An independent, physician-owned imaging center whose self-deprecating partners refer to themselves as "bottom feeders" won the most recent battle in the war over who gets the priciest, most technologically advanced medical arms.
In June, East River Medical Imaging Associates, New York, became the first commercial purchaser of GE Medical Systems' $2.7 million Discovery LS, a scanner that marries the high-end technologies of CT and positron emission tomography. Owned by five radiologists, East River upstaged every hospital in the country with the exception of Johns Hopkins Hospital in Baltimore, which bought the scanner to participate in continuing clinical trials. Unlike the teaching hospital, East River planned to immediately put the new scanner to work in its stable of modalities, which include MRI, CT, PET, ultrasound and X-ray.
This could be a trend that slow-moving hospitals are missing. And soon they may be crowded out by smaller and more nimble craft that are increasingly navigating the friendly waters for outpatient imaging facilities.
The decision to plunk down a few million to buy the Discovery and build the space to accommodate it took little time and effort, the East River partners say. The partners simply agreed they must have it.
"We don't have a lot of red tape," says Richard Katz, M.D. "It's easy for the five of us to get together."
Adds another partner, Morton Schneider, M.D.: "We see the future. We think we have to be somewhat visionary. That's what risk-taking is all about."
Feeding on scraps
The partners shrug off the significance of being first and don't brag about it much. They do little marketing, almost nothing directly to consumers. Founded at the end of 1985 with the introduction of MRI technology, the practice has naturally blossomed from two doctors and five employees to 10 radiologists and 102 workers spread across 19,000 square feet of office space on two floors.
So far there's plenty of business to go around in the medically rich Upper East Side, home to New York-Presbyterian Hospital and Memorial Sloan-Kettering Cancer Center, to name just two. The East River radiologists sometimes feed on scraps from their hospital neighbors, which simply can't squeeze in one more patient for a last-minute scan.
"We're the second button on the auto-dial," Schneider says.
East River competitors agree with that assessment. "We have more volume than we can keep up with-not that we turn people away-but to get to them sooner, sometimes people go to another (imaging center)," says Marc Brown, M.D., medical director of Columbia Presbyterian's East Side Radiology. "Theoretically (East River) may be competition, but in fact we are all very busy."
With dazzling advancements in radiology technology, the rise of consumerism and the growing popularity of what some call "retail medicine," the nonthreatening quality of imaging centers such as East River could be a thing of the past. While some hospitals contemplate the value of diversifying into outpatient radiology centers, a host of competitors are more than willing to dive into the radiology market, taking full advantage of new technologies-and the accompanying new business strategies.
"I'd say hospitals are more reluctant to invest in outpatient centers, and one reason is they see (such investment) as a duplication of cost already incurred in the hospital," says Robert Maier, president and chief executive officer of Regents Health Resources, Brentwood, Tenn., which consults with and helps develop medical imaging services. "They don't believe it will increase their market share but just take business away from the hospital and increase their cost base, whereas physicians see (freestanding centers) as a market advantage, so they are able to provide imaging to patients that is not only conventional but accessible."
Freestanding centers, if configured carefully, also can offer hospitals larger Medicare reimbursements, Maier says. What's more, patient Medicare copayments can be higher at hospital-owned freestanding centers, giving patients an extra incentive to go to outpatient centers. There's a marketing advantage, too. All things being equal, most patients would prefer to go to an off-campus facility than to an inconveniently located hospital where they have to wait in line behind emergency and surgical patients, he says.
"So there may not be much difference in terms of quality, but there may be a big difference in terms of cost and convenience and accessibility," Maier says. "A lot of hospitals don't appreciate how significant the contribution margins are and how important they are to their financial viability."
Profits from an outpatient facility could climb as high as 70%, Maier says.
No single player dominates the outpatient radiology market-yet. Local hospitals still have the bulk of the business, with hospital outpatient departments delivering 48%-144 million-of the 300 million diagnostic imaging procedures performed in the U.S. in 2000, according to research from U.S. Bancorp Piper Jaffray. Freestanding centers accounted for 36 million, or 12%, of the overall procedures.
In terms of dollars, freestanding centers take a higher percentage of the overall market for outpatient imaging, including hospitals, accounting for about one-fifth ($7.2 billion) of the $36 billion whole, U.S. Bancorp reports. Meanwhile, the number of imaging procedures performed in the U.S. has grown 8% a year since 1995. The most dramatic increases have been in high-end procedures such as ultrasound (39%), CT (32%) and MRI (24%), just from 1999 to 2000, U.S. Bancorp says.
That makes for a fragmented market, but research analysts at U.S. Bancorp say they expect freestanding centers to gain share from hospitals over the next decade, thanks in part to advances that make it easier to take technology off-site. Increasing cost-containment pressures and consumer preference will also drive the shift, U.S. Bancorp predicts.
At least one publicly traded company positioning itself for that future is Dallas-based Radiologix, which operates 122 facilities throughout the country, 16 of them in partnership with hospitals. Chairman and CEO Mark Wagar, who publishes his direct telephone line on the company's Web site, says Radiologix, although small and growing, may be the only public company focused solely on outpatient imaging. The company was founded in 1996.
Radiologix's growth strategy includes strong market concentration with the full array of imaging modalities to provide the best and most convenient services to patients and referring physicians, Wagar says. The company likes to stay on the cutting edge of technology-the first high-volume mainstream stop after a new technology emerges from academic environments.
Similar to what laboratory companies have learned, Wagar says, "If you want to be the preferred provider for high-end procedures, then you need to be the best provider in the market for the routine, which is X-ray and mammography." The proof is in the picture: Only one-third of Radiologix's volume derives from high-end technologies such as MRI and CT, but those technologies also provide the company's biggest chunk of revenue, he says.
Rather than homing in on hospital territory, Wagar says, the company prefers to partner with hospitals, viewing that "as an effective way for us to grow our business and to help a hospital be a better provider in the marketplace." Radiologix's ability to stay focused on outpatient imaging while sharing expenses wins greater market share for hospitals. "It's not infrequent to see 10, 20, or 30 more patients" per day than the hospital saw operating an imaging center on its own, Wagar says.
For the third quarter ended Sept. 30, Radiologix reported record service-fee revenue at existing centers of $69.2 million compared with $62.5 million for the year-ago period. Excluding a $1 million one-time charge because of a proposed merger that never closed, Radiologix earned $4.4 million, or 20 cents per share, compared with $4.2 million, or 20 cents per share, for the year-ago period.
Catering to the `worried well'
While Radiologix is focused on bringing its services to facilities on Main Street, other companies are breaking new ground with full-body-screening centers that capture the "worried well" before illness is even an issue. In some ways, full-body screenings are radiology's answer to the genomic revolution insofar as the imaging centers, which have proliferated on the West Coast for several years, screen patients for disease susceptibility before symptoms appear. Patients pay as much as $1,400 out-of-pocket to learn whether they have a buildup of calcium in their coronary arteries, a precancerous lesion in their lungs or a polyp in their colon.
The thinking is that if potential health problems are found early enough, patients better their chances for a healthy life and avoid invasive and costly treatments that will ultimately burden the healthcare system. But critics charge that such screenings are unscientific and generate too many costly and worrisome false positives.
"I am unaware of any selection process other than people walking off the street and having the money to pay for it," says Robert Stanley, M.D., chairman of the radiology department at the University of Alabama at Birmingham and president of the American Roentgen Ray Society.
Academics may still perceive the movement as flaky and "Left Coast," but full-body screenings are marching east, fueled by the growing popularity of preventive, consumer-driven medicine. Several entrepreneurs have plans to open centers in Manhattan before the end of the year.
Thanks in large part to leaps in CT technology in the past few years, which have made CT screening masterful at detecting presymptomatic abnormalities, increasing nonmedical dollars are being invested into such imaging centers, says Barry Borden, director of business development for Siemens Medical Solutions, Iselin, N.J.
The technology "really steps on a lot of toes in terms of the current care model," Borden says. "I think the whole system will embrace it over time, but it's a new shift."
Siemens is so convinced that this is the new wave that it plans to seek Food and Drug Administration approval to market many of its imaging devices for screening purposes. "There's opportunity there, and we'll pursue that opportunity," Borden says.
CT Screening International, Irvine, Calif., claims to be the biggest full-body screener, with plans to have 13 centers open by early January, including in New Jersey and New York. The centers' only rule is that patients from the ages of 35 to 40 have "severe risk factors." If not, they must be at least 40, says Philip Voluck, the company's president of marketing and sales. Even with those constraints, he says there are 20 million Americans who are "prime candidates for this type of screening."
CT Screening will compete in New York with Imaging for Life, an East Coast-based company that plans to open a Manhattan center soon and has operated a screening center in White Plains, N.Y., since the beginning of the year.
For now, Imaging for Life will concentrate on CT screenings, but the business plan is not written in stone, says Marc Manuel, executive vice president.
At least one screening company physician executive says he finds little common ground with hospitals. Founded in 2000, Scottsdale, Ariz.-based AmeriScan, which has famously brought radiology to the shopping mall, operates four centers in Arizona and California and plans to expand to more than 20 centers by the end of 2002, says Craig Bittner, M.D., its medical director and chief operating officer.
Bittner says he doesn't worry that hospitals will ever threaten his business. "We recruited a CEO from a big health system, and he moved like a dinosaur. We had to let him go," Bittner says. "(Health systems) can't pose any competition for us. There are just a million ways to do it wrong."