PACS market must overcome past hype to achieve commerical success in 1995

Technology to make PACS work efficiently has finally arrived

It has been more than a decade since medical imaging vendors beganpromoting the concept of picture archiving and communicationssystems (PACS). The initial promise of PACS was so great thatbuyers queued up to be the first on the block to buy a systemand bring their radiology department into the filmless `90s.

Unfortunately, the promise of PACS was just that-a promise.The first systems failed miserably, bogged down by technologicalbottlenecks and unrealistically high prices, causing the radiologycommunity to wonder if PACS was anything more than marketing hype.

Problems dogged the PACS market for years until technologyfinally caught up to the promise of the previous decade. Now thatthe technology to make PACS work is here, one needs to ask: Canthe promises of PACS vendors be believed, or is PACS just anotherflash-in-the-pan whose benefits are limited to the companies profitingfrom the sales of systems?PACS carries a heavy load of baggage.It has been regarded as a four-letter word by many in medicalimaging who were burned in the 1980s. The technology has maturedsince then, but the PACS market is still saddled with concernsabout cost and connectivity.

Despite some progress in addressing customers' misgivings,some people question whether PACS will live up to its potentialand become a thriving industry or remain a niche market. Giventhe changes in health-care policy over the past several years-especiallythe rise of managed care and capitation-the timing for a healthyPACS industry is optimal. Still, market growth may be hamstrungby concerns about technological obsolescence as well as the inabilityof PACS to provide a clearly defined return on investment, exceptin limited applications.

The connectivity question
A major obstacle to growth in the PACS market is connectivity, or the ability to link together scannersand other devices manufactured by different vendors. The developmentof viable connectivity standards has taken more than 10 years,and there is still work to be done and points to be clarified.

The medical imaging industry's solution to the connectivityconundrum is the ACR-NEMA's Digital Imaging and Communicationsin Medicine (DICOM) 3.0 standard, which provides for a set ofindustry-standard protocols that enable devices from differentmanufacturers to talk to each other. DICOM 3.0 was ratified shortlybefore the 1993 Radiological Society of North America meeting(SCAN 11/17/93).

At last year's RSNA conference, DICOM was a marketing buzzword,with many companies promoting their DICOM connectivity, regardlessof whether they had implemented the standard. Indeed, the firstworkable version of DICOM 3.0 is still months away. Several partsof the current revision have yet to be finalized, including anall-important section dealing with image compression.

Despite the best efforts of industry participants and a globalacceptance of DICOM 3.0 by modality manufacturers and others,DICOM will probably always be considered a well-intentioned butdifficult to implement non-standard "standard" for medicalimaging.

The American College of Radiology encountered similar problemslate last year when it attempted to define a guideline for teleradiology,a market that had matured many years before work on the standardbegan. The ACR's Standard for Teleradiology raised more questionsthan it resolved in its attempt to define principles of practicefor a market that had been practicing for years without definedguidelines or principles.

In fairness to the ACR, whose DICOM and teleradiology committeemembers have worked hard to establish both these standards, itis difficult if not impossible to design standards for an industrywhere proprietary designs have been the norm rather than the exception.

Rise of the defense contractors
The dynamics of the PACS market have changed considerably in the past several years in terms ofthe major players in the industry and the purchasing strategiesof buyers.

PACS was once the domain of the scanner vendors and film companies,but the market has recently become a haven for defense contractorsfaced with marked reductions in defense spending and dwindlingprofit margins. Many former Department of Defense contractorsare looking to medical imaging as the next great profit center.Major contractors who have recently entered medical imaging include:

• Loral, which last year purchased the PACS business of SiemensGammasonics (SCAN 9/14/94);

• E-Systems, which reportedly spent $16.5 million in the pastthree years for industry heavyweights Advanced Video Products(AVP) and Image Data (SCAN 11/23/94 and 11/4/92);

• Harris Corp., which has recently partnered with the Universityof California at Los Angeles on a joint imaging project;

• Lockheed Aerospace, which showed products from Icon MedicalSystems in its booth at the Healthcare Information and ManagementSystems Society meeting in February;

• Hughes Corp., which showed products from Cemax and Kodakat the HIMSS meeting; and

• Martin Marietta and Science Applications International Corp.,which have decided to venture into the world of systems integrationand consulting.

Smaller government contractors are entering medical imagingas well. One is Atlanta-based Consort Technologies, a PACS andRIS firm that, prior to entering the medical field, focused ondeveloping systems for the Department of Energy (SCAN 9/14/94).

Scanner manufacturers have, by and large, reevaluated theirposture towards PACS and elected to support PACS through DICOM3.0 interfaces. An example is the decision by Philips MedicalSystems to restructure its involvement in the PACS arena.

After struggling in the marketplace with such diverse partnersas Raytel and AT&T, Philips pulled back from providing a fullPACS offering and instead developed the EasyVision line of workstations,which offer DICOM connectivity.

Picker International revealed a similar approach last yearwith its Galaxy concept (SCAN 11/23/94). Of the ''big five'' modalitymanufacturers, only Siemens and GE offer PACS solutions in thetraditional sense.

Loral's purchase of Siemens Gammasonics allowed Siemens MedicalSystems to focus on Sienet, a PACS product developed at Siemens'Erlangen, Germany, headquarters that had been successfully installedin several sites in Europe over the past few years.

GE chose last year to reenter a market that cost the companymillions after an aborted start several years ago, when it euthanizedthe jointly developed Integrated Diagnostics (ID) product withIBM in 1992. At the 1994 RSNA meeting, GE displayed PACS solutionsoffered through its Network Products and Services Division (SCAN12/14/94).

The company promotes its PACS services on a consultant-typebasis, offering systems and network planning as part of its integratedPACS solutions. Companies like Olicon and others have also offeredthese services in the past. The trend towards consultant-basedsales rather than product-based sales is a welcome change, althoughthe objectivity of the provider may raise conflict-of-interestquestions for some customers.

Purchasing patterns have evolved from unilateral purchasingdecisions made by the radiology department to decisions made bya committee, with a shift in the balance of power from radiologydepartments to information systems departments. Rather than atoy of the radiology department, PACS is now looked at as an investment,a critical component in the development of a hospital-wide integratedinformation and image management system. PACS plays a criticalrole not only in the overall efficiency of the radiology department,but of the hospital as well.

How big is the market?
There is no question that PACS purchases have increased in many areas, especially teleradiology. But whilesales have been consistent, many vendors and industry insidersquestion whether the industry has reached the $350 million plateauthat analysts predicted in 1993. Establishing an exact numberfor PACS and teleradiology sales is next to impossible withoutsetting up clear-cut parameters.

Results of a recent survey conducted by Technology MarketingGroup of Des Plaines, IL, painted a rosy picture of future revenuegrowth, despite rapidly declining equipment prices.

For the 1994 study, TMG polled 200 radiology administratorsin U.S. hospitals and clinics. In-depth telephone interviews werealso conducted with 50 radiologists, 50 hospital administratorsand 50 MIS directors of hospitals larger than 200 beds.

The poll found that actual purchases of PACS components inthe U.S., including workstations, interfaces and archiving devices,totaled $349 million in 1993 (see chart, this page). Sales projectionsbased on the survey respondents' purchase plans indicate saleswill jump nearly 19% this year and another 16%, to $550 million,in 1996.

Component prices have tumbled since the last time TMG surveyedthe market. The poll found that purchasers paid an average of$92,500 for independent physician consoles in 1994, down 73% fromthe average price in 1992. According to TMG, the average priceof an optical drive jukebox was reduced by more than half in thosetwo years, to $172,000. The average price of a computed radiographysystem dropped from $400,000 in 1992 to $205,000 in 1994.

The survey claims that health-care reform and hospital consolidationare major contributors to the ascendancy of PACS. Half the radiologists,hospital administrators and MIS directors in the survey said reformand hospital mergers will hasten the implementation of image telecommunicationnetworks. About one-third indicated that their hospitals wereinvolved with other hospitals in developing a community healthinformation network (CHIN) or other network concept.

Another survey, by Concord Consulting Group of Concord, MA,predicted that the U.S. PACS market will grow to almost $1 billionby the turn of the century. The study claimed that managed careis driving much of the demand for the efficiencies that PACS canprovide.

The accuracy of these numbers is hard to ascertain, due tothe difficulty in assessing the size of the market. Part of theproblem arises from the dilemma of defining PACS. Traditionally,the PACS marketplace has included teleradiology, in-house imagedistribution systems (IHIDS), modality clusters (CT/MRI, NM/US),computed radiography and image archives. Newer areas like teleradiologyservices and alternate output devices (AODs) should also be included,although their combined sales volumes generated less than $15million in total revenue in 1994.

There are a number of areas that aren't considered traditionalPACS and can be considered PACS only in gray areas. These includelaser imagers, laser imager networks, digital dictation and voicerecognition systems, and RIS products (although the latter areusually considered part of an information system rather than partof an integrated PACS).

Other problems with defining market size abound. Virtuallyall the companies involved in PACS are either privately held orare part of a larger entity, and breaking out PACS-related salesnumbers is an inexact science. More importantly, there has beenno clear-cut definition of what actually constitutes a PACS sale,especially as it relates to discounting and grouped purchasessuch as those bundled with scanner acquisitions.

Discounting is a key area. If a hospital buys a PACS for $250,000and uses $150,000 in accrued film (or equipment) credits to offsetthe sale price, is the sale $250,000 or $100,000? Other questionsalso arise. Would the buyer have selected that particular vendorif film (or equipment) credits weren't a critical component inthe decision-making process? How great a factor was discounting?Was the sale of the PACS components a "freebie," givena cash value only so it can be factored into the cost of othergoods and services purchased by the hospital?It is easy to seehow numbers can be skewed to present a favorable picture of thePACS market since the first benchmark studies were done in themid-1980s. Overestimating the market's size is especially easywhen teleradiology sales are included. Teleradiology made up nearly50% of the total dollar volume of the entire market through 1993.

Unfortunately, investment bankers and others looking to evaluatethe market were drawn in by PACS' promise. The reality is thatgrowth will remain moderate in all but a few key areas.

Growth areas for PACS
The managed-care environment provides fertile ground for PACS growth. The need to reduce costs and increaseefficiency is the catalyst behind improvement in certain PACSsegments. Three key areas will experience growth in the laterpart of the decade:

• Modality clustering, including the archiving of data fromdigital modalities;

• Alternate output devices (AODs), which produce diagnosticor referral-quality images without using chemical processing;and

• Teleradiology services, which include the provision of off-sitereading services by specialists registered in a particular areaof expertise.

There will also be growth in in-house image distribution systems(IHIDS), computed and digital radiography systems (CR/DR) andother segments, although not at the pace at which the three mainareas will grow.

The modality-cluster approach is exemplified by the effortsof ultrasound vendors like Acuson, ATL, ALI Technologies, andKodak, which were early adopters of clusters, also known as mini-PACS.This market has failed to take off as initially projected, however,primarily because of delays in product shipments that have addednearly a year to market introduction times.

Despite the delay, ultrasound PACS is undergoing an intensemarketing push by vendors, which should help the segment attainsales of $12 million to $15 million this year. Unfortunately,ultrasound PACS will show relatively slow growth until ultrasoundvendors can demonstrate widespread connectivity between theirsystems and major PACS products, a feat which only a few companieshave accomplished.

In addition to ultrasound, CT and MRI "filmless"clusters are beginning to spring up, especially when teamed withteleradiology applications and cost-effective CD-ROM jukeboxes.

Alternate output devices have been available in medical imagingsince the 1990 RSNA conference, but it took managed care to spotlighttheir advantages. Recent advances in gray-scale printing technologythat enable the production of true 256 shades of gray at diagnostic-qualityresolution have allowed these printers to be used as cost-savingstools, mostly for archiving and producing prints for referringphysicians.

It is projected that within the next three years, better than70% of all referral copies will be output on paper imaging systems.These include solutions ranging from off-the-shelf Hewlett-PackardLaserJet 4 printers to Scitex and Canon paper printing systemsthat come complete with networks and DICOM interfaces.

The teleradiology services market will also skyrocket. Oneexample of future growth is TeleQuest, which is implementing auniversity-based overread network that includes nearly 400 radiologistsfrom eight universities (SCAN 12/14/94).

Half a dozen smaller regional networks are already being developedto complement existing networks like Teleradiology Associatesand CDI. Most radiologists will eventually feel competition fromoverread services being used in conjunction with managed-carecontracts.

Promise and pitfalls of DICOM
Companies enjoying the greatest success in the PACS market are those that offer logical solutionswith a defined growth path to expanded systems. Companies thathave put all their eggs in the DICOM basket are struggling.

DICOM has been interpreted by many as a panacea for radiology,the solution to the Tower of Babel that exists in medical imaging.Reality is somewhat more complex, due to the enormous problemof bringing older scanners into DICOM-based networks.

Fewer than 200 systems sold in recent years are fully DICOM-compliant.This compares to the more than 7000 scanners in operation thatwill probably never be DICOM-compliant, in part because of somevendors' reluctance to offer DICOM retrofits. Vendors and customersface a major challenge in fully implementing DICOM.

DICOM and managed care are almost mutually exclusive. Managedcare dictates that radiologists do more with the equipment theyhave, while DICOM requires facilities to buy more to get more(in this case newer imaging modalities that support the standardto obtain its benefits).

A solution could come from technologies that are less glamorousthan a true DICOM interface. While framegrabbers for digitizingimages are far from ideal in some situations, in many circumstancesthey offer an option for hospitals to transport images from ascanner to a network.

Framegrabbers can be combined with leading-edge technologylike optical character recognition, which recognizes and capturesdemographic and procedural data from a scanner console. This featureis found on Agfa's Impax PACS and confers many of the benefitsof DICOM, such as automated database management using basic DICOMheader information. This configuration can be achieved at a fractionof the cost of implementing a true DICOM interface.

The issue of DICOM or non-DICOM support is moot. Every vendorshould support DICOM. However, it's important to support a mixof DICOM and non-DICOM offerings until the standard becomes fullyadopted. Putting a company's entire product offering on the linewith a standard that isn't complete (two sections of the DICOMstandard, as of this writing, have yet to be ratified) is risky.

David vs. Goliath
Which companies will be long-term survivors in the PACS market? That is a frequently asked question to whichthere is no clear-cut answer. If money were a factor, large companieslike AT&T, GE and IBM could be expected to own the lion'sshare of the market. These firms have invested a combined $150million in PACS technology, with little or no return on theirinvestment. They own a fraction of the market share.

On the other side are small, independent companies like IconMedical Systems and film vendors like Agfa, whose PACS successis eclipsing its share of the U.S. film market. These companiesare thriving in PACS.

The biggest strength the "Davids" have is in offeringcost-effective, deliverable products. Vendors may talk about DICOMand the HL-7 (Health Level 7) hospital information systems interfacestandard, but if the solution isn't cost-effective and deliverabletoday, it's nearly worthless.

Sales reflect the importance of deliverable product: Icon hasdoubled its sales volume every year for the past four years andhas reached double-digit sales figures in millions of dollarsin 1994.

Agfa has gained overnight respectability in the market. Thesales the company has captured in the first few months of 1995alone put it on pace for $30 million in PACS revenues this year.The figure is about one-third of sales of the entire PACS marketlast year excluding teleradiology and RIS products. Deliverabilityand cost-effectiveness cannot be ignored.

The Goliaths have strengths that the Davids can't offer, however.Service is paramount with PACS, yet few companies outside of themajor vendors have a sufficiently strong service organizationto support PACS with the response time it needs. That should changeonce companies get more sites up and running, but for now thisremains a weakness with smaller firms.

The customer is key
PACS growth will increase in `95, despite concerns about cost and technology. Industry consolidation willcontinue to occur, causing sighs of relief from some and consternationfor others. Despite maintaining growth, the PACS industry willnot achieve its true potential until it is comfortable not onlywith the technology but with the players and issues surroundingPACS, such as health-care reimbursement.

If PACS succeeds it will be because the industry has respondedto the needs of customers. If it fails, it will be because theindustry has failed to listen to customers after all these years.

This report was prepared by Michael J. Cannavo, president ofImage Management Consultants of Winter Park, FL. SCAN SpecialReport is published four times a year.