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MRI ownership: What works well financially and what does not

Issue: September 2005

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Moderators: Douglas W. Jackson, MD Chief Medical Editor, Orthopedics Today; President, Memorial Orthopaedic Surgery Group, Long Beach, Calif. David Mauerhan, MD Orthopedic surgeon, Carolinas Medical Center, Department of Orthopedic Surgery Charlotte, N.C. Panelists: Jack Bert, MD Vice President and Medical Director, Summit Orthopedics, St. Paul, Minn. Bert Mandelbaum, MD Co-director, Sports Medicine Fellowship Program, Santa Monica Orthopaedic and Sports Medicine Group, Santa Monica, Calif. Alan Valadie, MD President, Coastal Orthopedics and Sports Medicine, Bradenton, Fla. Jeffry V. Glenning Administrator, Memorial Orthopaedic Surgical Group, Long Beach, Calif.

Douglas W. Jackson
Chief Medical Editor:

This is the first of several round tables on alternative sources of practice income for orthopedic surgeons. David Mauerhan, MD, co-moderator in this series, suggested we explore the areas and sources of alternative income for our readers. Most physicians obtain most of their income from face-to-face and hands-on time with patients. These round tables will deal with revenue sources outside direct patient physician contact.

In my conversation with Dr. Mauerhan, he also pointed out the tremendous variations in applying alternative revenue sources by surgeons around this country as well as the different ways they are being incorporated into their practices. He went on to suggest that we could learn from the different experiences and utilizations individuals and groups are having.

In this issue, we will look at office-based MRI facilities. We will explore leasing a unit, leasing utilization of a facility, buying an extremity unit and acquiring a scanner capable of doing all desired orthopedic scans. In my case, I found our group was ordering a significant number of MRIs, our staff was getting the authorization from the carriers and helping patients schedule their appointments. When I became able to read the MRIs as well as most radiologists at these different facilities they owned, it became apparent there was “no value added” in using an outside MRI facility. I can schedule my patients at times convenient to them in our facility at a competitive price and have the films available each time they return.

Dr. Mauerhan and I have invited some excellent panelists to share their experiences in using a practice-based MRI unit. We hope those who disagree or have had success in a different manner share their experiences in letters to the editor.

This round table is meant to bring you information you can choose to apply to your practice if you so desire. We cannot ensure any of these ventures will be financially successful, but want you to understand some of the thinking that has led others to bring MRI into their practices.

David Mauerhan, MD
Co-moderator:

Over the last several years, as I have traveled to various meetings and forums, I have heard my colleagues talk more and more about ancillary revenues and how they are becoming a “must have” in order to survive in today’s marketplace. Some have bragged that their revenue generators are “cash cows,” while others have discussed more moderate income flows that have helped them defray the increasing overhead all are experiencing in private practice.

The problem often is, however, that it’s usually an “apples and oranges” type of discussion because different state regulations may apply, depending on where one practices.

Additionally, I believe many surgeons, particularly young surgeons coming out of training and joining groups who have these ancillary centers, do not understand the business of startup and operating costs for these endeavors, and hence do not have a good understanding of the cash flow requirements on some ancillary revenue sources. Like any business venture, there are real costs involved in beginning the process and if individuals do not understand, they can end up losing large amounts of money. How these partnerships are structured in a group, what the “buy-in” for partners is and how that is paid, vary greatly among many groups.

By bringing together individuals from around the country currently involved in these issues, in a round table forum, we hope to provide honest information, both good and bad, that readers can use to assess whether or not this fits with their practice philosophy and needs.

Moderators: How did you decide on an extremity scanner vs. a larger scanner that would allow you to image all your orthopedic patients, including MRIs of the spine?

Jack Bert, MD: We chose the extremity scanner after doing a proforma of our group, which I believe is the best way to choose a scanner. First, the group must determine which patients are “portable,” which by definition are the patients who are “allowed” to have the scan done on their physician-owned MRI unit.

In a highly managed care market, HMOs and PPOs may have their own scanners, and perhaps only 30% to 40% of your group’s patients can be referred and subsequently reimbursed by the physician-owned scanner. Thus, a feasibility study and marketplace analysis must be done before proceeding to determine just what percentage of patients is available to be scanned.

Second, what percentage of patients needs spine scans? This is critical because the .2 T extremity scanners now available give equivalent images to a 1.5 T scanner (Shellock, Bert et al, Jrnl MRI, 2001). The advantage of an extremity scanner is that they are very low maintenance and have no cryogen costs and the initial capital expenditure is literally 60% less than a 1.5 T unit. If only 15% of the group’s scans are spine scans, then it may make sense just to have one or two extremity scanners that are convenient with respect to patient access.

Bert Mandelbaum, MD: We chose an extremity 1.0 Tesla MRI by ONI. One reason was that it offers highly effective extremity MRI with at least equal or better images and performance to the larger 1.5 T machines. The advantages are that it is open and requires a smaller space and less shielding and preparation than the larger machines. This then translates to lower space costs, machine and site preparation costs.

Jeffry V. Glenning: Our group initially rented a mobile MRI unit, which gave us a safe way of measuring the potential of this new modality. For groups looking to avoid a large initial capital outlay, a mobile unit can be a good way to gauge volume and reimbursement potential. Our experience with the mobile unit was positive, so we moved ahead with acquiring a General Electric Signa 1.5T Short-Bore LX Echospeed MR System. The purchase was part of a larger upgrade to our facility that included construction of a new building, as well as acquisition of digital X-ray and PACS systems. Since our group has a relatively high volume of spine and shoulder studies, we did not choose an extremity-only scanner.

Alan Valadie, MD: Our group started with an extremity scanner, but as we grew, it became feasible to become involved with a larger scanner to handle our spine and hip MRIs. Again, the key is to have reliable data on the number and type of scans ordered to make the right decision.

Moderators: How do you feel an orthopedist should finance his or her MRI units?

Bert: Choose the scanner based upon the above analysis. Do not joint venture with one of these outside the group with a private entity that only wants to provide financing. What usually happens with this relationship is that the financing entity wants 20% to 50% of the cash flow indefinitely and the group is tied to this entity for the life of the scanner. Your local bank will be happy to provide a loan (which in my opinion should never be above prime) to the group if the above analysis confirms the profitability of the proposed venture.

Moderators: What are the important financial considerations in getting started?

Mandelbaum: It is important to be realistic with your clinical system. Understand the real volume of cases and the mixture of case type. For example if you have 80% shoulders, it would not be ideal to have an extremity machine. The key is be realistic in case mix so that you can project exactly what your requirements are and that it matches your budgets.

Glenning: Any sound decision to purchase MRI will come from understanding the business model. It is vital that during the MRI selection process, groups prepare financial analyses using realistic volume, reimbursement and cost projections. Generally, the proformas should cover the first five years of operation and provide breakeven and return on investment (ROI) analyses.

Groups must consider their local market, payer mix and utilization rate. If the group is already using a mobile scanner, actual volume numbers can be used in the analyses. Otherwise, MRI referrals to outside facilities should be measured, taking into consideration contractual issues that may restrict the group from performing scans for certain payer groups on their own scanner. If the vendor provides the proforma, be sure to validate the assumptions.

Valadie: Some groups may not want to make the financial commitment of buying and owning an MRI unit. A lower-cost alternative is to block lease an MRI facility.

Startup costs in this arrangement are limited to the legal fees necessary to write up the contract. Working with a health care attorney who has set this up before may help keep startup costs to a minimum.

Moderators: What are reasonable operating margins, and are there other considerations impacting one’s practice?

Valadie: Reasonable operating margins under a block leasing arrangement can be 40% after allowing for billing/collection staff time. As in any situation when attempting to capture MRI revenues, it is critical to have accurate data regarding the number of scans typically ordered by the individual or practice. Under a block leasing arrangement, the lease times and expenses remain constant, so block time must be paid for even if it is not filled with studies. Support staff is necessary to diligently schedule patients during block time.

Moderators: What advice do you have regarding joint-venturing the office MRI capabilities?

Bert: I would not joint-venture with a radiology group nor any other type of entity. We were briefly involved with a leaseback arrangement on a per-click basis and this has been scrutinized by the OIG office, and needless to say, after making the front page of the New York Times, it is not something that a physician group wants publicized. Furthermore, it’s not all that profitable for the orthopedic group. It does not appear to violate Stark or Safe Harbor regulations, but it does have the potential for negative publicity by those who believe that physicians should not own any ancillary services, such as the AHA and/or your local state hospital association.

Moderators: What are the pros and cons of owning or participating in the ownership of MRI capabilities?

Mandelbaum: The pros are that it is yours and that your patients are able to enjoy the service of one-stop service as a convenience. It is essential to use the highest quality scanner and collaborate with the best group of radiologists. If that is the case, you can feel comfortable you will create the best value for the patient. On the other hand, reducing your quality to make profit will ultimately fail.

Valadie: At this point, I do not think there are any “cons” other than the financial risks of getting involved in a venture without appropriate due diligence first and suffering negative financial consequences.

Specifically regarding block leasing, the positives of this arrangement are minimizing startup costs, capital outlay and risk of owning the equipment. The negatives are that all scans ordered may not be captured as most imaging companies would like to capture some for themselves, that the amount of lease time (ie, number of hours per week) can only be changed once a year, and that it may be difficult to schedule all patients in the time leased. Overall, I think the pros far outweigh the cons given the need for us to capture ancillary revenue to offset the declining reimbursement for professional services.

Glenning: MRI ownership provides orthopedic groups with the ability to monitor and improve quality, provide convenience to their patients, and potentially provide a good source of ancillary revenue to the group. Additionally, groups may find that having in-house MRI capabilities help with recruitment and retention of physicians. Groups may find that they are in over their heads, however, if the initial financial assumptions used in their purchasing decision do not hold true or were flawed to begin with. Changes in payer mix or reimbursement, regulatory changes, or departure of a physician can all turn a profitable service into a marginal or losing proposition.

Moderators: How do you keep track of the profitability of your scanner?

Bert: We do a monthly analysis to determine who in the group is referring to the MRI unit as well as the monthly overhead for that particular ancillary service, which in this case is the MRI unit. As with all other ancillaries, once the fixed and direct costs are accounted for, the profitability of the unit (once again based upon increased throughput) geometrically increases so that at a certain volume, virtually 85% to 90% of the reimbursement of the scan is profit.

Valadie: We monitor the profits by examining this as a separate cost center. All costs and revenues regarding MRIs are carefully tracked as an independent profit center. We comply with regulations by keeping abreast of any regulatory rule changes and keeping in contact with our health care attorney.

Moderators: What areas should we watch in the future?

Bert: The American College of Radiologists (ACR) is trying extremely hard to prevent anyone but a radiologist from owning an MRI scanner. In New Jersey, they attempted to get legislation passed that would bar physician ownership except by radiologists. The attorney general’s opinion apparently has not held up in court, however. Similar legislation is pending in Texas that specifically states that unless the physician has had a residency in radiology, he cannot participate in ownership of an MRI unit. The radiologists are arguing that this radiologist ownership prevents self-referral by subspecialists who have MRI ownership and thus will decrease the number of MRI scans done nationally.

It is critical for the physician group to be aware of legislation in their state that could prevent physician ownership of ancillaries. We have our own lobbyist whom we share with several other groups, and we receive weekly summaries of any health care legislation that may affect us. We then react quickly with direct meetings with the authors of these bills and educate them as to the etiology of this type of legislation, ie, primarily by the AHA or ACR. It is critical for the physician group to do their best to obtain the ability to get “referral bypasses” of their MRI unit so the HMO patients can be done at their physician-owned scanner. The strategy for accomplishing this is to be price-competitive and service-oriented.

Valadie: Future considerations for us are that we are evaluating a shared ancillary model, which will allow us to capture all of our scans while sharing the risk and costs with other organizations. For those who are considering capturing MRI ancillary revenue, it is important to be aware of all the options: ownership or lease of equipment independently, block leasing, shared ancillary model, etc. Individual circumstances such as size and risk tolerance of the group as well as laws specific to certain states will determine the best model to use.

Mandelbaum: We await these challenges. In Washington, there are radiologist-led bills that suggest conflict of interest, and that that relationship drives up the costs. In our environment, the opposite is true. We have been very specific to maintain fees that are below radiology group practices by constantly surveying the market. Over those years, our fees have been at least 40% less. The patients are well aware of this and appreciate it. The key principle here is that if we take care of our patients … they will always take care of us.

Glenning: The regulatory environment surrounding physician provision of ancillary services is extremely complex. Issues such as payment for professional services provided by radiologists, in-office vs. off-site facilities, joint ventures, and leasing arrangements should be closely examined with the help of a health care attorney prior to making a purchasing decision. Compliance with both federal and state statutes should be examined.Moving forward, the regulatory environment will need to be closely watched by any group providing MRI services. Professional societies such as the AAOS and MGMA do a good job at monitoring and reporting regulatory changes in this area.