Radiologists make their living by teasing diagnoses from the light and shadow in murky X-rays, snowy ultrasound exams and the perplexing slices yielded by computed tomography.
Perhaps surprisingly, administrators often make decisions about managing radiology services in much the same way.
Armed with vague notions of the costs and revenues of various imaging services, many radiology managers have only a hazy idea of how to improve the financial operations of their departments.
It takes data to make decisions about which procedures are profitable and should be beefed up and which lose money and should be overhauled or cut. That information is often in short supply.
Ultimately, ill-informed management can be hamstrung in negotiating contracts with insurers and unprepared to plan and invest for maximum profitability.
Take CT as an example. Even savvy radiology managers have trouble fingering the exact cost of each resource consumed to produce a single CT scan. In principle, the easiest costs to identify are for direct supplies such as contrast agents and film. But inside many hospitals, barriers between materials management and clinical departments such as radiology prevent information flow on supply spending, which is needed to calculate costs by type of study or clinical case.
Labor costs, a major factor in healthcare, can vary widely depending on the precise type of CT or exam performed. Technological advances, a constant in radiology, may either reduce the need for human involvement or create new tasks for department staffers. Estimating labor costs requires work. And to be worthwhile, each estimate must be updated or risk causing more problems than it solves.
Next, there are the costs of just keeping hospital doors open-from bond payments to advertising to insurance-that get passed along as overhead to every department, including radiology, and are factored into the cost of every exam.
Radiology, however, often bears an extra burden. Expensive CT and magnetic resonance imagers can load on debt and depreciation expense, for instance. Other times, hospitalwide expenses are levied entirely against radiology departments because of their perceived ability to pay.
Finally, the revenue side of the ledger can be downright confusing.
Revenues never equal charges, and reconciling the two by clinical case is demanding yet necessary. Whenever master accounts of procedure codes, which identify services in information systems, are updated, for instance, it seems they must be changed again to reflect new demands by payers.
And the particulars of the revenue splits between the radiologists providing professional services and the hospital health systems present an endless source of financial confusion.
Glory days. Not many years ago, questions about the expenses and profits of radiology services were largely academic.
"Previously, we had such large margins that it didn't even matter much what our costs were," says Howard Forman, M.D., vice chairman of finance and administration for radiology at the Yale University School of Medicine.
In the glory days of the early 1980s, margins of 50% weren't unusual. Now, however, some departments struggle to stay in the black, and even a successful radiology service is more likely to yield profits in the neighborhood of 10% to 20%. (Precise figures are hard to come by, however, because cost and revenue accounting remains so hazy.)
Payment trends point to further compression of radiology margins. Already, some common services such as mammography are loss leaders for all but the best-run, highest-volume radiology departments. And with outpatient imaging under Medicare expected to finally move to a prospective payment system in 2000, the last reservoir of easy imaging money will soon run dry.
Once unrivaled cash cows, radiology departments have come under the administrative microscope as targets for cost reduction and profit improvement, thanks largely to spartan managed-care contracts.
Although the price pressure isn't unique to radiology, the turnabout has been particularly jarring there. Few hospital departments have been such supple moneymakers, boosting their bottom line with practically just the flick of the X-ray switch.
"It used to be that more procedures equaled more revenue," says Laura Shapiro, a manager in the business consulting arm of Siemens Medical Systems, Iselin, N.J. "Now if a hospital has enough managed-care contracts, less may be more."
Bad data. Although many administrators intuitively know how much the payment landscape has changed, Shapiro says, conventional reporting of financial information in radiology departments often obscures the extent and effect of the transformation.
Many hospitals and their radiology services still focus too much on capturing data about their charges, shortchanging the extent to which those bills actually get paid, Shapiro says.
At 223-bed Good Samaritan Medical Center, Brockton, Mass., Joseph Ciaccola, vice president for finance and chief financial officer, is set to go live in January on a new information system that he expects to solve many management problems by marrying financial and clinical data, down to the individual patient record.
"Right now we have a general ledger that captures our transaction costs," he says. "But it doesn't get into nitty-gritty patient information."
Although revenue figures are also available in aggregate, detail by patient and examination type is needed. To make a management difference, Ciaccola says, the two disparate but equally complex groups of data must be linked.
For the past year and a half, he has been laying the groundwork for a decision-support system that will integrate clinical and financial information using software provided by Transition Systems, Boston.
Ciaccola says three people have been working full-time on the project, primarily building a standardized reporting infrastructure for the clinical and financial pieces.
He estimated the direct labor cost of the effort at about $150,000 but declined to divulge the price of the information systems package for competitive reasons.
As a result of the project, Ciaccola says, Good Samaritan will be able to isolate variable costs and build specific clinical and financial standards for particular radiology department services, such as CT. Once the data framework is in place, the information gathered will help Ciaccola understand whether and how to bid for certain kinds of managed-care business.
Though simple on its face, the approach is revolutionary.
"As a community hospital, there's an expectation you'll provide certain core services," says Ciaccola. "We haven't gone after the profitability of a certain piece of equipment or service."
But that's about to change.
The payoff from the decision-support system, he explains, will be "a good tool" to completely understand radiology and other clinical services as businesses, allowing in-depth profitability analysis by imaging technique.
Overhead millstone. A stumbling block on the road to profitability is monolithic charges that the corporate departments of hospitals or systems level as departmental overhead, many radiology administrators say. Old habits die hard, and many hospital radiology departments labor under an especially heavy load of unquestioned overhead costs covering such common charges as marketing, rent and plant maintenance.
The rise of outpatient imaging centers, financed by entrepreneurs unencumbered by hospital costs, should spotlight overhead.
Siemens' Shapiro says one hospital, which she declined to name because of a confidentiality agreement, had charged the entire cost of a multimillion-dollar hospitalwide information systems project to the radiology department. Never mind that radiology was just one computer user among many. Shapiro says the mentality in finance was that "radiology was a moneymaker" and could carry the whole cost.
Overhead charges can saddle even an efficient radiology department with baggage that keeps it from being financially competitive. Although nightmarish allocations are rare, a radiology department manager must remain vigilant.
"The key is to ask questions," says J.D. Mace, a radiology administrator turned consultant and the president-elect of the American Healthcare Radiology Administrators, based in Sudbury, Mass.
In the end, these overhead, or indirect, costs are critical in determining the ultimate tab for providing services, especially inpatient services. And they can make the difference in the decision about which lines of radiology service to emphasize or downplay.
At a health system in the Midwest, Mace recalls, overhead charges that were allocated to a promising joint venture with local radiologists killed a deal before it got off the ground.
Seeking a more entrepreneurial solution to delivering outpatient imaging services, the health system, which Mace declined to name, sought a partnership with a gung-ho radiology group that provided services to a key hospital. The goals were to do more imaging and increase profitability. Although the physicians were asked to invest modestly in the operation, their capital wasn't as important as the commitment symbolized by their personal stakes.
Nevertheless, Mace says, once the system's overhead costs were passed through to the freestanding imaging center under consideration, they shot the return on investment for the doctors.
"In a fully allocated model, the hospital couldn't drive enough profit out of the venture to entice them to make an investment," he says.
In other words, the system's insistence on defraying its infrastructure costs by assigning them to the venture suffocated the deal.
Even substituting rosy estimates for the labor and variable costs that would be controlled by imaging centers wasn't enough to pump up returns, Mace says. System accountants stood pat on their overhead demands, ignoring the pleas of the venture's supporters, Mace says.
As a result, the system was left "standing on the sidelines," Mace says, abandoning the project to avoid angering the doctors, who also were negotiating a contract to provide inpatient services.
The ultimate cost. Figuring the cost of every unit of radiology service, such as a wrist X-ray, requires managers to factor in specific overhead, supply and labor costs.
Often seen as a glorious goal, such fully allocated costs always seem just out of reach, a Holy Grail of radiology administration. But trying to grasp them is worth the effort.
"I would guess that most administrators don't know what their fully allocated costs are," Mace declares.
Keep at it, he advises.
It's tough to be a pest, especially with top financial management. But there's a method to this inquisitive madness because these charges can loom as large as the more familiar direct costs of labor and supplies.
And while some industry watchers estimate hospital radiology department overhead accounts for 40% or more of their costs, the competition in independent imaging centers skates by with ballast of only 25%. Managed-care companies, of course, are free to pick off the cheaper provider by pegging their payment to the low end of the range. And overhead can make the difference. Maybe you can't change all the overhead, but measurement is the first step toward improvement.
Sometimes bad things happen to good people, and personnel cutbacks often compound the difficulty of navigating the financial maze.
"There are no mysteries about identifying costs in imaging services," says Tom Lindl, a vice president for U.S. Counseling Services, Brookfield, Wis. But hospital administrators "frequently fail to be as diligent as they should be," he says.
Fewer people, bigger stores. One reason, he says, is that fewer people are minding bigger stores. "With all the squeezing that's been done to the infrastructure, you've squeezed out a lot of knowledge in the system," he says.
Many hospitals and health systems, Lindl says, have scaled back the layers of technology-specific managers who understand the content of the exams and their organizations' financial workings. Those who are left are often too overwhelmed to ride herd on the myriad meaningful cost and revenue variables.
That brain drain is doubly damaging because skilled workers invariably are needed to play key roles in measuring and influencing radiology expenses, especially labor costs.
"Cost accounting systems are conceptually relatively simple," says James Rotherham, director of finance at 659-bed Lehigh Valley Hospital, Allentown, Pa. "But they are full of estimates, and in a hospital they need to be." Requiring each X-ray technician to log the actual time spent on every exam would lead to revolt. In evaluating labor costs, for instance, the trick is to estimate procedures accurately, particularly those that are frequently performed.
Lehigh Valley is updating its relative value units, a measure of labor content, in response to changes in clinical practices and new codes from payers, such as CPT and interventional codes from Medicare.
"Where we focus our energies is our high-volume studies," says Sheila Sferrella, radiology administrator at Lehigh Valley.
"We may have 50 to 75 charges in our master list of charges," but eight to 10 studies represent 80% of our volume, and that's where we focus on being most accurate, she says.
In the end, Rotherham says, Lehigh Valley's approach is to focus on managing expenses rather than enhancing revenues and margins.
"We feel our department heads can very much manage their costs, but they have difficulty managing the volume that comes to them," he says. "We don't give them marketing capability. They kind of sit back and get what the doctors order."
Furthermore, he says, the manager of radiology or another department can't really affect the level of payment, because government and private payers call the macro-economic tune.
Lehigh Valley believes in benchmarking and uses data from Mecon, based in San Ramon, Calif., to gauge spending and utilization. Hospital management expects all departments to rank in the top 25% of cost-effectiveness as measured by the Mecon database (See chart, p. 45).
For radiology, Sferrella says, five of eight cost centers measured by Mecon make the grade by placing in the top 25th percentile. The others just miss and may actually fail primarily because of quirks in how the data are categorized, she says.
Sferrella now gets updates of the benchmarking cost data along with payroll reports. Both run on her personal computer, and she can make sure labor costs align with fluctuations in imaging volume.
For Sferrella, a self-described perfectionist, the timely electronic reports are a godsend. "When you're managing 150 people, you can't do it by your gut all the time."
In radiology and other clinical areas, the key to financial and operational success, Rotherham says, is a "motivated department manager, not a finance manager. The work ends up in the manager's lap. Once they give it to me, it's a data entry function."
Especially in an area as subjective as radiology, it's not surprising that there's more than one way to tackle the financial problems.
However an organization measures costs, both direct and indirect, the main idea is to just do it.
"If you don't know how much it cost you at the procedure level, you don't know if you'll make money on it when you go out and contract with insurance companies to do it," says Sindy Smith, a consultant with Rochester, N.Y.-based Eastman Kodak, who advises hospitals on managing radiology costs.
Start now, she and other experts say, because when payments for outpatient services go the way of prospective payments for inpatient services, the last refuge for papering over poorly performing departments will be gone.
In the end, knowing fully allocated costs may be less important than figuring out the costs of performing each extra exam over the department's baseline, some managers say.
The fully allocated cost of an inpatient ultrasound exam is probably about 10 times the marginal cost, says Yale's Forman, a doctor who also has an MBA. But once you've bought the equipment and hired the staff, Forman says, the cost of performing an extra exam can be surprisingly low.
Fully loaded costs are necessary to develop long-term budgets and determine what the entire system is spending on radiology services, Forman says.
With all the pressure to cut costs-any costs-Forman warns that if necessary exams are not performed, the costs of patient care may be higher. So in managing radiology costs, Forman says, it remains important to consider the entire clinical picture.
"If a patient can be triaged or sent home earlier because of those studies, there may actually be a cost savings," he says. Therefore, he emphasizes that "marginal cost is really what's important."