Smarter Merger/Acquisition Decisions With Revenue Forecasting: Riverside Radiology

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The growing trend of large health systems acquiring outpatient imaging centers from radiology groups can create a stressful situation for all parties involved. It can be especially difficult for a radiology group’s leadership to part with what was once a very lucrative arm of the business, but acquisition offers do not grow on trees. Marcia FlahertyMarcia Flaherty, CEO of Riverside Radiology and Interventional Associates, Inc (Columbus, Ohio), faced just such a decision (along with the practice’s executive team) a few years ago. With its business compass always pointing toward the future, the group, which serves 45 locations, ultimately made the decision to part with Riverside Radiology’s outpatient imaging center operation, in a move that they have never regretted. “We were forecasting that technical revenue would be affected in the future,” Flaherty says. “As we looked into the future, we felt it was an opportune time to enter into those negotiations. We’ve always had strong, mutually respectful relationships with our hospital partners, so having that high level of trust, from the start, made the entire process more manageable for all of us.” Riverside Radiology’s decision to reduce its emphasis on gaining technical-component reimbursement ultimately paid off on January 1, 2011, when Congress changed the Multiple Procedure Payment Reduction from 25% to 50% for CT, CT angiography, MRI, MR angiography, and ultrasound exams. The numbers attest to the importance of predicting the decisions of Congress and CMS—a task that can be just as vital as predicting diagnostic trends. Unlike CEOs in other industries, executives in the health-care world face distinct issues that undeniably complicate the prediction game. “I don’t know of very many businesses that are placed in a position where they don’t know how people are going to pay them for their services a year from now,” Flaherty notes. “It is clearly a unique challenge that keeps you on your toes.” On the legislative front, a permanent solution for the reimbursement problem created by the Medicare sustainable growth rate each year has been delayed through the end of 2012, with Congress essentially telling CMS to rework the system completely. The move effectively punts the ball downfield during a contentious election year. Industry advocates are still busy educating lawmakers about the benefits of radiology, while hoping to avoid additional reimbursement cuts. Thomas Lombardi, MD, secretary/treasurer at Riverside Radiology, believes that revenue prediction can only be bolstered by having a finger on the pulse of Washington, DC. For Lombardi, who also serves as the practice’s finance chair and is a practicing radiologist, that means direct involvement in the political process. “It’s time for radiologists to step out from behind the computer monitors and become more engaged with government leaders, hospital administrators, and patient-education groups to demonstrate the value we bring to our community’s entire health-care system,” he says. He continues, “At Riverside Radiology, we try not only to gauge what is coming down the pike, but also the likelihood that it will come to fruition. From there, we make appropriate adjustments in our business and operations to ensure we maintain our role as an integral player in our community’s health-care arena. By getting out in front of potential changes that have an impact on how we practice medicine, we are more prepared to participate in the discussion and maintain some influence over what changes ultimately occur.” Relying on Data Internal data might be right under your nose, but effectively mining what is relevant—while ignoring the rest—can be a difficult proposition. As a start, Flaherty recommends a serious look at RVUs, payor mix, and trends in the percentage of self-pay patients. Recent historical data, usually meaning those from the past 6 months, can provide an initial baseline forecast by location. Long-term historical data (covering three to five years) can also be evaluated to refine the baseline forecast. Take the season into account in assessing volume declines during the months (usually January and February) when many insured patients must pay high deductibles. Jeff Fox, COO, says, “One major winter storm is factored in, if your group is located in a cold climate. We experience 10% to 12% less volume in January and February, compared with our averages. We use this information not just for budgeting, but to staff physicians more appropriately. June through October traditionally are higher-volume months, as patients’ activity levels increase.” Flaherty and her finance team typically compare recent payor-mix data with those from previous years to determine which payors are expanding, and which are contracting. “Comparing 2009 with 2011, our self-pay plus Medicaid financial classes have increased from a combined 13% to more than 20%,” Flaherty says. “Related to payor mix are all your major managed-care contracts and rates. All our agreements include an inflationary adjuster of 1% to 3%. Therefore, if a particular payor represents 12% of a practice’s gross charges, and that agreement stipulates a 2.5% increase effective in June, that must be factored in,” she adds. Flaherty adds that new CPT® codes can also have a significant negative impact, since they were probably not established when the original agreements were signed. Reimbursement for new codes might default to older rates. In a health-care world with so many variables, Riverside Radiology relies on low overhead in its mission to cover 16 hospitals and 45 sites. “We have access to a lot of reliable data because of our IT infrastructure and financial-reporting infrastructure,” Flaherty says. “This level of IT sophistication enables us to have real-time indicators, so it’s much easier to make revenue predictions, organizationally. We have four dedicated software developers who work with our division leaders to tweak and advance our IT systems and maximize the flow of information across the entire enterprise.” Savvy negotiating, year in and year out, keeps costs predictably low, despite partners who are increasingly unwilling to bargain. “During the past year, we renegotiated CT and ultrasound contracts with our largest health-partner systems for all their sites, and it was a tall order,” Lombardi says. “Part of that relates to the DRA and the reimbursement challenges over the past five years. Those have put pressure on independent imaging centers either to close or to sell to hospital systems.” In addition, he notes, “The vendors have become more competitive. Vendors are becoming more cost conscious, and we have definitely seen that in our last round of negotiations.” Worst-case Scenario Fox is not one to indulge in best-case scenarios. If unexpectedly favorable conditions emerge, he considers them a pleasant surprise. “When it comes to predicting revenue, we do a worst-case scenario, and then we do a most-likely scenario based on what has happened in the past,” Fox says. “For example, we knew that certain changes from CMS were going to come down, but we had a few variables that were up in the air. We knew about them in October 2011, but we did not get final rulings until late February 2012 on some issues.” Another external factor that will only speed up is continued upgrading of hospital information systems, fueled by incentives to integrate the electronic health record with the financial system and the RIS. “We have two hospitals that are upgrading, and we factor that in to our revenue predictions,” Fox says. “During their upgrades, normal operations change, and it creates a manual process that we use to get billing information. Subsequently, our cash flow can dip from 30 days to two or three months. You must be cognizant of what partner hospitals are doing. It can force you to remap and rework everything.” Boosts in patient volumes can considerably alter revenue predictions. Fortunately, it’s fairly easy to predict when a new business, such as a large specialty physician group, is about to come on board. Ultimately, it’s more important to determine how the new patients are going to participate in the payment process, Fox says. “You must know who you need to get your reimbursement for services from, and unfortunately, more and more of that is coming from the patient,” he notes. “Radiology groups must legally contact patients to collect monies. That presents a challenge in budgeting and forecasting. Our self-pay element has increased over the past three years—largely due to high-deductible plans. For a group of our size, that can add up to millions of dollars. If you don’t have a cost-effective way of collecting those dollars, then you may never collect.” Greg Thompson is a contributing writer for ImagingBiz.com.