Strategic Imaging Center Technology Deployment

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In the technology-driven field of radiology, it is not just what is installed, but when, where, and why the technology is deployed, according to three experts interviewed by Many factors drive technology decisions, beginning with the existing competitive environment and inevitably arriving at the Deficit Reduction Act of 2005. “The most important factor to consider is that technology is not a strategy,” began Kevin Locke, partner, Charis Healthcare, LLC, Hudson, Ohio, a company that specializes in helping hospitals and physicians develop services in the outpatient setting. “Technology is an enabler to allow a strategy to be implemented. In our estimation the strategy needs to be built around market opportunity, strategic objectives, end-in-mind financial objectives, and relationships between physicians, hospitals, and/or other imaging providers.” One point each expert agreed on is that technology decisions should be predicated on the competitive arena in which a provider is based. But whether a center is new to the market or an established competitor will also impact technology choices, said Richard Townley, MBA, president and CEO, AGI Healthcare Group, San Ramon, Calif, a company that helps hospitals, radiology groups, and imaging center operators reduce costs, improve productivity, and grow revenues. Townley said technology choices could differ based on the following characteristics: New center Existing center interested in upgrading technology Joint venture, or restructure of a joint venture, in which one of the partners has a higher technology in its system. An imaging center operator new to a market will feel the most pressure to compete based on technology, Townley explained. If market intelligence reveals that a competitor plans to install a scanner that represents a significantly higher technology than that planned for the new center, then the costs in additional capital, maintenance, and siting should be weighed against the potential loss in volume. Townley said this dilemma for market newcomers is most pronounced in the 3T versus 1.5T MRI, and 64 channel CT versus 16-channel CT. “In both of those cases, the higher levels of technology are overwhelmingly not necessary in a typical outpatient setting in most markets in the US,” said Townley. “However, because the referring physicians’ perceptions can come into play so significantly, and if we are concerned that these perceptions can hurt us from a volume standpoint, we may look to see if we can somehow put together some of that higher level technology that makes sense from a capital standpoint.” Existing players, on the other hand, should not feel as much pressure to engage in a technology war that pits 3T MRI against a late-generation 1.5T MRI, or 16 channel CT against 64-channel CT. “We may not necessarily feel compelled to upgrade, because we have already established our service delivery, and we have shown the referring physicians that we are meeting their needs from a clinical standpoint with the existing technologies,” Townley said. A joint venture in which one of the partners already posses the higher technology in another location can also relieve the need to install the latest and greatest technology, because the provider does not necessarily need to have a redundant system in every point of service. “If we have a joint venture with a hospital and a radiology group, and one of them already has a 3T, then we would not feel compelled to put the 3T in this center,” Townley explained. The strategy in that instance, Townley explained, would involve being able to say to the marketplace that the higher technology exists in the network, and scheduling and triaging accordingly. Playing the Technology Card Nonetheless, technology can be a significant differentiator. “You need to be able to differentiate yourself in order to garner an appropriate share of the market so that you can operate a financially successful venture.” noted Tim Stampp, MBA, principal of Medical Imaging Specialists LLC, Metairie, La, which assists radiology groups and hospitals in developing and managing outpatient imaging centers. But if a center chooses to compete in a given market on the basis of first-to-market with a technology, it needs to be aware that this strategy can be replicated, Stampp said. “You have to be prepared when you choose to fire a shot over the bow of a competitor by elevating the level of technology,” cautioned Stampp. “You’re going to have to be prepared for them to react if they can react. So, you have to play on the strategy of being first to market and use it as a relationship builder with the referring community. Hopefully, by the time your competition replicates that strategy, you are going to be ahead of the game, and they are going to be playing catch up.” But the choice to be first-to-market with a technology must make economic sense, emphasized Stampp. “You have to say to yourself, ‘If I can differentiate myself on this technology, is it going to push me to a point where I can garner enough volume to offset the increase in cost of this technology?’ If the economics come back and it doesn’t make sense, then you have to look at your alternative. Then you may have to choose from the lesser of two evils.” The All-Important Market When it comes to performing marketplace due diligence, everything is important, according to Locke. “You’ve got to know as much as possible about competitors,” he said. Answers to the following questions are mandatory: What do the competitors do well, what do they not do well? What are the areas in which competitors are winning in, what are the areas in which you are winning? How much loyalty do competitors have from referring physicians, and how much can you win from referring physicians? What are your competitor’s niches? Are they service related, or technology related? Is it financially related: Do they have joint ventures in place, do they have block leases in place? “These are all issues that you’ve got to understand related to your competitors,” Locke advised. “Once you understand them, you’ve got to design a strategy specifically to compete against what other folks are doing in the marketplace.” Townley recommends interviewing referrers, vendors, lenders, builders, and realtors to get their input on new center development and recommends soliciting the following information from referrers: Level of satisfaction with current provider Financial relationship with existing providers (proceed with caution here) Quantity of exams they refer (Townley recommends reducing that by 40% or 50% because referrers typically inflate their numbers). Technology preferences, interests (what are they hearing about at the conferences they are attending?) Likes and dislikes about their current service Who is planning to add technology Which current providers are considering upgrading equipment Current providers offering leasing arrangement “Referrers are important, not only for our due diligence, but also for when it comes time to finance the project,” Townley revealed. “Lenders want to see the specific date of our client’s contacts with the referrers. We actually schedule them out: who they are, what kind of volume they expect, and what type of exams we will expect. Then the lenders will talk to some of those people, they will randomly pick maybe 10% to do their due diligence on our due diligence.” Townley also calls on his relationships with vendors and lenders to find out who else is building and buying. “We buy a lot of equipment through our client base, so within acceptable ethical standards, we want to find out to what extent are they expect to upgrade in the marketplace,” Townley said. “We will talk to the major banks…to get a sense of the current and potential competition.” DRA Is Felt Certain decisions in developing an imaging center technology strategy are evergreen, pertaining to both up and down markets. But there is no question that the Deficit Reduction Act has had a significant impact on the technology break-even for independent diagnostic testing facilities (IDTFs). “To the extent it has reduced reimbursement for Medicare patients, with many commercial payers following suit, it reduces the margins on services, and therefore requires much lower costs and/or higher volumes to achieve the same level of bottom line financial success, “ noted Robert Townley. Stampp concurred. “The reductions in reimbursements mean that your breakevens are higher,” he said. “On a macro-economic basis, trends at the federal, state, and commercial payer level are driving down reimbursement. If reimbursement goes down, and you are considering a more expensive piece of equipment, your breakeven goes up significantly. You have to do the appropriate market due diligence to determine whether or not it’s a smart business move.” According to Townley, driving higher volumes to compensate for lower reimbursement is challenging because operating costs for facility, staff, and consumables are fixed by local market conditions. “Accordingly, the key variable over which a center operator has control is the level of capital employed towards technology,” Townley said. As a result, new technology upgrades and/or replacement in existing centers are down significantly in lower reimbursement markets, Townley noted. “Key impact from DRA and its aftermath, however, is that center development activities are down dramatically from the last seven years,” Townley acknowledged. “Most of the center activity now is restructuring of the existing centers ownership.” Locke is seeing much the same among the entrepreneur market. But while the DRA has been a game-changing phenomenon in the freestanding outpatient market, it is having no affect whatsoever among hospitals opening sites in the outpatient market. “The hospitals we have been working with,” Locke said, “it hasn’t affected them at all.”