Imaging services companies predict revenue growth despite slowing economy

Proposed pay cuts for PET could make providers more efficient

Medical imaging services’ business continues to grow at a robust rate, despite a deepening recession and temporary dislocations caused by the Sept. 11 terrorist attacks. Fee growth is stable or trending upward, according to shared imaging service providers.

Radiologix of Dallas forecasted revenue growth of over 8% for 2001. Results for the third quarter (end-September) showed a same-facility increase of almost 11%, according to Mark Wagar, chairman and CEO. That growth rate maintains the company’s pace of last year.

“Our internal growth has been tremendous,” Wagar said. “Demographics is driving that. Most people are expecting continued underlying growth in this industry in the next decade.”

An aging U.S. population that demands more imaging services, the shift to higher end procedures, and steadily expanding imaging applications are major factors fueling procedure revenue growth, he said.

“We heard from GE that they believe MRI (procedure) volume is growing at about 15% a year,” said Richard N. Zehner, chairman and CEO of Alliance Imaging in Anaheim, CA. “We think that is on the high side and that it may be more like 10% to 12%, but clearly the number of people per year getting MRIs is growing.”

Alliance saw its revenue rise 8.2% in the third quarter compared with the same period last year. Scans per system per day during 2001 increased to 9.7 from 9.4 in 2000, CFO Kenneth S. Ord said.

There had been concern that this year’s economic slowdown might cut into demand for imaging services, according to Zehner. Massive layoffs could potentially affect imaging volume as people lose their health insurance. There is no sign, however, that this is happening.

“We are where we thought we would be this year,” he said. “The question is, might we have been even better?”

Healthcare generally is not as directly affected by recession as other industries, Wagar said. In the face of layoffs, people may actually seek medical services they had put off, in order to take advantage of their existing insurance coverage.

The September attacks did appear to have a minor effect on the imaging services industry, although business quickly returned to normal. The impact of the attacks was seen in delayed payments for past services and postponed examinations.

“We believe that the Sept. 11 events caused a bit of a slowdown in scans for September as patients became distracted,” Zehner said.

People in affected areas canceled appointments and some scans were rescheduled, Wagar said. In addition, a slowdown in mail delivery and electronic payment systems delayed cash inflows temporarily. Empire Blue Cross, for example, which was based in the destroyed World Trade Center, was down for about a week, he said.

“But their return to online service was remarkable, given the tragedy they faced,” Wagar said. “Indicators from October are that all of our business operations have returned to normal. We have recovered revenues and collections that were delayed a few days.”

Pricing for imaging services appears to be remaining stable as volume growth continues strong. Alliance saw an overall drop in its average price per scan of about 2% in the third quarter, but much of that can be attributed to volume discounting, Zehner said.

“Prices are pretty flat, but our volume is growing,” he said.

Alliance hopes to reduce the impact of sliding price scales, the imaging services business’s equivalent of volume discounts. While high-volume customers will probably always demand better deals, a more rational pricing system would benefit both shared service customers and providers, Zehner said.

“We were giving credits for efficiency, but the hospitals really haven’t focused on this,” he said. “We would much rather come up with a fair price and charge that, period.”

As shared service providers build a larger presence in local markets and provide a full range of imaging services, their pricing leverage can increase, keeping a check on the demand for discounts, Wagar said.

“We (at Radiologix) have seen stable prices to modest increases. This is a function of our position in the marketplace,” he said.

By providing patients, referring physicians, and healthcare plans with one-stop shopping convenience as well as state-of-the-art service and more access points, shared imaging service providers can control managed-care companies’ demand for discounted procedures, he said.

Medicare pricing has been stable to slightly increasing over the last few years, Wagar said. If a private payer demands a huge discount over Medicare, Radiologix is willing to walk away from that business. The payer usually returns because of the strong position of the service provider in that market.

“We don’t do that lightly, only when a payer is truly out of line,” he said.

The trend to more technologically advanced procedures has also buoyed pricing, Wagar said. Radiologix provides a full range of imaging services, including low-cost x-ray and mammography. Customers who come in for the basics, however, tend to use the same provider for higher margin MRI, CT, and PET services.

New PET system installations are currently facing delays as providers and their customers wait for Medicare to announce reimbursement cuts. That announcement was expected by the end of November. Medicare was originally looking to drop PET procedure prices from about $2300 to around $800. Physicians and industry, however, may have persuaded the agency to moderate the cut to between $1500 and $1900 per procedure. At that level, the PET service industry should benefit from more rational margins and greater incentives for efficient operations, Zehner said.

Alliance’s average technical fee per PET procedure runs about $850 and the price of isotope supply is about $400, he said. Customers can make a reasonable profit with reimbursement above $1500. The change should bring PET more in line with MRI profitability, which offers margins in the area of $200 per procedure.