Radiology Alignment: Common Structures and the Value of Radiologists’ Services
Whether given incentives by the continued cuts in reimbursement levels or by the desire to monetize an operating asset, radiologists in the market continue to sell their imaging centers to buyers of many kinds—for-profit imaging-center owner/operators, for-profit hospitals/health systems, and not-for-profit hospitals/health systems, among others. Although the sale of the imaging center transfers all (or a portion of) the ownership to the buyer, there are still opportunities for radiologists to remain involved in the business. Specifically, many radiologists continue to provide exam interpretations and/or specific management services.
The relationship between the newly purchased imaging center and the radiologist is generally consummated through a professional-services agreement. Compensation paid to the radiologist often stands out as one of the most significant factors of any professional-services agreement. To mitigate regulatory-compliance risk (involving the federal Stark law; anti-kickback statutes; or, for organizations exempt from federal tax, IRS regulations) and to validate the fairness of the compensation terms, the services of an independent valuation company can be procured to assess whether the compensation terms of a professional-services agreement are consistent with fair market value.
Freestanding imaging centers typically bill payors on a global basis. The job of the valuator is to determine the portion of the global fee that should be paid to the radiologist for the interpretation services rendered. Many valuators will use a top-down approach to determine this interpretation (professional) fee.
In a top-down approach, the valuator separates the professional and technical components of the imaging center’s net revenues using published CMS reimbursement data. The professional-component calculations are applied to the collections from all imaging codes, regardless of payor, to determine the professional fee payable to the radiologist. Professional-component calculations, in this sense, refer to the percentage of the global fee allocated to professional services.
For example (based on 2012 reimbursement rates for Dallas, Texas), CPT® code 70250, for skull radiography, had nonfacility professional reimbursement of $11.99 and global reimbursement of $38.23. Therefore, the professional-component calculation for this code would be 31.3%. The actual fee to be included in a professional-services agreement is often stated as a percentage of global net revenues, a fixed annual payment, or a fixed fee per exam.
To apply the top-down approach accurately, it is imperative for the valuator to consider two factors. The first is current Medicare-reimbursement: Assuming that CMS technical fees decline for an imaging center, all things being equal, professional fees will increase, relative to global revenues. By using noncurrent reimbursement data, a valuator might inaccurately estimate the appropriate professional fee.
The second factor is any projected shift in imaging volumes: As a percentage of global revenues, MRI exams generally have a professional fee of approximately 20%, while radiography has a professional fee of approximately 25% (and sometimes more). If the estimation of a professional fee is based on historical volumes and no consideration is given to projected changes in the underlying center’s exam mix, the professional fee could be materially affected.
Certain adjustments also might need to be applied to the professional fee, depending on the specific professional-services agreement. For example, if an imaging center covers certain costs that benefit the radiologist (such as billing/collections costs), an adjustment to the professional fee might be required. In this example, the imaging center might bear the cost of billing/collections services that the radiologist would otherwise have to bear. Therefore, a reduction in the professional fee equal to the cost of the provided billing/collections services might be warranted.
Another common practice is the creation of a management arrangement between the radiologist and the newly purchased imaging center. In many cases, radiologists are involved in the daily operations and management of the imaging center prior to the transaction. If the acquirer desires to continue to engage the radiologists (through a professional-services agreement) to perform management duties, then a management fee might be reasonable.
Radiologists typically provide clinical oversight or management under management-services agreements. It is then appropriate to consider physician-executive compensation, in lieu of the typical management fees for nonphysician management services. To be subject to physician-executive compensation rates, the services must require a physician specialized in radiology. In this instance, the management fee might be calculated as an annual stipend by multiplying the hourly rate (at fair market value) for physician-executive work by estimated annual management (or clinical management/oversight) hours.
It is important to note that the market’s observed range of compensation (3% to 7% of net revenues) for imaging-center management services is generally not applicable to management services that involve clinical responsibilities. This fee range is for typical management services, such as human resources, financial and accounting oversight, IT oversight, and the like, which are usually performed by nonphysician personnel.
If radiologists perform typical management services, then typical management fees are appropriate. After the transaction, it is more common for the acquirer to provide some or all typical management services. If the physician provides a portion of the typical management services, then certain adjustments should be made to the market rate, so that the imaging center is not paying for duplicate services.
Whether through interpretation or management services, there are opportunities for radiologists to remain involved in an imaging center, even after its sale. Determining a reasonable fee, at fair market value, for services rendered is imperative—not only for regulatory compliance, but also for the sustainability of the relationship between the radiologist and the imaging center.
Jonathan Helm, CVA, is a senior manager in the Professional Service Agreements Division of VMG Health, a national health-care transaction and advisory company. Alexandra Higgins is a senior analyst in the division. This article is not to be construed as legal advice.