COMPETITIVE THREATS TO THE FUTURE OF DIAGNOSTIC IMAGING

1. Brown University - Rhode Island Hospital COMPETITIVE THREATS TO THEFUTURE OF DIAGNOSTIC IMAGING Howard.Forman@Yale.Edu

2. Agenda • Economic Backdrop • Financial Backdrop • Medicare • Threats • My opinion

3. Economic Backdrop • Overall Economy is near capacity • Increasing concerns of rich/poor disparities and returns to capital as opposed to labor • But – overall GDP growth is teetering; unemployment is low (historical basis), but growing; and industry utilization is at the upper end of the range (inflationary pressures) • Inflation, while of concern, is not high by historical standards • Energy cost inflation may work its way into the pipeline but its effect on the economy would tend to ameliorate its effect on gross inflation • Biggest current risk may be the decline in the US Dollar. Our goods will cost less overseas (thus, avoiding recession?), but (ex-China, which is quasi-linked to our dollar), most other international goods are more expensive and remove pricing pressure for domestic-US firms

4. Economic Backdrop • Risks of Recession are real, but HIGHLY dependent on consumer • Thus far, very resilient • Equity markets reflect overall optimism • Biggest threat to economy is housing bubble • Takes several years to (retrospectively) learn how bad it was. • Worst case scenario (increasing inflation, declining growth, and, thus, further declines in our dollar) • Declining consumer spending • Greater unemployment • Greater uninsured problem • Housing deflationary spiral in the setting of high leverage: yielding sustained slowdown • Spillover effects to equity markets

5. Healthcare Finance Backdrop • Historical spending (other than a few brief periods) has always been above GDP growth • We prefer to spend our increasing disposable income on improving our health • Income elasticity of demand for healthcare is greater than unity • Growth in healthcare spending is a fact/given • Where that growth is greatest is a big issue • PhRMA for a while • Medical Devices • Imaging and Cardiovascular interventions • Fastest growth will always draw the attention of the media, the public, and both political parties

6. Health Care Spending (NHE) 2005:Highlights • $1.99 Trillion up by 6.9 % (down from 9.1%, 8.1%, and 7.2% in three preceding years) from prior year. $6697 per capita up by 5.9 % • GDP (nominal) growth 6.3 % • 16 % of GDP (highest ever, grew by 0.1% this year): Healthcare, as percent of GDP, has been growing since 1997, after a slight decline during the mid 1990s • Private spending grew at a 6.3% rate and public spending at 7.7% (45.4% of NHE are PUBLIC; up from 43.9% in 1999) • Public Expenditures (per capita) • Overall $3041 • Federal $ 2169 • State and Local $873 • Total U.K. (Public and Private): < $3000 (2003 data was $2317)

9. National Expenditures for Health Services and Supplies(1) by Category, 1980 and 2005(2) $234.0B $1,860.9B Source: Centers for Medicare & Medicaid Services, Office of the Actuary. Data released January 8, 2007. (1) Excludes medical research and medical facilities construction. (2) CMS completed a benchmark revision in 2006, introducing changes in methods, definitions and source data that are applied to the entire time series (back to 1960). For more information on this revision, see http://www.cms.hhs.gov/NationalHealthExpendData/downloads/benchmark.pdf. (3) “Other” includes net cost of insurance and administration, government public health activities, and other personal health care. (4) “Other professional” includes dental and other non-physician professional services.

10. Percent Change in National Expenditures for Health Services and Supplies(1) by Category, 2004 – 2005(2) Source: Centers for Medicare & Medicaid Services, Office of the Actuary. Data released January 8, 2007. (1) Excludes medical research and medical facilities construction. (2) CMS completed a benchmark revision in 2006, introducing changes in methods, definitions and source data that are applied to the entire time series (back to 1960). For more information on this revision, see http://www.cms.hhs.gov/NationalHealthExpendData/downloads/benchmark.pdf. (3) “Other” includes government public health activities and other personal health care. (4) “Other professional” includes dental and other non-physician professional services.

11. HI-Medicare Part A • Hospice care (since 1982) • Inpatient Hospital services • Skilled nursing facility care (after a 3 day hospital stay) • 22% of beneficiaries actually received HI services in 2002 (slight increase from 1993, when figure was ~ 20%) • Average expenditure per enrollee increased by 3.3 %; Now $4410 (2006)

12. Medicare: Financing Part A • 1.45% Payroll tax on total income, matched by employer • No limit • Money flows into trust fund • There are no restrictions on spending (from current income and trust fund) • Changes in medical practice may result in huge increases (or, theoretically decreases) in spending which have no influence on budgeting of any given year • In theory, no access to any funds other than trust fund and current payroll tax revenue

13. TR, 2007

14. Medicare Part B - Supplemental Medical Insurance • Physician services • Home Healthcare • Durable medical equipment (DME) • Outpatient medical services • Clinical lab tests; Imaging • PT/OT • Emergency Room service • Ambulance; • Hep B, Flu, Pneumococcal vaccines • Screening: Pap smear, mammography, colon; cholesterol; Diabetes; Glaucoma; Prostate cancer • Prescription drugs which can not be self-administered including certain anti-cancer drugs

15. TR, 2007

16. Medicare: Current State of Affairs • DRA – outpatient facility and multi-part examination reimbursement reductions • Not evidence based, but easy to enact • CMS revisions • CMS revises RBRVS-based fees on a 5 year basis • Reductions in practice expenses are included in last (2007) round • Med PAC • Very thoughtful organization • Recommendations carry a lot of weight • Would reverse some DRA changes • But would probably offset the effect by reducing technical reimbursement due to archaic assumptions (11% cost of capital and 50% utilization rate for imaging equipment) • BBA 1997/ Sustainable growth rate legislation • Will dramatically reduce all physician fees • Could have ripple effects • SCHIP renewal

17. Medicare: The future • Reduced spending growth must be achieved for HI (Part A), SMI (Part B) and PDPs(Part D) • Likely accompanied by tax and cost-sharing increases • Most effective tools for reduced spending require some combination of empowering consumers, introducing market mechanisms into the program, and removing distorting incentives • But easiest tools are reimbursement reductions

18. Competitive Threats • 9 most terrifying words in the English language • Managed Care – Benefit design • Threats from outsourcing and competition • Turf and external threats

19. Government • Primarily Medicare • Ripple effects to all other payers • SGR – Sustainable Growth Rate Legislation • Physician Quality Reporting Initiative • Competitive Bidding demonstration project • Wheelchairs versus Chest X-Rays • Spot (and futures?) market for reads? • A la David Brailer • Medicare Advantage • Further concentration of buying power in the hands of (larger) entities

20. Managed Care – Benefit Design • Pre-authorization/pre-certification • Increasing use of RBMs • In-house and outsourced • AIM purchased by Wellpoint • RIA purchased by Magellan • Co-pays and Co-insurance • Previously not used for imaging and laboratory testing • Highly effective in Pharmacy Benefit Management • # 1 Statin? • Back to tighter networks with POS plans? • Offer every provider, but no co-pays with preferred (i.e., low cost)

21. Outsourcing Threats • The opportunity for Nighthawk (as a specific firm, and generically) is Final Reads • Right now, company has small share of tiny market (less than $200 million in annual revenue against a backdrop of $40 Billion (??) in opportunity) • If they can penetrate final read market (and this obviously applies to all domestic-based competitors) - - real concern!

22. Extra-Radiology Threats • As a specialty, we have always dealt with (and thrived during) turf battles • Stark Rules and self-dealing concerns • Gain-sharing • Great opportunity for managed care and Medicare • Could be the greatest, ultimate, threat to continued high growth in imaging • Emergency Imaging; Oncologic Imaging; Musculoskeletal Imaging

23. Where do we go from here? • Price Pressures may increase • Low cost providers will be best-positioned • Competition is no longer local • If a practice makes too high a demand on local market (managed care or even facility), there are real alternative options • Count on increasing volume, but plan for slower growth • Do not over-hire • Put a premium on a flexible workforce • Use of RAs, PAs, etc.

24. Where do we go from here (continued)? • Deal with local turf issues • Based on quality, ability, and competence • Do NOT attempt to deal with turf on the basis of title (Radiologist) • Hire strategically • Cardiac imaging • PET Imaging • Orthopedic Imaging • Staff strategically • Do NOT allow outsourcing of any imaging, unless it is absolutely necessary (short term losses may be acceptable)

25. Strategic Planning • PQRI – Participate and plan for future • Next likely steps • Increases in reimbursement will be tied to some metric of quality • Reporting times? • Reporting information? • Outcomes reporting? – not that far off (think MQSA) • Contemplate open-bidding and what it will mean for your practice • Scenario analysis • Choose (sub)specialty with an eye to the consumer

26. Good News • For many reasons, our trainees have been top-caliber for a long time • Field is populated with intelligent, ambitious, and technologically adept physicians • The pipeline is strong • Direct relationships between Radiologists and clinical peers make outsourcing, by fiat, unlikely • In fact, most outsourcing is from the Radiology Groups, themselves, at this point

27. Good News • Since the first dire warnings of our demise (15 years ago), our incomes have (with brief exception) grown faster than all other physician specialties • We are highly adept at using novel technologies and will continue to do so • Passivity will not be rewarded; Stay focused on consumer and payers when making decisions • Future of specialty is not in doubt. Make-up of job will always be changing - be prepared to change with it….

28. Questions ………?