-referrals.

But in the last few years, Smith said, the business has broadened to include more competition from other physicians and business groups.

"In some sectors you'll see that it's competitive as can be. Where the hospital and radiologists haven't figured it out yet, somebody will," he said. "Market demand will be met."

Three-way joint ventures, involving a hospital, radiology group and a specialty physician group such as cardiologists or orthopedists, are now surfacing as well. "Typically they've used each other as competitors. Now they are viewing each other as collaborators and partners," Smith said.

Ken Davis, a health care attorney with Katten, Muchin, Zavis & Rosenman in Chicago, said he had seen a new model of joint ventures recently involving medical practices that share the same office building. He has seen those groups come together to build a center in their shared space.

"Under this model, no single group practice has to be financially at risk for an entire magnet [or other equipment]. Instead, they are only financially at risk for their anticipated piece of the capacity of that imaging center," Davis said.

For all the different models, Davis said, a key to success is ensuring that there will be enough patient volume to warrant making such a significant capital investment.

The financial risks are great. Groups might have to tie their financial success to the success of the imaging center. And physicians in a group might have to give personal guarantees on loans used to finance the project, meaning their personal wealth would be jeopardized if the center fails.

"And there are plenty of these ventures that fail; it's not a dead bank certainty," Davis said.

There is also some legal concern with physician development of imaging centers because of the federal Stark law, which prohibits physicians from referring Medicare and Medicaid patients to entities in which they have a financial interest.

But Davis said Stark has an exception that allows referring physicians to open imaging centers under certain conditions. The so-called in-office ancillary services exception allows physicians in a group practice to refer to the practice for ancillary services such as imaging. The exception is only available for group practices, so physicians who can't meet that criterion could run afoul of Stark.

Davis said other laws, including the federal anti-kickback statute and state certificate-of-need laws, also should be weighed by physicians who are planning a diagnostic imaging center. But with a well-structured business plan and the proper legal advice, he said, the centers often can be launched in a legally sound way.

The capital required to start a diagnostic imaging center is substantial. A small operation could cost $500,000 to $1 million to build and equip while a large one could cost $5 million to $8 million, said Robert Maier, president and CEO of Regents Health Resources, a Brentwood, Tenn.-based firm that does consulting and development work in medical imaging.

Fueling the high capital costs are the equipment itself, the shields that must be built into the facility to protect against the powerful equipment, and the need for upgrades and new equipment purchases as technology advances.

"There is a lot of capital required both to start and maintain this business. So that has to be well thought out in the beginning," Maier said. "It's not a matter of turning on the cash spigot and suddenly the money is there."

Check contracts, competition

Maier recommends that physicians research their potential contracts with payers before starting a diagnostic imaging center. He said more and more payers are "looking askance" at this type of development because they are concerned about the potential for abuse by referring physicians.

Other experts warn that starting a diagnostic imaging center could chill a physician group's relationship with a local hospital by creating competition between the two.

"The problem is that as these ancillary services grow in terms of a trend, the economic pressures on the hospital become greater," said Steven Williams, senior vice president of marketing and sales for Irving, Texas-based MedSynergies, which provides financial and IT consulting services to physicians. "The economic balance fails here, and hospitals are therefore incentivized to try to capture or recapture the revenue they have lost."

And finally, experts say launching a new venture will require some patience, with profits likely not surfacing until after the first year.

John A. Tata, MD, a radiologist and consultant in Queensbury, N.Y., who has helped develop three imaging centers, said his group learned to be patient when it opened a center in a new market.

"Even though we had some working relationships with some physicians in that community, for the most part we were a relatively new commodity, so we really had to prove ourselves," Dr. Tata said.

"It takes a while to grow and mature."