Diversified Radiology: Pressing the Hospital Advantage

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Diversified Radiology of Colorado, PC, has cast a long shadow in Denver since radiologist Kenneth Allen, MD, founded the practice in 1927. The group underwent a major growth period in the 1990s, when it merged with Metropolitan Radiology and Western Radiology, and today, the 60-radiologist practice serves 11 hospitals and has an ownership stake in eight outpatient imaging facilities, including one in the Fort Collins area. Practice CEO Christopher “Kip” McMillan began his career writing software for a medical billing company, subsequently joined DivRad as director of billing services, and took the helm as CEO in 2001. He is active in the Radiology Business Management Association and serves on the board as Western director. He agreed to discuss with ImagingBiz.com the leadership challenges and benefits associated with large practices.

ImagingBiz.com: For a radiology group as large as DivRad, what is the ideal balance between outpatient/office-based activities and a hospital-based practice?

McMillan: Probably 50-50. We’ve always stated that goal, but we’re probably at 70-30, hospital-based total volumes and professional clinical volumes. Technical revenue from owning imaging centers is an interesting question in this day and age. With the Deficit Reduction Act (DRA), that is not the clear profit-margin revenue stream it once was, and there are times when it appears that we are going to fund every government project through imaging-center revenue reductions.

We, as a group, refer to that stream of revenue as passive revenue, referring to the fact that a doctor doesn’t have to read a study to earn it. We like the idea of a passive revenue stream, but we are a bit risk averse, on purpose, in how we invest our monies to create passive revenues. We are looking for stable return on that type of investment, and we are keeping a wary eye towards expanding into any additional outpatient technical revenue opportunities because of all of the changes that are going on. I think that’s true with most practices: Everyone is trying to see how this is going to shake out.

ImagingBiz.com: The entrepreneurial segment of the market seems to be stepping up its transactional activity in that arena.

McMillan: In some areas, the large groups got in early, and they tend to control the market. I think they are in a pretty good position. For other groups—and I think we fall into this category—that are in a marketplace that was already highly competitive for outpatient, the opportunities are limited. For outpatient to be a meaningful part of our business, it has to generate a significant amount of revenue, because once you divide profits across 60 docs, they start to question if that is the best route to go. What would seem like an insignificant profit margin to us would be considerable money to a single entrepreneur. That is why they are able to compete on narrower margins than a large group would want to.

ImagingBiz.com: What is the management style and culture of the organization that you have created within the administrative team?

McMillan: Business casual: We run fast, jump high; that’s our management style—loose hand on the reins. We are very good at defining roles and responsibilities. I hire very good people and then leave them alone to do the job. We check in regularly through formal meetings on performance toward specific goals, but I don’t do a lot of micromanagement. We are pretty strongly objective-based management. I think there are real challenges for large groups with a strong administrative arm in remembering who’s the tail and who’s the dog. We’re pretty good about that. It is not lost on us that this is a medical practice, and the shareholders who generate the revenue do own and decide the direction of the company. We try to remember our role as information providers, in making sure we define the challenges and the options available to the group, and ensuring that the physicians are plugged in and knowledgeable in deciding the direction of the organization. That’s trick one: Make sure you are honoring that. Then, make sure you are following through on your role in accomplishing those goals and report back successes toward, and challenges of, those objectives.

ImagingBiz: What will be the key success factors for large radiology groups in the next few years?

McMillan: For large radiology groups, it is going to be a high level of involvement in communications with the shareholders. It would be interesting to run the statistics,