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, but we have a pretty good balance in this group between newer and long-term shareholders, and I think that benefits us greatly. We’ve got a lot of physicians with a lot of experience, and they’ve seen a lot of changes. On the other hand, we’ve got enough newer shareholders so that we aren’t in a rut, or holding fast to something that’s always worked for us, and unwilling to deal with the changes that are necessary. Communications, awareness, and being involved are key, making sure the shareholders are involved and aware that the challenges are going to be huge in the next few years. Being mobile, being able to chart a course, but being flexible and able to make changes relatively quickly will also be important. The bigger the group, the more difficult that is to do. Our name is not accidental: Diversified Radiology. We like to keep a blend of hospital-based business and clinically based business, and some ownership and some joint ventures, so that no single change in the market is going to impact our financial situation detrimentally. It is also going to be important to avoid the no-win situation and to have a lot of avenues to pursue. ImagingBiz.com: Declining reimbursement rates, increased competition, and self-referral have created a perfect storm for radiology groups in most markets. How have these market forces affected DivRad, and how have you led the organization through the dynamics of this change? McMillan: We became very concerned about Medicare’s approach to the health care crisis, which I think we all agree is to reduce the amount we pay physicians. I’m pretty certain it’s not the right answer, but it looks like we are going to be doing that for a while. We are fortunate that, comparatively, we don’t have a high Medicare-payor mix, and we’ve done a couple of things in preparation for the DRA. We converted all of our commercial contracts; they do not refer to a percentage of Medicare. All of our commercial contracts state a straight conversion factor off of the RVU scale. Very few of our large commercial carriers here in Denver attempted to piggyback on the decreases through budget neutrality, anyway. There was a lot of preparation in making sure that didn’t happen, in that we disassociated those commercial contracts from a Medicare rate. That was step one. Increased competition is not so bad in Denver. Colorado is not a certificate-of-need state, and that shows in the number of entrepreneurial players we have in town, but in our market, that has shaken out to a handful of players. With respect to increased competition for hospitals, well, there are days when you are welcome to it. Staffing hospitals has become more and more difficult, with the historical demand for level of service and the acuity of the studies. It is much more difficult to earn a margin reading in a hospital than it is in an outpatient environment, but it does benefit big groups. If you are at that many hospitals, it gives you some strategic opportunities to be involved in the outpatient world just because you are in the hospital environment. I think there are appropriate self-referral environments. If a physician truly has a plain-film camera or something in a semi-remote or rural location for patient convenience, I don’t consider that self-referral. However, I think we all believe there are instances in which self-referral is a financial-based decision on the part of the referrers, but when we talk to our partners in the insurance world, we stress that we are very comfortable competing on appropriateness and quality of care. We found, over the past several years, that trying to argue whether or not self-referral is financially motivated by referrers is a pretty weak position. Arguing quality of care, it is pretty easy, in a 3-month period, to perform outcome-based volumes per DRG measurements. Five commercial payors in town make up 75% of the commercial insurance volume. Sitting down with those individuals, we can certainly have enough of the database that we can tell you our outcomes on referrals for a specific study. We will participate with them in data gathering, and we will force the issue that way. The truth is, they already know the answer. I think most of the insurance carriers are looking for a defensible, nonconfrontational way of talking to the self-referral situation, so we speak their language: It’s costing you money to let this continue, and we are going to help you find a way to address this that is as nonconfrontational as we can make it. The fact that the UPS guy has had three MRIs in the last week seems ridiculous to us, but we can look at the data together. That’s how we try to handle this, but it is an ongoing battle. In our most recent contract negotiations with the carriers, we’ve talked a lot about hospital-based acuity and why our rates were going to have to go up: we are providing the outpatient service, but the volume did not go to us, so there was no way for us to balance the impact for the acuity of the hospital-based service. We’re trying to convince them of this, and if not, they’re just going to have to pay us more for what we’re doing in the hospitals. ImagingBiz.com: In what ways do you rely on your leadership team to build strategic growth programs? McMillan: First, we have a very good group of physicians. The vast majority of their efforts are focused toward medical care; however, they are more than willing to participate in leadership, a big part of which is strategic planning. It starts at the very top with the governance level of the practice. We do have annual, off-site, weekend-long strategic planning meetings every year. I think we do a good job every year at focusing on strategic issues and not devolving into tactical crises management. Every year, we come up with a strategic plan, and we try to keep it reasonable: three or four significant strategic goals for the year and tasks toward those goals that will be measured. We spend a lot of time at our regular leadership meetings reviewing where we are toward those goals. ImagingBiz.com: How do you keep your physician partners current on issues that face their practice? McMillan: When you start out as a small group and everyone gets together once a month, you participate in every decision the group makes, down to how-many-ply toilet paper to use in the billing office. Then you get into a large group, and it is impossible to do that. You really struggle against shareholders (who have always been plugged in) getting a sense of disenfranchisement, with decisions being made in the group that they not only did not participate in, but may not even have been aware of. We found it is of critical importance of keep the doctors current on the issues. We tried a number of things, as there is no one method that serves the needs of all of the doctors. All of our meetings are open: committee meetings, board meetings, finance committee, and operational committee; all meetings are open, and any doctor who wants to attend is encouraged to attend. We do a pretty good job of keeping people aware of when the meetings are and what the agenda will be. We send out reminders. Along with the Web site, we have an intranet site, with ongoing, updated information on a whole host of topics that is always available for physicians to look at. For the executive committee, at the end of every week, the last thing I do before I leave is send a one- or two-page update out on everything that’s going on: ongoing projects such as a hospital contract or an insurance company negotiation. I think one of the challenges for the leadership committee is that the docs are going to them with questions, so that weekly update gives them the ability to respond. It supports them in their role of keeping the docs plugged in, and that has a real benefit. That’s probably one of those things we do that works better or has a greater impact than all of the formal reports. There are Fridays when you don’t even want to think about the week, let alone write it all out, but it keeps you honest. If, at the end of the week, you have to report the progress you made on specific issues, you are less likely to say, “I’ll do that on Monday.” It serves its purpose to keep me moving on some of the projects I might be more likely to let lapse. We do an annual report every year. It shows what we’ve done with income and it lays out the strategies and goals for next year. We do a lot of communications throughout the year by email. ImagingBiz.com: Do you see an emergence of a national radiology provider group on the horizon? McMillan: I don’t think so. Somebody asked me years ago about the possibility of there being a handful of nationally based megagroups in the future. The longer I do it, and particularly with us having 11 hospitals, I think it is delivering medical care and having physicians tied to service at a hospital that is critically important, and I don’t see anything changing that. I would certainly hope radiologists are always based in a hospital, providing that involvement in the treatment of the patient, and it doesn’t go to the lowest bidder for the interpretation of studies. That would be criminal and probably malpractice at some level. Having said that, when you look at the application of NightHawk-style services (and sometimes that care is better, or at least as good), I think there is probably an application for large groups providing after-hours coverage. Having been here and doubled in size since I joined the group in 2000, when a group becomes geographically diverse, it’s hard for the group to hold together in a strategic vision. From a pure business perspective, it doesn’t seem like that ought to be a problem, but the unique thing about our business is the fact that the owners are the ones providing the product, so given the one man, one vote with which professional corporations tend to approach medical care, you can’t get that many decision makers in a room and have it be effective. If there are going to be national groups, the old structure of the shareholders—one man, one vote—something about that’s going to have to change. If there is going to be a national group on the horizon, I think it will be tied to national health care reforms. Something is going to happen there in the future, but depending on how we in this country deal with that, I think, in response to that model, we’ll see changes in how radiology is going to be provided.