Magellan Health Services is expanding into the radiology-benefits market to diversify its revenue as it tries to help insurers slow the growth in spending on imaging services.
The Avon, Conn.-based behavioral-health benefits manager, which emerged from bankruptcy in 2004, announced last week it signed a definitive agreement to pay $122 million to buy Hackensack, N.J.-based National Imaging Associates, the leading benefits manager for radiology services.
The expansion plan comes amid sagging spending on Magellan's core behavioral-health benefits management business. Rene Lerer, Magellan's president and chief operating officer, said that behavioral health would still be the company's main thrust. But Edmund Kroll, an analyst with investment bank SG Cowen & Co., said a radiology line of business would soften the blow of a shrinking behavioral-health market.
Magellan is losing contracts with health plans--mainly Aetna--that are deciding to run their behavioral-health management themselves, which reflects an expected $330 million loss in revenue in 2006 for the company, said Magellan Chief Executive Officer and Chairman Steven Shulman in a conference call with investors.
In the past 10 years, behavioral-health spending has dropped to 2% to 4% of overall healthcare spending from about 10%, Lerer said. The drop in spending also coincided with psychiatric hospital closures, bed reductions and decreases in lengths of stay (April 4, p. 6).
Meanwhile, Medicare spending on imaging services increased 60%, to $9.3 billion, from 1999 to 2003, according to the Medicare Payment Advisory Committee. In addition to diversifying revenue with the purchase, Magellan aims to help rein in radiology spending growth, Lerer said.
A drive to cut costs was welcomed by James Borgstede, chairman of the board of chancellors for the American College of Radiology, as long as it's to get rid of waste. Any cuts should target the improper use of services, he said, which by one estimate add as much as $16 billion per year to healthcare spending.
Lerer said National Imaging's management would stay on board with Magellan and that Magellan's experience could bolster National Imaging's expertise because cutting costs in radiology would be similar to what Magellan helped do in behavioral health. The deal is subject to regulatory approvals and is expected to close during the first quarter of 2006.