a feasibility analysis for a fixed mri unit

A Feasibility Analysis for a Fixed A Feasibility Analysis for a Fixed MRI UnitMRI Unit

Amy Everage HendricksonAmy Everage HendricksonUniversity of KentuckyUniversity of Kentucky

Martin School of Public Policy and AdministrationMartin School of Public Policy and AdministrationMasters of Healthcare AdministrationMasters of Healthcare Administration

Capstone ProjectCapstone ProjectSpring 2008Spring 2008

OverviewOverview Product ReviewProduct Review Literature ReviewLiterature Review Purpose of the StudyPurpose of the Study Managerial QuestionManagerial Question Background and Retrospective AnalysisBackground and Retrospective Analysis MethodologyMethodology Data Sources and CollectionData Sources and Collection Prospective Situational Analysis Prospective Situational Analysis LimitationsLimitations RecommendationsRecommendations

Product ReviewProduct Review

Magnetic Resonance Imaging (MRI) is a Magnetic Resonance Imaging (MRI) is a noninvasive diagnostic technique that noninvasive diagnostic technique that produces computerized images of internal produces computerized images of internal body tissues and is based on nuclear body tissues and is based on nuclear magnetic resonance of atoms within the magnetic resonance of atoms within the body induced by the application of radio body induced by the application of radio waves*waves*

*Merriam-Webster (2008)*Merriam-Webster (2008)

Product ReviewProduct Review

*Iglehart (2006)

Literature ReviewLiterature Review

Financial Feasibility and Future Success of Financial Feasibility and Future Success of MRI ServicesMRI Services Optimal success in the capture of imaging Optimal success in the capture of imaging

revenue tied to appropriate staffing and revenue tied to appropriate staffing and technology.technology.


Imaging revenues have historically been one of Imaging revenues have historically been one of the two most profitable business lines for the two most profitable business lines for hospitals*hospitals*

All hospital in this study reported strong MRI All hospital in this study reported strong MRI volumes contributed to volume growth and volumes contributed to volume growth and financial success*financial success*

MRI Technology is offering physicians precisions MRI Technology is offering physicians precisions in surgery and accuracy of diagnosis, in surgery and accuracy of diagnosis, particularly Cancerparticularly Cancer

*The Advisory Board Company (2005)*The Advisory Board Company (2005)


Future of MRI Technology*Future of MRI Technology* 1.5T vs. 3.0T1.5T vs. 3.0T

Spine and breast images are inferior to the 1.5TSpine and breast images are inferior to the 1.5T Coils not yet available for some servicesCoils not yet available for some services

Open vs. ClosedOpen vs. Closed Limited image quality due to lower magnetic Limited image quality due to lower magnetic

strengthstrength

*Tannenbaum (2005)*Tannenbaum (2005)


Competition for MRI ServicesCompetition for MRI Services Hospitals, radiologists, non-radiologists Hospitals, radiologists, non-radiologists

physicians and independent testing facilities*physicians and independent testing facilities* Hospital did have greater capture of services Hospital did have greater capture of services

over others.*over others.* Importance of CON Law and application of the Importance of CON Law and application of the

Stark LawStark Law

*Mitchell*Mitchell (2007)(2007)


MRI Market Potential MRI Market Potential 6% of all outpatient imaging volume and 30% 6% of all outpatient imaging volume and 30%

of all imaging profits come from MRI*of all imaging profits come from MRI*

*Advisory Board Technology Watch (2005)*Advisory Board Technology Watch (2005)

Purpose of the StudyPurpose of the Study

To analyze the feasibility of establishing a To analyze the feasibility of establishing a permanent, fixed MRI service at Newco permanent, fixed MRI service at Newco HospitalHospital

Managerial QuestionManagerial Question

Can the organization anticipate revenues Can the organization anticipate revenues adequate to justify this new service?adequate to justify this new service?

MethodologyMethodology

Retrospective AnalysisRetrospective Analysis SWOT AnalysisSWOT Analysis

Prospective Situational AnalysisProspective Situational Analysis Financial ProformaFinancial Proforma Breakeven AnalysisBreakeven Analysis

Data Sources and CollectionData Sources and Collection

InterviewsInterviews Direct ObservationDirect Observation Inpatient and Outpatient MRI VolumesInpatient and Outpatient MRI Volumes Manual Reports and DocumentsManual Reports and Documents Automated Decision Support ToolsAutomated Decision Support Tools National, State, and Area Development National, State, and Area Development

District specific dataDistrict specific data Journal ArticlesJournal Articles

Background and Retrospective Background and Retrospective AnalysisAnalysis

Organizational Setting & Organizational Setting & DescriptionDescription

96 bed, acute-care, rural hospital 96 bed, acute-care, rural hospital Not-for-profitNot-for-profit 1 of 9 hospitals 1 of 9 hospitals Located in Eastern KentuckyLocated in Eastern Kentucky Provides services of a community hospitalProvides services of a community hospital Full-service imaging departmentFull-service imaging department

Goals and ObjectivesGoals and Objectives

Mission: Improve the health and promote the Mission: Improve the health and promote the well being of the peoplewell being of the people

Formalized strategic planning process for the Formalized strategic planning process for the organization and for the hospitalorganization and for the hospital

Organizations grand strategy is to be a Organizations grand strategy is to be a financially viable ongoing entityfinancially viable ongoing entity

Support system objectives: by growing volume Support system objectives: by growing volume and market share, improving patient satisfaction, and market share, improving patient satisfaction, and establishing quality with staffing and and establishing quality with staffing and technology.technology.

GovernanceGovernance

Reports to manager of radiologyReports to manager of radiology Administrative Responsibility/Community Administrative Responsibility/Community

CEOCEO Reports to organizational president/CEOReports to organizational president/CEO Governed by Board of TrusteesGoverned by Board of Trustees

Profile of Existing ServiceProfile of Existing Service

MRI service availableMRI service available Mobile Contract ServiceMobile Contract Service Two days a weekTwo days a week Maximized within the 1Maximized within the 1stst year of operations in year of operations in

20012001

Patient Satisfaction 3.35 on a 4.0 scale, Patient Satisfaction 3.35 on a 4.0 scale, below industry benchmark of 3.55below industry benchmark of 3.55

No current marketing plan or strategyNo current marketing plan or strategy

Revenue Cycle ManagementRevenue Cycle Management

Established charge and billing structureEstablished charge and billing structure

Information SystemsInformation Systems

Integrated information system in placeIntegrated information system in place Digital picture archiving systemDigital picture archiving system No automated patient scheduling systemNo automated patient scheduling system

FiscalFiscal

2007 work stoppage2007 work stoppage Declines in volumes, revenue cycle Declines in volumes, revenue cycle

efficiency, cash flowefficiency, cash flow 2007 operating loss of $6 million2007 operating loss of $6 million Non-restricted days in cash is 23Non-restricted days in cash is 23

Human ResourcesHuman Resources

Employees represented by USWEmployees represented by USW Negotiated salary and benefits in market Negotiated salary and benefits in market

placeplace

Materials ManagementMaterials Management

Centralized materials management Centralized materials management functionsfunctions

Member of large GPOMember of large GPO Good Leverage for competitor pricingGood Leverage for competitor pricing

Regulatory & LegalRegulatory & Legal

Well established organizational policy and Well established organizational policy and proceduresprocedures

Approved certificate of needApproved certificate of need

Volume and Market AnalysisVolume and Market Analysis

Current market share is 43.08%Current market share is 43.08% MRI volume decline in 2007 due to:MRI volume decline in 2007 due to:

Private physician competitor went into businessPrivate physician competitor went into business Work stoppage by unionWork stoppage by union Limitation of a two day a week serviceLimitation of a two day a week service

National use rate is 61.5/1000National use rate is 61.5/1000 Socioeconomic demographics and epidemiology suggest Socioeconomic demographics and epidemiology suggest

61.5 is a conservative estimate in this market61.5 is a conservative estimate in this market Slight population increase over next five yearsSlight population increase over next five years

MRI UtilizationMRI Utilization

Newco Hospital Service Area FY 2007

1122

2604

0

500

1000

1500

2000

2500

3000

Total MRI Scans at Newco Total MRI Scans in the ServiceArea

# M

RI

Sca

ns

Payor Mix for Newco Hospital MRI Services

34%

33%

8%

25%Medicaid

Medicare

Self-Pay

Commercial & ManagedCare

Community and Medical Staff Community and Medical Staff SupportSupport

Local Advisory committeeLocal Advisory committee Medical StaffMedical Staff Government officialsGovernment officials Business leadersBusiness leaders

Facility and Physical PlantFacility and Physical Plant

No vacant space in the hospitalNo vacant space in the hospital Good undeveloped space adjacent to the Good undeveloped space adjacent to the

west end of hospitalwest end of hospital

SWOT AnalysisSWOT Analysis

StrengthsStrengths Well Established Physician Referral BaseWell Established Physician Referral Base Vacant space available for developmentVacant space available for development Ample Parking at site for new constructionAmple Parking at site for new construction Location of hospital Location of hospital 9% Imaging volume growth over the past 5 years 9% Imaging volume growth over the past 5 years Competitive salary & benefit packagesCompetitive salary & benefit packages Experienced manager in medical imagingExperienced manager in medical imaging Existing contract with interpreting radiologists Existing contract with interpreting radiologists New PACS imaging system New PACS imaging system


WeaknessesWeaknesses No existing space availableNo existing space available Part-time mobile MRI servicePart-time mobile MRI service Poor marketing and advertising for MRIPoor marketing and advertising for MRI Congested centralized registration in imaging Congested centralized registration in imaging

departmentdepartment Congested centralized imaging waiting roomCongested centralized imaging waiting room Expensive benefit packages Expensive benefit packages


OpportunitiesOpportunities Increased referral potential with full time Increased referral potential with full time

service service Draw commercial patients into upscale settingDraw commercial patients into upscale setting Make services available 24/7Make services available 24/7 Kentucky CON laws Kentucky CON laws


ThreatsThreats UnionsUnions Aggressive physician practice & diagnostic Aggressive physician practice & diagnostic

competitioncompetition Tertiary care centers within one hourTertiary care centers within one hour Two strong hospitals in primary service areasTwo strong hospitals in primary service areas Increasing trend for physician and radiologists Increasing trend for physician and radiologists

to compete for imaging business to compete for imaging business Potential for Kentucky to Lift CON law Potential for Kentucky to Lift CON law

Prospective Situational Prospective Situational analysisanalysis

0200400600800

10001200140016001800

Current A

ctivi

ty

Year 1

(27%

)

Year 2

(40%

)

Year 3

(45%

)

Outpatient MRIScans

Inpatient MRIScans

Total MRI Scans

Projected Volume Growth of MRI Projected Volume Growth of MRI Scans at Newco HospitalScans at Newco Hospital

Scope of ServiceScope of Service

24/7 Service24/7 Service M-F 8-4:30M-F 8-4:30 Nights and weekends emergency on call Nights and weekends emergency on call

serviceservice Population service: Cradle to GravePopulation service: Cradle to Grave Full-range of MRI servicesFull-range of MRI services

Capital Equipment and Capital Equipment and ConstructionConstruction

Construction:Construction: Modular addition and renovated spaceModular addition and renovated space Completed architectural planCompleted architectural plan Hard bid construction estimatesHard bid construction estimates Total construction 1976 sq. feetTotal construction 1976 sq. feet Cost estimate $617,089Cost estimate $617,089

Equipment:Equipment: 1.5 T closed MRI1.5 T closed MRI Cost $1,307,279Cost $1,307,279

Workforce AssessmentWorkforce Assessment

Modality based staffing modelModality based staffing model Experienced MRI Technologist candidates Experienced MRI Technologist candidates

availableavailable Training provided by vendorTraining provided by vendor

MarketingMarketing

New Marketing Director hiredNew Marketing Director hired Strategic marketing planStrategic marketing plan Advertising and direct marketing visitsAdvertising and direct marketing visits

Outcomes EvaluationOutcomes Evaluation

MeasuresMeasures VolumesVolumes Operational expenseOperational expense Patient satisfactionPatient satisfaction QualityQuality

Financial AnalysisFinancial Analysis

CurrentActivity Year 1 Year 2 Year 3

StatisticsProjected growth 27% 40% 45%Inpatient MRI Scans 86 109 120 125 Outpatient MRI Scans 1,036 1,312 1,450 1,502

1,122 1,420 1,571 1,627

Revenues

Inpatient 180,342 234,846 272,688 296,548 Outpatient 2,172,492 2,829,069 3,284,938 3,572,371

Other - - - -

Gross Revenues 2,352,834 3,063,915 3,557,626 3,868,919

Less Revenue Adjustments: Charity 28,508 37,124 43,106 46,878 Medicaid 430,677 560,838 651,209 708,190 Medicare 471,403 613,872 712,790 775,159 Estimated Uncollectible 134,396 175,013 203,214 220,996 Other Revenue Adjustments 603,762 786,233 912,925 992,806

Total Revenue Adjustments 1,668,746 2,173,080 2,523,244 2,744,028

Net Revenue 684,088 890,835 1,034,382 1,124,891 29% 29% 29% 29%

Expenses

Salaries - 70,782 72,906 75,093 Mobile MRI services 321,600 - - - Payroll Taxes & Empl. Benefits - 21,235 21,872 22,528 Annual service agreement on MRI - Warranty 110,000 110,000 Supplies (5 days inventory on hand) 79,415 103,556 117,952 125,830

Lease (MRI 5 years with buy out option) 235,310 235,310 235,310 Marketing (Intercompany standard 2% of revenue) - 30,639 35,576 38,689 Corporate Overhead (MRI = 23% of Rads 7%) 33,773 34,786 35,829 36,904 Hospital Overhead (see corporate overhead) 106,586 109,783 113,077 116,469 Minor equipment purchases 434 250 325 100 Interest Expense 75,578 73,701 71,688 Depreciation - 33,040 33,040 33,040

Total Expenses 541,808 714,959 849,588 865,651

Excess Revenues over Expenses 142,281 175,876 184,794 259,239

20.8% 19.7% 17.9% 23.0%

Incremental Net Revenue 33,596 42,514 116,959

^ Minor equipment purchases consists of equipment with a purchase value of less than $1,000.

NPV @ 6% 167,732

NEWCO HOSPITALMRI PROJECT PLAN PROFORMA

Breakeven Analysis

# of Patients 1143Total Net Revenue 714,981

Cost Description Fixed Cost ($)Variable CostsSupplies (5 days inventory on hand) 103,556$

Fixed CostsSalaries 70,782$ Payroll Taxes & Empl. Benefits 21,235$ Annual service agreement on MRI WarrantyLease (MRI 5 years with buy out option) 235,310$ Marketing (Intercompany standard 2% of revenue) 30,639$ Corporate Overhead (MRI = 23% of Rads 7%) $34,786Hospital Overhead (see corporate overhead) $109,783Minor equipment purchases $250Interest Expense $75,578Depreciation $33,040

Total Fixed Costs $ 611,403

Total (Variable Cost + Fixed Cost) 714,959.00 Break even in year 1

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Months

Rev

enu

e Net Revenue

Fixed Cost

Total Costs

Breakeven GraphBreakeven Graph

LimitationsLimitations

No information is collected by any agency No information is collected by any agency relative to outpatient service statisticsrelative to outpatient service statistics

The need to rely on experiential The need to rely on experiential information from expert subjectsinformation from expert subjects

No reporting requirements for hospitals in No reporting requirements for hospitals in Kentucky, Tennessee, or VirginiaKentucky, Tennessee, or Virginia No data sources for utilization of services in No data sources for utilization of services in

the private sector for physicians or the private sector for physicians or independent diagnostic centersindependent diagnostic centers

Limitations ContinuedLimitations Continued

This means that all projections, while This means that all projections, while based to the extent possible on proprietary based to the extent possible on proprietary utilization data and national use rates, utilization data and national use rates, required educated assumptions to be required educated assumptions to be made from the experiential datamade from the experiential data

RecommendationsRecommendations

Proposal for a permanent fixed MRI Proposal for a permanent fixed MRI service be approved and that full service be approved and that full implementation, under the direction of the implementation, under the direction of the Manager of Radiology, be achieved within Manager of Radiology, be achieved within six monthssix months

ReferencesReferences Iglehart, John K., (2006). “The New Era of Medical Imaging – Progress and Pitfalls.” Iglehart, John K., (2006). “The New Era of Medical Imaging – Progress and Pitfalls.”

New England Journal of Medicine, 354:2822-2828New England Journal of Medicine, 354:2822-2828 Merriam-Webster’s Medical Dictionary. (2008). “Magnetic Resonance Imaging” Merriam-Webster’s Medical Dictionary. (2008). “Magnetic Resonance Imaging”

http://medical.merriam-webster.comhttp://medical.merriam-webster.com Mitchell, Jean M. (2007). The Prevalence of Physician Self-Referral Arrangements Mitchell, Jean M. (2007). The Prevalence of Physician Self-Referral Arrangements

After Stark II: Evidence from Advanced Diagnostic Imaging. After Stark II: Evidence from Advanced Diagnostic Imaging. Health AffairsHealth Affairs, , 26:3, 26:3, 415-424. 415-424.

Tanenbaum, Lawrence, N., (2006). Clinical 3T MRI: Mastering the Challenges. Tanenbaum, Lawrence, N., (2006). Clinical 3T MRI: Mastering the Challenges. Applied RadiologyApplied Radiology, , 35:11, 35:11, 34-50.34-50.

The Advisory Board, H*Works: Structure and Responsibilities of Diagnostic Imaging The Advisory Board, H*Works: Structure and Responsibilities of Diagnostic Imaging

Departments, Departments, Original Inquiry BriefOriginal Inquiry Brief, May 24, 2005., May 24, 2005. The Advisory Board, MRI: New systems, applications herald future volume growth, The Advisory Board, MRI: New systems, applications herald future volume growth,

Technology WatchTechnology Watch, November 4, 2005. , November 4, 2005. www.advisory.comwww.advisory.com

Special Thanks To:Special Thanks To:

Committee Chair: Leonard Heller Ed.D.Committee Chair: Leonard Heller Ed.D. Committee Member: Sarah Wackerbarth Ph.D.Committee Member: Sarah Wackerbarth Ph.D. Committee Member: Adetokunbo Oluwole Ph.D.Committee Member: Adetokunbo Oluwole Ph.D. Outside Advisor: Trena Hall Outside Advisor: Trena Hall

Clinical Director of Corporate ProjectsClinical Director of Corporate Projects

Appalachian Regional HealthcareAppalachian Regional Healthcare

Questions?Questions?

a feasibility analysis for a fixed mri unit

Health & Medicine

prospective situational analysis

product review

data sources

advisory board

retrospective analysis

swot analysis

literature review

managerial question