The Elements of a Feasibility Study
The number of freestanding diagnostic imaging centers opening in the United States has slowed considerably as markets have become increasingly saturated and reimbursement has declined. That’s why, more than ever, it is important to consider carefully the feasibility of opening a new center. One way to weigh the potential risks and benefits—and to plan your center’s technology investments to maximize its potential—is to use a professionally prepared feasibility study.
"The relative importance of doing your homework has increased substantially. Before you embark upon a project, you really have to understand whether you have a shot at making it work." — Tim Stampp, MBA, Medical Imaging Specialists LLC, Metairie, LaElsa Ozuna-Richards, MSA, CMPE, founder and president of REA Healthcare Strategies, Reno, Nev, agrees. “Based on my experience, when those practices that are opening a new imaging facility explore a market and define the needs of that market, they’re much more prepared to make capital acquisition decisions and plan service delivery,” she says. “A feasibility study identifies those factors for you.” Studies generally take three to six weeks to complete, and they leverage data on everything from competitors’ market shares to referring physicians’ needs and opinions in order to paint a clear picture of the marketplace’s level of demand for services and technology. Stampp says that of the clients for whom he’s performed feasibility studies in the past, more than 50% have chosen not to open a new center based on the results of their assessments. Ozuna-Richards reports similar results from her clients. “We have customers who just opened up an imaging center, and they’re unable to get all the referrals that they had anticipated,” she says. “Had they done a feasibility study prior to entering that market, they would have understood the market much better.” The Capital Issue A crucial component of the problem is the high level of capital outlay necessary for investing in advanced imaging technology. “Based on what the data you’ve assembled tell you, you’ll begin to understand what kind of service you need to offer from both a technology and a service-delivery standpoint,” Stampp says. “If there are already two 3T MRIs in town, and 3T has become the expectation in the market, do you think you’ll be able to compete with a 1.5T system? Your cost of entry is going to go up significantly, and your capture-rate requirement for market share is going to go up significantly.” Both Stampp and Ozuna-Richards use a referring-physician survey tool to pinpoint the needs of the market’s referral sources accurately. “I identify all the referral sources within a three- to five-mile radius, for example,” Ozuna-Richards says. “We can also do a comparison of different markets, and the client can choose a market based on that.” She adds that because clients must invest so much in equipment, doing more to evaluate the market can be thought of as insurance. Stampp also advises an approach to market-volume assessment based on hard, quantifiable data. To determine demand by modality, multiply current modality utilization rates by your market area’s population. What you’re hoping to see, according to Stampp, is a little room for improvement. “You need to understand what the service levels are in the marketplace,” he says. “Does it take two weeks to get the next available mammography appointment, or five days for the next available MRI?” Ozuna-Richards emphasizes the importance of a clear understanding of brand health—both yours and that of your competitors. “Right now, there’s so much competition in the playing field that if clients see a decline in referrals, they’re immediately calling us to see why,” she says. “That’s why brand health is an important consideration. What does the current market see the other brands as lacking or supplying?” Stampp concurs, “You need to know the referring physicians’ perception of the competition.” The Intangibles Intangible factors must also be taken into account when assessing the potential profitability of a new business. In a referrals-based market, these issues can make or break a new freestanding imaging center. “The toughest part is understanding the relationships between referring physicians and existing providers,” Stampp says. “You’ve really got to spend time on understanding that.” Existing relationships can be complicated by the presence of PHOs and independent practice associations. “You really want to be sure to cover your bases,” Ozuna-Richards says. “Let’s say you want to put a PET scanner in, but when you call all of the referring sources, you find they’re already getting their PET services from a competitor and can’t change their referrals. That’s key information for you to have.” The possibility of physician self-referral in the market is an equally worrisome proposition. “Do all the orthopedic offices in town have their own magnets?” Stampp asks. “Does a large primary care group have in-office imaging? If thirty of the fifty primary care physicians in town are all part of the same practice and they have imaging in their offices, you need to know that.” These considerations apply to hospitals as much as to practices, Ozuna-Richards notes. She has done several feasibility studies for large health networks hoping to expand their outpatient services, and the results have been revealing. “In the case of three hospital systems, we did the study to determine the service-offering demands and brand health of the systems because they wanted to enter the ancillary-care market,” she says. “In each case, they found it more critical to work on service delivery first. The referrals were being leaked out to competitors because of inefficiencies in service delivery, so if they had invested in outpatient centers, they wouldn’t have optimized their referral potential.” All three systems opted not to expand services after seeing the assessment results. Feasibility studies, however, are about more than deciding whether to open a new business. They also play a vital role in refining the direction of the new imaging center by targeting optimal strategies in terms of both modality investments and service. “The clients who’ve chosen to open their centers after our feasibility studies have seen that our assessments were right on the money,” Stampp says. “In fact, they’ve been able to exceed their expectations.” Nine Basic Elements What factors need to be taken into consideration before entering into a new venture? Both Stampp and Ozuna-Richards describe an in-depth, multistep process that includes nine elements. First, determine the service area for your planned venture. “What is the geographic composition of the area?” Stampp asks. “Most people typically break that down by ZIP code. You’re looking for two key drivers: the area needs to represent a population base from which the proposed center can reasonably expect to draw patients.” Second, locate the competition. The definition of your service area must take into account the locations of existing imaging service providers. “You wouldn’t expect somebody to drive 50 miles past three centers to come to your center,” Stampp notes. Third, know your key customers and their demands. “Look at this in terms of both technology and service delivery,” Ozuna-Richards says. “How do key customers want their services delivered?” Fourth, identify the demographics of the market. What does the market look like in terms of population age and income? What services is your population most likely to need? Fifth, know your payor mix. “You also want to segregate that market into some different payor categories,” Stampp notes. “How many people are on Medicare, how many are on Medicaid, and how many are insured by commercial insurance? Estimates can be made based on demographic characteristics or obtained from third-party sources.” Sixth, assess your level of brand recognition. “Are you already known?” Ozuna-Richards asks. “Are you a new player? Would your referring customers use a new facility? If you do have some brand recognition in the market, do you already have good brand health?” Seventh, determine the volume potential of your market. “You really want a clear understanding of what the outpatient imaging-volume potential would be for a new freestanding imaging center within a defined geographic space, and you want to break that down by modality,” Stampp advises. Eighth, identify your competitors and know what they have to offer. “A competitive profile is very helpful in determining your positioning,” Ozuna-Richards says. “Know what your competitors are offering and how they’re offering it.” Ninth, be familiar with factors that could indirectly and directly influence your intended market. “You’re looking for salient characteristics,” Stampp says. “What’s driving the market: insurance contracting, service excellence and technology, relationships with referring physicians, or excess capacity?” Armed with this information on your potential to affect the service area in question, you’ll be better prepared to optimize the cost of entry and maximize return on investment. “Going in as an intelligent player makes the game that much more fun,” Ozuna-Richards says.