Structuring Imaging Ventures in Today's Regulatory Climate
Over the past 15 years, outpatient imaging has been subject to high growth rates. Because this has been particularly true of the more profitable high-end imaging services, this growth has attracted attention from all quarters. For the first 10 of those 15 high-growth years, outpatient imaging was most often provided by hospitals or by radiologists; they made high-end imaging available as part of multi-modality imaging services. Over the past 5 years, however, clinicians have increasingly become active participants in the provision of the high-end outpatient imaging services that are ancillary to their specialties. Conflict between clinicians and radiologists/hospitals has often been the result. Where the provision of high-end outpatient imaging services is concerned, collaboration has been seen far less frequently. The challenges made to clinicians’ involvement in outpatient imaging, to date, have been primarily regulatory and financial, with barriers erected by commercial payors growing in some regions. Nearly every imaging provider has been affected by decreasing Medicare and commercial payments; in response, providers are trying to cut costs, improve productivity, and increase procedural volumes. Ongoing Trends A number of the factors that affect the provision of imaging services today can also be expected to have a continuing influence on this industry in coming years. Hospital inpatient and emergency-department volumes are increasing significantly and are having an impact on campus imaging services by creating shortages of capital, capacity, staff, and space. At the same time, hospitals continue to lose high-end outpatient imaging, oncology, cardiology, and surgery services, primarily because their competitors concentrate on offering more convenient access, better service, and the ability to meet the needs of patients and physicians. Increasing numbers of underinsured and uninsured patients are receiving services at the hospital, leading to a deterioration in the economic health of the remaining outpatient imaging performed on the hospital campus. There is growing friction between specialists and the hospital regarding coverage and exclusivity for inpatient and outpatient services (and off-campus competition for revenues). Patients are demanding user-friendly service delivery, while at the same time becoming more discerning in evaluating quality of care and their out-of-pocket costs. Pressures from CMS, OIG, state agencies, and commercial payors will continue to affect payments, infrastructure costs, and the formation and operation of outpatient imaging ventures. The Deficit Reduction Act (DRA) of 2005, which became effective in 2007, continues to be one of the key factors influencing group outpatient imaging revenues. On a regional basis, the response of commercial payors to the DRA, along with the success of their initiatives, can also have an important impact. The pending conversion-factor reduction effective in 2008 will also be an element requiring consideration and planning. Of course, the degree to which an imaging group is affected by these changes depends on its individual circumstances, including its examination mix, its payor mix, its geographic location, the terms of its existing and future contracts, and the success rate of its collections program. The 2008 Medicare Physician Fee Schedule (MPFS) proposed rule changes will become effective January 1, 2008, and phase III of the Stark regulations became effective on December 4, 2007. Several new rules affecting imaging providers will result. Some types of leasing arrangements, particularly those in which investors are not at risk, would effectively be barred under the MPFS proposed rule changes. Also affected are percentage compensation arrangements (other than those for professional services). As a result of the new regulations, markups (ie, profits) on certain purchased and reassigned technical and professional component services for Medicaire patients ordered by the group billing for the service are no longer allowed. Certain services furnished under arrangement with a hospital that, in turn, bills for such services are now under scrutiny and could well be propitiated. Congress has threatened to outlaw global billing of imaging services and even now this concept still appears to be under serious consideration. Nonetheless, there are still situations in which an outpatient imaging venture might be beneficial. If the referring physician group can meet the in-office Stark rules and the expected revenues will be adequate (even in light of DRA and continuing reimbursement/enrollment pressures by payors), then it may be wise to proceed. This is also true if a leasing arrangement will meet regulatory requirements and the numbers make sense, so long as those involved realize that what is deemed acceptable today by regulatory agencies may not be acceptable in the future. Even if technical-component profits are only expected to be marginal under a free standing venture enrollment basis, the venture may be beneficial from a global or relational standpoint (between the hospital and radiologists); however under this economic scenario it may be beneficial to evaluate if the venture can be structured properly to allow for revenues based on hospital provider status (thus having a beneficial impact on the members’ financial returns). If all applicable considerations can be adequately met, the venture may be needed to keep the group cohesive and to further its strategic viability in retaining and recruiting high-quality physicians. The estimated impact of the DRA on technical revenues for 2007 for a typical multi-modality center with both low and high end services is a reduction of 6% to 7%, although the total effect depends on the applicable modality mix, payor mix, and geographic location (as well as on how commercial rates are affected by CMS policies). There was no change in payments for nonvascular ultrasound, radiography, fluoroscopy, mammography, and noncardiac nuclear medicine. For cardiac nuclear medicine, the change in Medicare Part B rates typically meant a technical-payment decrease of 10%; for CT, 12%; for MRI, 35%; for vascular ultrasound, 40%; and for PET, 45%. The 2008 conversion-factor reduction of 10.1% will generally have little or no effect on technical payments for cardiac nuclear medicine, CT, MRI, vascular ultrasound, and PET, since those rates are already determined under the DRA at the lesser of the Medicare Part B rates or APC, which is normally the rate which prevails. Losses of 10.1% will be seen for nonvascular ultrasound, radiography, fluoroscopy, mammography, and noncardiac nuclear medicine. Together, these will probably cause a loss of 1% to 2% of technical revenues for a given provider. As before, the actual impact will vary according to modality mix, payor mix, geographic location, and changing commercial rates. Venture Structure There are five main types of imaging ventures; of these, two are simple and three are more complex in structure. In the first simple structure, the referring group owns the facility and provides outpatient imaging services for its patients (so long as the group is in compliance with the Stark regulations prohibiting self-referral). The facility bills payors for imaging services under its provider status. Groups using this model must remain aware of any anti-markup provisions affecting billing for the professional component of the imaging services. In addition, they must be aware of any regulations that are in effect regarding physicians' supervision over certain studies. In a second type of simple structure, a radiology group owns the facility and provides outpatient imaging services. The group bills payors for imaging services either under its physician practice status or, if not permitted to provide the services as a physician practice (due to non-group ownership participants) then as an independent diagnostic testing facility. The three types of complex structures are all joint ventures, typically organized in ways that complied with the regulations that were in effect at the time of their formation. The first type is a joint venture involving a hospital-based provider and a leasing company, the second is a joint venture between a hospital and nonreferring entities (such as a radiology group), and the third is a joint venture entered by a physician group or imaging company and a leasing company. In evaluating the feasibility of joint ventures that involve leasing companies, it is important to remember that future MPFS rules could affect referring physicians' investment in such ventures. CMS has proposed expanding the definition of an entity, for Stark-regulation purposes, to include not only the entity (the physician group practice) that bills the Medicare or Medicaid programs for the referred patient, but also the entity that performs the designated health service. This would impede the ability of referring physicians to hold ownership interest in a leasing company, if the leasing company were to be viewed as the entity that performed the designated health service. There is no exception in the proposed rule that would permit referrals under such circumstances. CMS has received many comments on this proposal; while it was not adopted in the most recently released ruling, there is no way to predict whether CMS will adopt it in a future ruling, either in 2008 or in subsequent years. Important Steps Before embarking on the formation of any outpatient imaging venture, make sure that it is feasible in terms of group cohesion and from regulatory, economic, and relational standpoints. Identify key provisions between the parties first; then, document them in a comprehensive term sheet on which all parties can agree before getting too far down the path toward a joint venture. The term sheet should define ownership and governance, services provided, location, enrollment status, operating plan, day-to-day management, capitalization, professional services, and related terms. Be certain that the venture agreements address how the arrangement will be dissolved or modified if the regulations affecting it change or the parties involved are dissatisfied. Determine, from the beginning, to what extent any of the parties to the venture will be making tangible and intangible contributions and how value will be assigned to those contributions. Have the proposed venture reviewed at the highest levels as early as possible to help minimize unpleasant surprises later, when the project is reviewed for approval. Remember to use competent legal advisors in forming and evaluating any venture.