After Congress passed the DRA, reducing Medicare reimbursements for imaging services, the radiology landscape has never been the same. This is especially true for joint ventures between radiology groups and hospitals to provide outpatient imaging, according to Richard Townley, MBA, president and CEO of AGI Healthcare Group, a consultancy headquartered in San Ramon, California.
Prior to the DRA, hospitals and radiology groups often entered into joint ventures for the ownership of OICs simply to increase market share. This is not the case anymore, Townley says. These days, the market is saturated with providers, and the joint-venture incentives have changed.
“There has been a big post-DRA drop in building new OICs or annexes on the hospital campus,” Townley says. “Now, it’s more about restructuring existing centers. In 2005, we might have seen 10 new centers and one restructuring; now, it’s 10 restructurings to one new center.”
—Richard Townley, MBA, president and CEO
AGI Healthcare Group , San Ramon, California
The focus today is on bringing in money. “The big move now is to better reimbursement,” Townley explains. “The big effort is going to be joint ventures that are restructured or structured to enable the parties to grow revenues through higher reimbursement, as opposed to joint ventures being formed to meet a market need.”
Because hospitals can bill Medicare under more lucrative Ambulatory Payment Classification rates, as opposed to the Medicare Physician Fee Schedule rates that freestanding imaging centers use, the incentive is to bring joint ventures in under the hospital wing, Townley says. “It’s important to have the transaction structured so the hospital can bill under its Medicare rates,” he says, “and most important, so the hospital can bill the commercial rates for the commercial payors.”
Insurance companies still pay hospitals (as acute-care providers) contracted rates that can be, Townley says, “double and sometimes more” the rates that imaging centers can charge for the same exam.
As a result, the hospitals are most often the ones seeking joint ventures with OICs, Townley adds. The hospitals might want to buy into imaging centers as equal partners, or perhaps to buy them outright. The incentive is to expand the hospital reimbursement pool for outpatient imaging—and to capture revenue streams for surgery (and other hospital services) that naturally flow from diagnostic tests performed at outpatient centers.
Townley also notes that hospitals often face space constraints that prevent adding high-end imaging on campus, and they might be able to use joint ventures to add capacity “in a more capital-efficient way,” he says.
Pressure on Radiologists
While hospitals might have strong incentives to seek joint ventures, this doesn’t mean that radiology groups with targeted imaging centers are in positions of strength to negotiate, Townley says. The opposite is more often the case.
“In most markets, there’s enough capacity,” he says. “There aren’t a lot of new imaging centers being built. What we see now, in light of the current economic uncertainty, is centers extending hours and staying open on weekends, rather than buying new magnets—doing more with less capital investment. Hospitals are looking at this and saying, in light of this uncertainty for radiologists, ‘We want to be bigger players in this.’”
Other factors also work to the advantage of hospitals, Townley says. For instance, a hospital can argue that forming a joint venture with the radiology group that interprets for it removes competition between them and achieves a strategic realignment beneficial to both parties. “It eliminates the perception of competition; it eliminates the competitive capital-formation need. The radiologists can grow revenues with the cachet of the hospital’s name, and the hospital has the benefit of radiologists managing the center on a day-to-day basis,” he says.
Moreover, a joint venture with its hospital client works to cement a radiology group’s hospital contract at a time when some hospitals are turning to radiologist-employment models or bringing on teleradiologists to handle interpretation remotely.
“If the local radiology group has 100% of a center, then the hospital may say, ‘We won’t renew the contract; we’ll bring in a teleradiology group that provides some on-site work and complement that with specialty readings,’” Townley says. “That is also a factor to